Report on 2000 Annual Accounts

Report on 2000 Annual Accounts ALL-TIME HIGH EARNINGS · 2000 - a year of growth. · Integration of the German BfG Bank, acquisition of the Baltic banks and a stake in the Polish Bank BOS. · Number of employees now 21,500 (13,000). · Number of e-banking customers 800,000 (390,000) · The Group's total result* increased by 34 per cent to SEK 10,080 M (SEK 7,497 M). · Operating result rose by 72 per cent to SEK 8,800 M (SEK 5,122 M). Operating result for comparable entities excluding one-off items rose by 59 per cent. · Return on equity was 16.5 per cent (17.2 per cent) based on total result* after tax and 16.9 per cent (14.6 per cent) based on the operating result for the year. · Earnings per share improved by 35 per cent to SEK 9.43 (SEK 6.96). · Assets under management amounted to SEK 910 billion (SEK 702 billion). · Income in the fourth quarter from all areas was record high; record results in Retail Distribution and Merchant Banking. · Costs in the fourth quarter were above previous quarters, partly due to increased bonuses and partly attributable to IT- and e-banking costs. · A dividend of SEK 4.00 (SEK 3.50) is proposed - an increase of 14 per cent. * Operating result plus change in surplus values in life insurance operations and pension settlements/provisions. President's Statement Year 2000 was an eventful period both within and outside SEB. Markets were characterised by a generally strong economic climate but with roller- coaster conditions in the world's stock markets. Although stock prices declined towards the end of the year, 2000 as a whole, including the fourth quarter, was marked by major activity in the markets, which had a favourable effect on SEB's income and result. Work within SEB was characterised by the strong expansion. The German BfG Bank was consolidated from the beginning of the year and the shares outstanding in the three Baltic banks were acquired towards the end of the year. The acquisition of a block of shares in the Polish Bank Ochrony Srodowiska, BOS, signified the closing of our Baltic circle. But in addition to this acquisition-based geographic expansion, we also invested in organic growth in new markets during the year through the development of new e-banking and e-brokerage services. Against the background of the weaker market trend, the year's total result of SEK 10,080 M was gratifyingly strong. The fourth quarter was strong in all income areas, especially regarding net result of financial transactions. However, the change in surplus value was influenced by negative financial effects due to the downturn of the stock market. Nevertheless, income in the fourth quarter was above previous quarter. Also costs for the fourth quarter were higher than in previous quarters. These higher costs are attributable to IT-costs and to bonuses as a consequence of the good result. The costs for e-banking and e- banking related IT-costs surged mainly because of costs for the pan- European e-banking platform. The UK e-banking and e-brokerage service opened in early February at www.seb.co.uk and the Norwegian service will open later this spring. All in all SEB had a completely different form at the end of 2000, compared with the end of 1999. The number of employees had been increased from 13,000 to 21,500, and the proportion of employees in Sweden decreased from 75 per cent to 45 per cent. The base in the Nordic countries within Nordic Banking and Asset Management & Life has shown great strength during the year. From that base we have expanded our core business geographically into the Baltic states and Germany. The third development phase within SEB is the growth into new markets with totally new concepts - our introductions of e-banking services in Denmark, the UK and Norway. Increasingly strong base Nordic Banking has successfully continued rationalisation and efficiency programs during the year. Accordingly, increased income was generated within our Nordic Banking operations at the same time as the costs of ongoing operations, excluding result-related personnel costs, continued to decline. It was particularly gratifying to see the progress made within Retail Distribution and Merchant Banking, which achieved a record result in the final quarter and for the year as a whole. The comprised main group Nordic Banking reached a record 25 per cent return on allocated capital. Asset Management & Life was adversely affected by the change in surplus values during the fourth quarter. Although this reduced the full-year result, the return on equity was still 19 per cent. Enskilda Securities reported an almost 100-per cent improvement in result, despite the deterioration in conditions during the latter part of the year. The risk level and thus the volatility in our income continued to decrease for comparable entities. SEB has closed the circle around the Baltic Sea SEB has expanded its core area geographically during the year, through the integration of German BfG, the acquisitions of outstanding shares in three Baltic banks as well as a minority share in the Polish Bank BOS. The integration and restructuring of BfG progressed more rapidly and efficiently than expected. The restructuring programme and the sale of subsidiaries resulted in the number of employees being reduced by 660 persons and a decrease in the cost base. Currently, intensive efforts are underway to change the brand to SEB and to increase the level of income in the insurance area, among others. The three Baltic banks with 4,200 employees are active in less mature markets, where growth within the financial service area is high. Traditional lending and deposits are growing by 20 per cent a year, but it is also interesting to see how fast the e-banking penetration increases. Profitability of the operations in these banks is good. It is also gratifying to see how rapidly these banks have been assimilated in the SEB culture and how smoothly the co-operation is functioning. The acquisition of slightly more than 30 per cent of the BOS reflects a first step for SEB in a large and expanding market. Development of platform for e-growth Outside SEB's core businesses on a Nordic base and the geographically extended core, a strategy for exporting our knowledge of e-banking from Sweden was started in 1999. We have in year 2000 built and introduced our pan-European model in Denmark and Germany and in early 2001 in the UK. In contrast to markets for physical goods, e-banking and e-brokerage operations are continuing to expand. Our experience from the Swedish market shows that such operations also grow profitably. During 2000, the number of e-banking customers in the SEB Group rose from 390,000 to 800,000, with countries outside Sweden accounting for the greatest growth. SEB now has e-banking services in seven countries. During the fourth quarter, major efforts were made to prepare for the launch of the pan-European model in the UK and Norway, and to construct a completely new corporate portal for Sweden that will be introduced in March 2001. During 2000, the total central costs for e-banking development amounted to SEK 946 M. E-banking development activities have also been carried out in BfG, the Baltic banks and some business areas. Organised for quality and co-ordination At the end of the year, the decision was made to implement a new organisation, which has been introduced as from 1 January 2001. The new structure is oriented towards different customers and their various needs in different countries rather than towards products, as previously. Accordingly, we have also co-ordinated our e-banking activities with the various geographic and customer-oriented areas. Internet-based services have become such a large and natural part of all operations that they need to be co-ordinated in a better way with our other banking channels. The objective is to allow our customers to utilise all of the various channels when and how it suits them. 2001 - a year for the consolidation of the new markets Many experts consider that after a weaker first half, the economy will take an upward turn during the autumn of 2001. In SEB's case, this will probably mean a lower rate of growth on the income side. 2001 will be a year of consolidation for SEB, with continued focus on raising efficiency in the areas of both costs and capital. IT-costs will be kept at this level or reduced if the market develops in an unfavourable manner. GROUP ACCOUNTS As a result of primarily the acquisition of BfG and the shares outstanding in the three Baltic banks SEB today is an entirely different Group than at year-end 1999. Total assets have increased by 58 per cent and are now comprised 36 per cent of euro compared with 10 per cent at year-end 1999. Countries outside the Nordic region accounted for 45 per cent of income (20 per cent during 1999). Thus the comparability for the underlying trend has been heavily influenced by the addition of new entities. The Group´s result for comparable entities is presented in Appendix 1. Income Income for comparable entities excluding changes in surplus values was SEK 22,707 M, an increase by 25 per cent, primarily due to increased commission income in all relevant business areas. The change in surplus values within SEB Trygg Life has had a negative impact on the growth-rate due to the dependency on equity markets valuation. The addition of BfG, the Baltic banks and Orkla Enskilda Securities and one-off items has increased the income level to SEK 32,995 M (SEK 21,038 M), an increase by 57 per cent compared with 1999. Net interest earnings for comparable entities rose by 7 per cent to SEK 7,148 M (SEK 6,674 M), attributable mainly to increased deposit volumes. Including the new entities, total net interest earnings amounted to SEK 11,616 M (SEK 6,858 M). Net commission income for comparable entities rose by 34 per cent, to SEK 11, 006 M (SEK 8,212 M), mainly due to a strong increase in securities commissions as a result of the strong stock market trend at the beginning of the year and the high rate of equity trading turnover in 2000. Commissions related to lending and payments also contributed to the result to a large extent. Including the new entities net commission income amounted to SEK 13,846 M (SEK 8,317 M). Net result of financial transactions for comparable entities rose by 50 per cent, to SEK 3,004 M (SEK 1,999 M). This was mainly attributable to favourable bond and equity trading, including derivatives. Foreign exchange earnings accounted for SEK 1,368 M (SEK 1,142 M). Including BfG, the Baltic banks and one-off items of SEK 230 M in BfG, net result of financial transactions amounted to SEK 3,552 M, an increase by 75 per cent. Other operating income includes dividends and amounted to SEK 3,644 M (SEK 2,327 M). Capital gains and other one-off items totalled SEK 1,690 M (SEK 948 M). Of this SEK 262 M was included in the fourth quarter result, mainly attributable to capital gains in connection with sales from the so called venture capital portfolio. Other large one-off items in 2000 are SEK 500 M from the sale of Svensk Exportkredit, SEK 420 M from the sale of the Bank´s head office building and SEK 373 M from the transaction with Orkla Finans. Even if capital gains are treated as one-offs, a certain portion of SEB´s income continously has this nature. For 2001 capital gains of more than SEK 500 M has been realised already. Other one-off items in the Group were SEK 230 M attributable to BfG for the first and second quarters and reported as net result of financial transactions. During the fourth quarter, the result from the sales of debt collection credits to Hoist Kredit AB, SEK 236 M, was reported as recoveries within Retail Distribution. SEK 88 M is a result of a sale of property in the run-off operations. In total one-off items amounted to SEK 2,306 M (SEK 1,275 M). Change in surplus value in life insurance operations was influenced by the negative financial effects due to the stock market trend and amounted to SEK 337 M (SEK 1,502 M). Sales, that is, new premiums insurance and extra payments on existing insurance, rose by 39 per cent to SEK 12,306 M. This change in surplus value is described in detail in Appendix 2. Costs Costs for comparable entities was SEK 15,734 M, an increase of 11 per cent or approximately SEK 1,500 M. There are two well-defined underlying causes for this increase. One is that the good results within above all Enskilda Securities, Merchant Banking and Retail Distribution have led to an increase in bonus payments of just over SEK 600 M. The other is the development within IT-operations, where costs including staff costs have increased by more than SEK 600 M. The addition of BfG, the Baltic banks and Orkla Enskilda Securites has raised the cost level to SEK 22,332 M (SEK 14,464 M), an increase of 54 per cent compared to 1999. The cost structure and levels vary significantly between different sectors of the bank. In Nordic Banking - Retail Distribution, Merchant Banking and SEB Securities Services - the costs have successively been reduced in recent years. During 2000, costs declined somewhat, not taking into account the higher performance-related compensation paid as a result of the sharp earnings improvement in these business areas. The cost/income ratio for Nordic Banking has been improved from 0.62 to 0.53. In the growth-oriented main group Asset Management & Life as well as in Enskilda Securities, costs rose due to volume growth as well as increases in performance-related compensation. Merely in Enskilda Securities staff costs rose by close to SEK 600 M. Staff costs The level of staff costs for comparable entities was SEK 9,355 M, an increase of 13 per cent compared with 1999. This is due to the good results in certain sectors resulting in higher bonus payments. The addition of BfG, the Baltic banks and Orkla Enskilda Securities increased the level of staff costs by 52 per cent to SEK 12,761 M. The number of full time equivalents emloyees, measured as an average during the year, increased to 20,368 (13,455). Part of the cost increase is attributable to pension costs, for which compensation is received from SEB's pension funds. This compensation, which amounted to SEK 943 M (SEK 873 M) in 2000, is a positive item in total costs and includes the pension insurance scheme that replaced the earlier profit-sharing system. In addition, SEB has during the year received a repayment of SEK 62 M from SPP, which has decreased the staff costs. IT costs Total costs for IT for comparable entities amounted to SEK 3,688 M, an increase of 22 per cent compared with 1999. The major reason for the increase in IT-costs is the development of e-banking and internet-related areas and the prevailing freeze period during 1999 prior to Y2K. The addition of BfG and the Baltic banks increased the IT-cost level to SEK 4,842 M, about 20 per cent of total costs for SEB. In this definition "IT-costs" is a calculated amount including cost for own personnel engaged in the IT-sector, either in internal IT-companies or directly within the business areas. External IT- cost as specified in the annual accounts, i.e. rental fees for systems and equipment, consulting fees, maintenance etc amounts to SEK 2,338 M. The IT- development has been intense over the whole year with an uneven weight of the cost distribution towards the fourth quarter. The cost level for the first three quarters was around SEK 1,000 M per quarter, whereas the cost in the fourth quarter isolated was SEK 1,695 M. For 2001, IT-costs will be kept at this level or reduced if the market develops in unfavorable direction. Costs for e-banking During 2000 SEB has carried out its e-banking activities in a separate management unit classified as a joint Group activity. Running cost for operating the Internet bank has been charged to the business units mainly within the retail operation whereas cost for developing the e-banking activities has been expensed immediately and carried as a joint group cost. Total costs within SEB e-banking amounted to SEK 1,268 M including IT-costs. Of that, SEK 322 M was charged to the business units and the rest - SEK 946 M - was invested jointly for the group but accounted for as expenses during this period. The activity has increased during the year. Cost in the first quarter was only SEK 94 M whereas the cost in the fourth quarter isolated amounted to SEK 464 M, which includes developing costs for the pan-European model in Denmark, Norway and the UK as well as improving the Swedish e-banking set up. Restructuring reserves On 31 December 2000, SEK 1,999 M - including SEK 300 M in the current year - of the restructuring reserve of SEK 2,255 M established in the accounts for 1997, had been utilised. The acquisition of BfG in January 2000 was made at a purchase price below the equity value, which has resulted in a difference of SEK 3.3 billion (negative goodwill). The negative goodwill has been allocated in the accounts for 2000. (See further Appendix 3) Lending losses and doubtful claims The Group's lending losses, including changes in the value of assets taken over and write-downs, amounted to SEK 890 M, net, of which SEK 730 M, net, pertained to BfG. The level of lending losses was 0.12 per cent. In 1999, the Group´s recoveries and withdrawals were greater than the lending losses, including value changes in assets taken over for and write-downs of financial fixed assets. Accordingly, a positive net of SEK 289 M was reported. During 2000, incurred losses and provision of possible lending losses amounted to SEK 2,658 M (SEK 1,089 M), while recoveries and withdrawals from reserves, including the reserve for political risks abroad amounted to SEK 1,800 M (SEK 1,296 M). Doubtful claims, net, that is, after provisions of possible lending losses, increased because of the consolidation of BfG and Vilniaus Bankas to SEK 8,365 M (SEK 2,824 M), while the volume of pledges taken over declined to SEK 214 M (SEK 626 M). The changes were in line with expectations. Credit exposure During the year the total credit portfolio increased by almost SEK 374 billion to SEK 926 billion, mainly due to the acquisition of BfG and the consolidation of Vilniaus Bankas. As a consequence of this the overall structure of the credit portfolio has changed. From a geographical point of view, the portfolio has become more diversified and by year-end the Nordic region represented 43 per cent of the total credit portfolio, in comparison with 75 per cent by year-end 1999. SEB's exposure to telecommunications (defined here as telephone operators and manufacturers of teleproducts, including their respective subcontractors) as well as the IT-sector is well analysed. The exposure of the Group on companies within the tele-communications industry is approximately SEK 12 billion or 1.2 per cent of its total credit exposure. Most of it is related to well-established Nordic companies of excellent credit quality. In addition, SEB takes part in a number of Nordic-related project financing arrangements for major operators, mostly within OECD countries. The IT-sector represents a very small part of the total credit portfolio, SEK 4 billion, or less than 0.4 per cent. The exposure is, as earlier reported, spread among a large number of companies, where the newly established companies represent a very small portion. See further Appendix no. 4. On 31 December 2000, SEB´s exposure in emerging markets amounted to SEK 11,483 M, net, after provision for possible lending losses (SEK 10,405 M). Large surplus value in pension funds The total assets in the pension funds amounted in 2000 to SEK 23.2 billion (SEK 25.2 billion), while commitments amounted to SEK 8.0 billion (SEK 7.1 billion). Accordingly the surplus value for 2000 amounted to SEK 15.2 billion. Options program for 1,000 employees As in 1999, the Board decided on an options program for Group Management and at the same time broadened it to include about 1,000 senior executives and key persons. Tax costs Taxes amounted to SEK 2,856 M (SEK 1,355 M), which yields a weighted tax rate of 29 per cent. Of this amount, SEK 1,730 M (SEK 1,288 M) is taxes paid, SEK 980 M (SEK -209 M) deferred taxes and SEK 146 M (SEK 276 M) taxes for previous years. Earnings per share and return on equity The calculation of earnings per share, including/excluding changes in surplus values in life insurance operations, appears in the following table: Result incl. Result excl. change in surplus change in surplus values values 2000 1999 2000 1999 Operating result 8,800 5,122 8,800 5,122 Pension provision 943 873 943 873 Change in surplus values 337 1,502 Total result 10,080 7,497 Taxes and minority interests -3,195 -1,832 -3,101 -1,411 Result after tax 6,885 5,665 6,642 4,584 Earnings per share 9:77 8:60 9:43 6:96 (2000: 704 557 680 shares, 1999: 658 503 093 weighted number due to new issue) Return 16.5 17.2 16.9 14.6 Risks and capital management To utilise the Group's capital in the best possible manner and to assess the profitability of the various business areas with greater precision, SEB uses a steering model based on Capital at Risk. Capital at Risk encompasses valuations of the risk for unexpected losses resulting from the Group's business at any given time and is based on statistical probability for various types of risks, that is credit and market risks, insurance risk and operational and residual risks. Capital at Risk is an important component of allocated capital for the business areas. The remaining portion is primarily goodwill that is attributable to acquired companies which is matched by a need for shareholders' equity. In calculating the return for the business areas, earnings after standard tax, 28 per cent, is placed in relation to the allocated capital. The bank's risk level has increased due to the consolidation of new subsidiaries. The risk level for each risk type, not taking into account diversification, is summarised below (SEK billion): 31 Dec, 2000 % 31 Dec. 1999 % Market risk 3 6 2 6 Credit risk 32 66 22 61 Insurance risk 5 10 5 14 Operations and 9 18 7 19 residual risk The daily Value at Risk (VaR) within the Group exclusive BfG was an average of SEK 47 M during 2000, that is, with 99 per cent probability it is expected that the business area will not lose more than SEK 47 M during a trading day. During the year, this risk varied between SEK 24 M and SEK 86 M. The following table shows the distribution by risk type: Min Max Average 31 31 Dec. Dec. 1999 2000 Interest 24 75 42 35 52 risk Currency 2 21 8 6 3 risk Share 2 47 14 9 15 risk Diversifi -17 -19 -18 cation Total 24 86 47 31 52 Within BfG's marketplace, the corresponding average VaR was SEK 17 M at year-end. During the years, BfG's VaR varied between SEK 8 and 24 M. An increase in market interest rates by one percentage point at 31 December 2000 would result in a value decline in the Group's interest- bearing assets and liabilities, inclusive derivatives, by SEK 1,600 M (SEK 800 M). Capital base and capital adequacy The capital base for the financial group of undertakings (excluding the insurance companies) amounted at year-end 2000 to SEK 53.3 billion (SEK 46.5 billion). Core capital was SEK 36.5 billion (SEK 34.4 billion), of which SEK 1.8 billion constituted core capital contribution. (For calculation of the capital base see Appendix 5). The risk-weighted assets amounted to SEK 496 billion (SEK 318 billion). The increase is attributable to the BfG Group and BOS being included in the financial group of undertakings as of 2000. Through ongoing capital efficiency measures with BfG and the rest of the Group, risk-weighted assets were brought to a level of the goal of SEK 495 billion established at the time that BfG was acquired. The increase in risk-weighted capital is reflected in the decline in the core capital ratio to 7.4 per cent (10.8 per cent) and the total capital ratio of 10.8 per cent (14.6 per cent) compared with the Group's goal to maintain a core capital ratio of at least 7 per cent and a total capital ratio of not less than 10 per cent. During the year, SEB participated actively in the preparatory work regarding the Basel Committee's and the EU's proposal to change the capital adequacy rules. This work has provided good insight into the changes that are expected. The Group will continually monitor forming of the new rules and successively match the Group's capital situation against the expected capital demands that will arise when the new rules become effective. Rating During the fourth quarter of 2000 both Standard & Poor´s and Moody´s revised their outlooks for SEB from negative to stable. Standard & Poor´s motivation was SEB:s strong earnings growth in its core markets, the anticipation of stable short and medium term earnings and continued restructuring of BfG. Moody´s change reflects mainly BfG´s smooth integration into the SEB Group. Events after the reporting period At the beginning of 2001, about 1.4 million shares in OM were divested with a capital gain of about SEK 340 M. On 19 February, 2001, SEB held about 0.9 million shares in OM. Simultaneously, BfG has sold shares in Deutsche Börse with a capital gain of approximately EUR 26 M (approximately SEK 230 M). As of 2001, SEB's operations are organised into six divisions: Personal Banking Sweden, Personal Banking International, BfG, Corporate & Institutions, Investment Management & Life and the Baltic States & Poland. The distribution is based mainly on SEB´s customers and their needs. The Board will propose to the Annual General Meeting on 5 April 2001 that SEB acquire own shares in the securities portfolio. Dividend The Board of Directors proposes a dividend of SEK 4.00 (SEK 3.50) per Series A and Series C share, corresponding to 40.9 per cent of earnings per share. The total dividend amounts to SEK 2,818 M (SEK 2,466 M). The last day for trading in SEB cum dividend is Thursday 5 April, 2001. Stockholm, 20 February, 2001 Lars H Thunell President and Group Chief Executive The interim report for January-March 2001 will be published on 4 May, 2001. The printed version of the annual report will be distributed in the second half of March. Annual General Meeting will be held on 5 April 2001. SEB´s reports are available on the Internet (www.seb.se; www.seb.net). Additional information is available from: Gunilla Wikman, Head of Group Communications, +46 8 763 81 25 Lotta Treschow, Head of Investor Relations, +46 8 763 95 59 ------------------------------------------------------------ This information was brought to you by BIT http://www.bit.se The following files are available for download: http://www.bit.se/bitonline/2001/02/20/20010220BIT00060/bit0003.doc The full report http://www.bit.se/bitonline/2001/02/20/20010220BIT00060/bit0003.pdf The full report