Basel II an opportunity Mikael Inglander, Chief Financial Officer - PowerPoint PPT Presentation

Basel II – an opportunity Mikael Inglander, Chief Financial Officer Anders Karlsson, Chief Risk Officer

Contents • Introductory remarks • Basel II – Capitalisation – stakeholders – RWA calculation – A transition period – A comprehensive and generic risk process – Implementation – risk information of operational importance – Implementation – risk information of strategic importance • The loan portfolio – does Basel II make sense? – Lending to the public – Residential properties – Municipalities, agriculture, forestry, and Swedbank Finance – The remaining portfolio • Concluding remarks

Opening remarks • Basel II confirms Swedbank’s low risk profile • There is a transition period of three years with a gradual capital release possibility • The FSA is starting its evaluation of the Bank’s approach to Pillar 2 • Internal calculations and stress tests confirm a strong income statement, a strong balance sheet and consequently a potential capital release • Asset quality and collateralisation with a significant mortgage portfolio characterized by very low historical and expected losses • Good diversification of credit risk between countries, customer segments and industries where Hansabank increases the diversification • High, stable capital generation • Sound risk, capital and performance management where Swedbank’s implementation of new risk management tools supports the goal of being the leading service provider and will further improve the quality of our loan portfolio

Swedbank’s stakeholders Capitalisation Society Customers Change to Legislation Swedbank A sustainable Financial another Supervision bank bank with good Stability Shareholders reputation Changing the Landscape avoid investment Risk Premium or Debt Investors Repayment of debts

Swedbank a clear beneficiary of new regulation Pillar 1 – QIS 5 supports a gradual capital release Basel 2 Minimum Capital Requirements vs Basel I 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 2007 2008 2009 2010

Transition period - A new complexity to manage Transition Period Basel I Basel II Full Effect Capital Requirement Basel I Transitional Minimum Capital Level Basel II Hypothetical Long Term Capital Level Hypothetical Pillar 2 buffer Basel II Pillar 1 2006 2008 2009 2010 2007

CEO Monthly BoD Annually Report CEO & SBA Ad-hoc BoD Semi Annual BoD Monthly CEO & SBAs daily A comprehensive and generic risk process Control monitor and Loss Analysis New Regulations In-depth Analysis Risk&Threat measures & Suggest actions Migration Analysis Limit Control Tier 1 and Tier 2 Sector Analysis Income Statement Sensitivity Analysis Analyse Actions Follow Up Scenario Analysis Quantify risk PD and LGD Stress Testing Sensitivites OLDB Value at Risk Identify risk Self Assessments Credit Process Covering all risks Credit Watch List NPAP Risk Factors Prevent risks Fin-Risk Policy Compliance Policy Op-Risk Policy AML Policy Credit Policy

A consistent implementation of new management and business tools Risk information of operational importance Credit Business Performance Swedish Banking management management management Region •Mandate structure •Risk adjusted •Risk adjusted Local Bank performance a function of risk pricing tool measurements classification •Customer Branch •A differentiated • Balance segmentation credit process scorecards Corporate •Portfolio analysis Manager Customer

To be the leading service provider is supported by a consistent implementation • Rapid decisions by using scoring • A professional counterpart Customers • A Customer adjusted sales and offering process • A potential capital release supports the strategy of capturing: • current growth Growth • future organic growth • new growth • A comprehensive view on material risks Risk • Enhanced focus on minimizing unwanted risks management • Further improvement of quality in the loan portfolio • Increased transparency • Time release for advise and sales through an efficient credit process Cost • Efficient resource allocation through improved management tools efficiency • Risk adjusted pricing and performance measurement • Risk adjusted credit process Professionalism • Enhanced navigation equipment in a competitive landscape • A comprehensive view on customer needs

Capital management in Swedbank A conceptual view of the risk and capital management process Risk Control Prevent Identify Quantify Suggest Analyse and Report risks risk risk Measures Profile monitor Capital goal Simulation Qualitative Risk Risk Strategic Risk Adverse Risk • RWA Strategic Tolerance Capital Planning Profile Scenarios • Capital Levels Profile • P/L Discussion Needed • Capital Ratios • T1 • Capital Structure • Capital Strategy Iteration

Swedbank’s Lending to the Public SEK 890 bn as of Sep. 2006 Municipalities Other collateral 67,407 47,321 Guarantees, unsecured 99,223 Corporate collateral 146,204 Residental properties 529,247

Swedbank’s loan losses 1998 – 2006 % of lending to the public 0,40% 0,35% 0,30% 0,25% 0,20% 0,15% 0,10% 0,05% 0% 0,00% 1998 1999 2000 2001 2002 2003 2004 2005 Q1-3 2006

Swedbank grows in low-risk retail segments Change in loan portfolio, by sector, SEK billion Municipalities Other corporate lending Other service businesses Forestry and agriculture Dec 2004 Transportation Dec 2005 Manufacturing Sep 2006 Construction Retail, hotels and restaurants Real estate management Private individuals of which Swedbank Mortgage 0 100 200 300 400 500

Hansabank’s growth is diversifying the risk Change in loan portfolio, by sector, EUR m Other Financial intermediaries Hotels and restaurants Construction 2004 Other business services Agriculture and forestry 2005 Energy, gas Sep Municipalities and Education and student loans Transportation Real estate Wholesale and retail Manufacturing Other private individuals Private mortgages 0 500 1 000 1 500 2 000 2 500 3 000 3 500 4 000

Portfolio split by country and industry, EUR 13.2 bn Hansabank’s loan portfolio is well diversified EUR M 1 000 1 500 2 000 2 500 3 000 3 500 4 000 4 500 500 0 Private mortgages Other private individuals Manufacturing Wholesale and retail Real estate, renting Transportation Education and student loans Municipalities and government Energy, gas Agriculture and forestry Other business services Construction Hotels and restaurants Financial intermediaries Other Estonia Latvia Lithuania Russia

Residental properties Residential properties, a low-risk segment MSEK 529,247 Condominiums 64,855 Single family homes 357,288 Multi-family housing 107,104 0.20% Historical loan losses 0.15% 0.10% 0.05% 0.00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3 Private Corporate

Portfolio risk profile Sep 2006 Swedbank Mortgage - retail Probability of Default Distribution Swedbank Mortgage as of Sep 2006 • 82% of the portfolio has a Probability 180 000 of Default (PD) below 0.10% 160 000 140 000 120 000 • Retail mortgages amount to 43% of MSEK 100 000 the Swedbank’s loan portfolio 80 000 60 000 • Historically, extremely low loan losses 40 000 20 000 0 • The average loan-to-value ratio in Default 10 11 12 13 14 15 16 17 18 19 20 21 0 1 2 3 4 5 6 7 8 9 Swedbank Mortgage’s loan portfolio is Probability of Default 45 % Percent 70 60 50 40 30 • Well-diversified 20 10 0 • Strong asset quality <30% 30-60% 60-70% 70-75% 75-85% 85-100% >100% Distribution of loan to value • Conservative LTV ratios

Portfolio risk profile Hansabank’s private mortgage portfolio risk profile Sep 2006, EUR 3.8 bn • Mortgage portfolio is 30% of total loan Exposure, €mio PD Mortgage portfolio 40% 700 • Distribution of portfolio exposure by 35% 600 rating classes similar in all countries 30% 500 25% • High concentration of exposure in the top 400 4-5 rating classes 20% 300 15% • Weighted average predicted PD for 200 10% mortgages is ~ 0.42% 100 5% • Loan-to-value for 66.8% of mortgage 0% 0 portfolio is below 70% (analysis is based 0 1 2 3 4 5 6 7 8 9 1011 1213 1415 16 1718 1920 21 on property values on date of issuing Mortgage portfolio loan-to-value distribution loan) 30% 25% % of portfolio 20% • Increases Hansabank diversification 15% • Strong asset quality 10% • Conservative LTV ratios 5% 0% <40% 40% - 60% 60% - 70% 70% - 80% 80% - 90% >90% Distribution of loan to value

Other collateral and municipalities Forestry/agriculture, leasing and municipalities SEK 67,407 M SEK 47,321 M Other collateral Forestry and agriculture Municipalities 9 LTV <75% 16 32 Swedbank Finance Municipalities guarantee 31 26 Historical losses municipalities incl guarantees Historical losses forestry/agriculture 0,04% 0,20% 0,18% 0,16% 0,14% 0,12% 0,02% 0,10% 0,08% 0,06% 0,04% 0,02% 0,00% 0,00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3