Summary * Operating profit improved by 51% to SEK 5.0bn (3.3) * The return on shareholders' equity increased to 26.2% (15.5) * Earnings per share rose by 77% to SEK 6.32 (3.57) * Income was SEK 8.2bn (6.0), an increase of 36% * The cost/income ratio further improved to 39.7% (44.3) * Profits after tax increased to SEK 4.1bn (2.4) The Group
Operating profit over SEK 5bn, a rise of 51% Handelsbanken's operating profit increased by 51% to SEK 5,016m (3,331). Income grew by 36%, mainly due to significantly higher net fee and commission income and net gains/losses on financial items at fair value. Expenses, including SPP which is consolidated in the Bank's accounts from 1 January 2006, rose by 22%. The return on shareholders' equity increased to 26.2% (15.5). The cost/income ratio improved to 39.7% (44.3). Earnings per share were SEK 6.32 (3.57) and as a 12-month moving total SEK 19.70.
Income up 36% to over SEK 8bn Income increased by 36% to SEK 8,189m (6,030), with net interest income representing SEK 3,727m (3,805) of this amount. In Sweden, the margin on first-time priced mortgage loans continued to fall. Average lending volumes increased by SEK 110bn to SEK 994bn, an increase of 12.5%. Lending volumes in the branch office operations outside Sweden increased by 30% to SEK 209bn (161).
Net fee and commission income increased by 45% to SEK 2,342m (1,616). Equity market-related commissions and insurance commissions increased the most. Insurance commissions were SEK 619m (222). SPP represented SEK 348m (-) of this amount. Commissions include the share of the return which the Bank receives when the total return to the policyholders is higher than the guaranteed rate of interest. The Bank's share of the return was SEK 284m (43), with SPP's share being SEK 210m and Handelsbanken Liv's share SEK 74m (43). The risk result in the insurance operations was SEK 49m (19).
Net gains/losses on financial items at fair value increased to SEK 1,894m (459). This large increase is mainly due to the change in value in the previously underfunded insurance portfolios at SPP. SPP's commitments to policyholders are measured at fair value and since market interest rates increased during the period, the value of the liabilities fell. This had a positive impact of SEK 1,105m on the operating profit. Excluding this effect, net gains/losses on financial items increased by over SEK 300m. This was mainly due to a substantially increased result in the Bank's trading operations.
Consolidation of SPP affected cost increases in the Bank Expenses rose by almost 22% to SEK 3,252m (2,669), with SEK 214m of this arising from the consolidation of SPP. The Bank's trading operations reported a significantly higher result which meant that provisions for performance-related remuneration increased. The Group's high return on equity also resulted in an increased cost for a possible allocation to the Oktogonen profit-sharing foundation for 2006. Exchange rate differences, additional costs due to the consolidation of SPP and the increase in performance-related remuneration represented three-fourths of the total increase in costs. Staff costs rose, particularly in Norway and Great Britain, due to the focus on new branches. The number of employees in the Group rose by 700 to 9,956 (9,256), and 509 of this number came from SPP. Total IT costs increased, but only by the amount previously borne by SPP.
Recoveries exceeded loan losses For the fourth quarter running, Handelsbanken reported net recoveries on loan losses. Gross losses continued to decrease, while recoveries were somewhat more than for the corresponding period last year. Net recoveries were SEK 79m (-30). The loan loss ratio was -0.03% (0.01). Net bad debts were SEK 1,441m (1,420), equivalent to 0.13% (0.15) of lending.
Capital ratio, buy-back of shares and rating The capital ratio was 9.5% (10.2) and the tier 1 ratio was 7.2% (7.2). The ratios include profits generated during the quarter.
Since the 2005 AGM, the Bank has repurchased 20.6 million shares, of which 7.4 million during the quarter. The number of outstanding shares was subsequently 649.0 million. The board is proposing to the 2006 AGM to cancel the repurchased shares. At the AGM, there will also be a proposal from the board for a new repurchase programme for a maximum of 40 million shares.
Handelsbanken's rating was unchanged with all three rating agencies which rate the Bank. Moody's rating for the Bank was Aa1 and from Fitch and Standard & Poor's AA-.
Successful demutualisation of SPP - the business segment generated over SEK 1.5bn of the operating profit SPP was demutualised into a profit-distributing company at the year-end. A shareholders' contribution was then performed and SPP could subsequently increase the proportion of equities in its investment assets without restrictions for reasons of solvency. The operating profit for the whole Pensions & Insurance segment was SEK 1,504m (81), of which SPP represented SEK 1,390m (-). The return on policyholders' funds was 2.69% at SPP and 3.14% at Handelsbanken Liv. Since the return in the two companies was higher than the guaranteed level, 10% of the return went to each company. The aggregate administration result in the two companies was SEK -15m, positive at Handelsbanken Liv but negative at SPP.
Lars O Grönstedt President and Group Chief Executive
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