Swedbank Mortgage Interim report January – June 2010
- Operating profit amounted to SEK 1 672m (1 813)
- Net interest income decreased by SEK 30m to SEK 2 011m
- Covered bonds amounting to SEK 125bn have been issued during the period
The Swedbank Mortgage Group (in Swedish: Swedbank Hypotek) comprises the parent company, Swedbank Mortgage AB (publ) and the wholly owned subsidiary Swedbank Skog och Lantbruk AB (inactive company). Swedbank Mortgage is wholly owned by Swedbank AB (publ). Swedbank Mortgage provides long-term financing for residential housing, commercial properties, municipal investments and agricultural and forestry properties.
Numbers within parenthesis refer to the corresponding period from the previous year unless noted otherwise.
Profit analysis
Operating profit amounted to SEK 1 672m (1 813). Net interest income was SEK 30m lower than the previous year and amounted to SEK 2 011m (2 041). The lending margins have developed in a positive direction, primarily during the second quarter. Together with increased volumes there is a positive contribution to the net interest income. The strategy of extending the average maturities of the funding remains and has a negative effect on net interest income. Net interest income has also been negatively influenced by effects that occur due to funding concentrations in the form of benchmark loans, where there is a corresponding positive effect on net gains and losses on financial items at fair value. Replacement of extraordinary funding, in the form of funding from the Riksbank, has a negative effect, as well as lower interest levels resulting in a lower return on equity. All these factors combined contribute to a reduced net interest income for the period.
Commission expenses, arising from business interchange with the savings banks and partly owned banks, were SEK 253m (332). The reduction is mainly a result of changes in the agreement on commission costs with the savings banks.
Swedbank Mortgage applies the fair value option according to IAS 39 since the transition to the IFRS regulations. As of April 2009, a gradual transition to hedge accounting was initiated by application of fair value hedges. As of April 2010, cash flow hedges are also applied. The objective is to reduce the volatility of net gains and losses on financial items at fair value. The change in value, which mainly consists of unrealized results, amounted to SEK 65m (96) for the period.
Lending
Lending to the public increased by a nominal amount of SEK 9 314m (34 253) net during the period. Loans to the private sector rose by a nominal amount of SEK 12 106m (23 645) and lending to the agricultural and forestry sector increased by SEK 1 318m (3 036). Loans to the corporate sector decreased by SEK 4 100m (increase of 7 572). Swedbank Mortgage’s loans to the public amounted to SEK 680 986m (657 589) as per 30 June 2010, of which the change in the market value of the loans accounted for SEK 7 334m (8 112). The credit quality of the lending remains very high. Credit impairments amounted to SEK 174m (-1). Swedbank Mortgage has changed its valuation model for portfolio provisions which had a one-time effect on credit impairments, increasing them by SEK 153m during the period. The total loan loss ratio thereby amounts to 0.05% (0.00%). Provisions for anticipated losses amounted to SEK 224m (68) as per 30 June 2010. Credit impairments and provisions are specified in note 4 and 5.
Funding
Covered bonds are the company’s primary source of funding. The quality of the covered bonds rests on the very high quality in Swedbank Mortgage’s loan portfolio, where the average loan-to value ratio is 45 percent calculated on loan level. During the first six months 2010, the activity of issuing new covered bonds has been high. The nominal amount issued to external investors was SEK 67bn in the Swedish market and SEK 58bn in the international marked. Covered bonds issued to the parent company, which previously were used in order to utilize the funding facilities offered by the Riksbank and the National Debt Office, are replaced by ordinary funding in the same pace as the extraordinary funding is due.
From November 2008 to April 2010, Swedbank Mortgage participated in the Swedish state’s guarantee programme for funding. At the end of 2009, Swedbank mortgage had a nominal outstanding volume of SEK 8bn in commercial papers to external investors under this guarantee. As of April 2010, all of these commercial papers have reached maturity.
Capital adequacy
At the end of the period, the capital quotient amounted to 1.23 (1.20 as per 31 December 2009) and the tier 1 capital ratio as well as the total capital adequacy ratio was 9.8 percent (9.6 as per 31 December 2009).
The capital requirement according to pillar 1 amounted to SEK 25 553m at the end of the period, compared to SEK 4 614m at full effect of Basel 2. A specification of capital adequacy is provided in note 10.
Interest rate risk
An increase in market interest rates by one percentage point as per 30 June 2010 would have reduced the fair value of Swedbank Mortgage’s interest-bearing assets and liabilities, including derivatives, by SEK 710m (75 as per 31 December 2009). A one percentage point increase in market interest rates as per 30 June 2010 would have reduced Swedbank Mortgage’s net gains and losses on financial items at fair value by SEK 213m (214 as per 31 December 2009) regarding financial items at fair value.
Risks and uncertainties
The primary risks are credit risk, financial risk and operational risk. Swedbank Mortgage maintains a low-risk profile through a well-diversified credit portfolio and limited financial and operational risks. In addition to what is stated in this interim report, a description of the company’s risks is provided in the annual report for 2009. No significant changes have taken place with regard to the distribution of risks compared to what is stated in the annual report.
Events after 31 December 2009
No significant events have occurred.
For further information please see enclosed pdf.