year-end report 2011 Page 2 of 48
2011 has again been an eventful year. It began with astrong belief in the economic recovery despiteuncertainties regarding public finances particularly in anumber of European countries. During the summer, theanticipated macroeconomic developments changeddramatically as more and more people questionedEurope's economic sustainability. Once autumn arrived,anticipated growth worldwide as well as in Europe andSweden was gradually downgraded resulting inexpectations of lower interest rates. During the year,there was significant focus on regulatory developments,not least regarding future capital and liquidityrequirements. Given this situation, we stopped our buy-back programme. The Swedish authorities detailed theirfuture capital requirements at the end of November.These were somewhat tougher than expected andimmediately resulted in having to write down goodwill inLatvian operations, by SEK 1.9bn. New banking rulesare welcome and they form a basis for attaining a morestable financial sector in the future. In the short term,higher capital requirements affect all stakeholders in thebank - customers, shareholders and employees.Customers note that the price of money has becomemore expensive, shareholders see their return on equitydecrease compared to before the fiscal crisis andemployees note efficiency measures and tougherrequirements regarding variable pay.
Swedbank has generally delivered on the outlook wehad stated a year ago when we said we would see agradual improvement in profit before impairments. Weposted a profit of SEK 11.7bnfor the year against SEK7.4bnin 2010. The improvement is mainly the result ofrecoveries and a stronger net interest income at thesame time as costs remained stable. We haveincreased our core Tier 1 capital ratio by 1.8 percentagepoints to 15.7 per cent Basel 2) in respect of buybacksand dividends.OUR PRIORITY AREAS IN 2011At the beginning of 2011, we presented four areas ofpriority which at that time were thought to contribute themost to long-term profitability and our desired position inthe future: customer in focus, quality and effectiveness,growth in selected segments, and a robust balancesheet with low risk. We have made progress; however,there is still a lot to be done.
Customer in focus
To remain competitive and profitable in the long term,we must diversify our offering and provide competitiveservices for each customer segment. In Sweden, ourservice concepts have been well received and morethan half a million new customers came on board by theend of 2011. Customers who have selected a serviceconcept on average buy more products, are slightlymore profitable for the bank, and have a highercustomer satisfaction level than customers who havenot yet chosen to subscribe to a concept. In the Balticcountries, the new customer service model has led togreater confidence in the bank, which is expected to
enable us to win a larger share of our customers’ overall
banking business. In 2011 we received severaldomestic and international awards in the Balticcountries, including as the most respected company inthe financial sector in Estonia, Latvia and Lithuania. Tomeet customer demand for advice, extensive trainingwas conducted during the year. In Baltic Banking, 1 400advisors, customer service representatives and linemanagers participated in training programmes to meetthese new customer requirements. Extensive trainingwas conducted in Sweden as well.
Quality and effectiveness
Our aim in 2011 was to keep costs (excluding variablestaff costs) flat against 2010 figures. Excluding one-offrestructuring costs in the third and fourth quarterstotalling SEK 430m, costs were reduced by about SEK200m (SEK 250m excluding variable staff costs). Thereduction was mainly due to lower costs in Russia andUkraine, as well as lower consulting costs particularly inthe risk organisation. In order to spread a sound costculture and increase awareness of what drives the
-term profitability, we are focusing more onEken, our general remuneration programme, whereallocation is in the form of restricted shares. At the sametime individually allocated variable pay decreased byover 25 per cent in 2011 despite the 58 per centimprovement in results. Group Business Support wasformed on 1 January 2011 to rationalise, standardiseand simplify processes in IT, support and productdevelopment. Initial steps have been taken; however,there remains much work to be done within GBS. It willtake many years of dedicated work to attain ourmaximum efficiencies.
Growth in selected segments
Swedbank saw generally low lending growth during theyear, and we remained restrictive in our mortgagelending in Sweden. We have strengthened our positionamong midcorps and in private banking in Sweden.Growth has been solid in terms of both customers andvolumes, particularly in the fourth quarter. As part of ouraim to grow in the premium segment, new staff wererecruited and training provided during the year.However, new-customer growth in the service conceptdid not meet expectation. The measures being taken toensure that the risk-adjusted margin from largercompanies reaches a targeted minimum level continuedduring the year with good results. In many cases,cooperation with customers has been intensified,however, in some cases customers have chosen to taketheir business elsewhere.
Robust balance sheet with low risk
The risks in Swedbank’s balance sheet were further
reduced in 2011 on both the asset and liability sides.We have issued approximately SEK 250bn in long-termbonds, compared with maturities of SEK 180bn. Bydoing so we extended the average maturity of ourcapital market funding, increased our liquidity reservesand made ourselves structurally independent of short-term funding. The state guaranteed funding thatmatured during the year has been largely replaced bycovered bonds. Going forward our annual issuing needswill be significantly lower compared with our averagebond issues in the last two years. This positivedevelopment has been confirmed by the ratings
agencies. Moody’s upgraded Swedbank's financialstrength rating in June and Standard and Poor’s raisedSwedbank’s rating in December. We expect the lower
risk level will pay for itself since our relative costs ofcapital market funding will decrease over time.