Board of Directors' report

Profit for the year rose 10 percent to a record-high level of SEK 12bn. Earnings per share improved to SEK 23.28, and the Board proposes that the dividend be increased from SEK 8.25 to SEK 9.00. Volume growth was favourable in all major markets.

Swedbank consists of Swedbank AB (the parent company), its subsidiaries, associates and a joint venture. The group structure, with the parent company and the principal wholly and partly owned entities, is shown in the illustration below. Swedbank also operates branches in Copenhagen, Helsinki, New York, Oslo and Shanghai.

Holdings of shares in associates and group entities are reported in Notes 24 and 25 to the balance sheet. The five-year summary contains a summary of the group’s financial development, with key ratios, income statements and balance sheets for the last five years.

CHANGES IN GROUP STRUCTURE

Acquisition of TAS-Kommerzbank (OJSC Swedbank)

In July, Swedbank acquired all the shares in the Ukrainian bank JSCB TAS-Kommerzbank. TAS-Kommerzbank, in turn, is the sole owner of the Ukrainian bank CJSC TAS-Investbank.

The acquisition was settled in cash. Moreover, an additional payment of up to USD 250m may be payable within three years of the acquisition, subject to TAS-Kommerzbank’s earnings and financial performance. On the acquisition date, the additional payment was estimated at USD 125m.

The acquisition analysis, presented on the acquisition date in July 2007, is preliminary and may be updated before the end of June 2008. In the analysis, acquired customer relationships have been valued at SEK 243m by estimating the present value of future results from acquired business volumes to the extent Swedbank feels it has sufficient control over them. These relationships have an estimated remaining life of 7.5 years, with a corresponding amortization schedule. TAS-Kommerzbank is active in a highly expansive banking market driven by economic growth and has opportunities to increase its market share. Consequently, the reported goodwill item represents the acquisition of an organization that can capitalize on existing and forecast growth opportunities in the Ukrainian banking market. The fair value of the TAS trademark is insignificant and has not therefore been reported separately from goodwill. The acquisition of TAS-Kommerzbank is also described in Note 42.

In December, JSCB TAS-Kommerzbank changed its name to OJSC Swedbank and CJSC TAS-Investbank changed its name to CJSC Swedbank Invest. The re-branding will be completed during the first half of 2008.

In the business area report, the Ukrainian banks are included in International Banking.

Acquisition of Söderhamns Sparbank

During the first quarter of 2007, Swedbank acquired the remaining 60 percent of shares in Söderhamns Sparbank from Sparbanksstiftelsen Söderhamn, a savings bank foundation. The purchase price amounted to SEK 117m. On the acquisition date, the new subsidiary’s reported assets amounted to SEK 1,160m and its reported liabilities to SEK 1,039m. The difference between the purchase price and acquired equity according to the subsidiary’s accounts has essentially been allocated to assets that will be depreciated through the income statement. The acquisition is also reported in Note 42. At the time of acquisition, Söderhamns Sparbank had two branches and 25 employees. Following the acquisition, it has become part of Swedish Banking. In August, Söderhamns Sparbank was merged with Swedbank.

Branch in Shanghai

In April, the Chinese authorities approved Swedbank’s application to upgrade the representative office in Shanghai to branch office status.

Sale of CEK AB

Together with the other owners of the card processing company CEK AB, Swedbank sold its shareholding to EDB Business Partner during the second quarter 2007. The sale generated a capital gain of slightly more than SEK 40m.

Ownership changes in Russia

During the third quarter, Swedbank’s Board of Directors decided to transfer ownership of the Russian bank OAO Swedbank and the leasing company OOO Hansa Leasing from Hansabank in Estonia to Swedbank AB. The transfers will be made at market value and require the approval of the Russian authorities.

The Russian operations are included in the International Banking business area.

Acquisition of Russian corporate finance business

In December 2007, Swedbank signed an agreement to acquire ZAO OKO Capital Vostok, a Russian corporate finance company, from OKO Bank of Finland. The company is active in investment banking with its main focus on financial advice for Nordic and Russian companies in connection with acquisitions and divestments in Russia. The company has seven employees.

Swedbank has also agreed to cooperate with OKO Corporate Finance Ltd, an OKO Bank Group subsidiary, in the area of corporate finance in Russia, the Baltic States and the Nordic countries.

The acquisition is subject to regulatory approval.

Swedbank Babs acquires Zamsos AB

In December, Swedbank Babs acquired all the shares in the development company Zamsos AB. Zamsos AB has developed a next-generation payment system, Zaci, for chip card payments.

OTHER IMPORTANT EVENTS IN 2007

Swedbank’s Annual General Meeting

Swedbank’s Annual General Meeting (AGM) was held in Stockholm on 27 April. The AGM elected two new members to the Board of Directors, Gail Buyske from the US and Simon Ellis from the UK. Board members Ulrika Francke, Berith Hägglund-Marcus, Göran Johnsson, Anders Nyblom, Caroline Sundewall were re-elected, and Carl Eric Stålberg was elected as Chair.

The dividend to the shareholders was set at SEK 8.25 per share in accordance with the Board’s proposal. The dividend was paid by VPC (the Swedish Central Securities Depository) on 8 May.

The Board and the President and CEO were discharged from liability for the year 2006.

The AGM also resolved, in accordance with the Board’s proposal, to amend the articles of association and decided on guidelines for the remuneration of senior executives; read more under "Guidelines for the remuneration of senior executives", below. The AGM’s resolution regarding the repurchase of treasury shares is described below under the heading "Disclosures regarding the Swedbank share, etc."

The Board was authorized to raise loans according to chapter 11 section 11 of the Companies Act. Lastly, the AGM resolved to issue and transfer participating interests in Swedbank First Securities LLC and to approve the merger between the bank and the wholly owned subsidiary Söderhamns Sparbank.

Deloitte AB was elected as the bank’s auditor until the conclusion of the AGM 2010, with Authorized Public Accountant Jan Palmqvist as Chief Auditor.

The AGM decided on the guidelines for the Nomination Committee. In accordance with the Swedish Code of Corporate Governance, the bank will announce the names of the members of the committee not later than six months before the next AGM. The composition of the Nomination Committee can be found in the Corporate governance report.

New capital adequacy rules – Basel 2

Effective 1 February 2007, new rules apply in Sweden for capital adequacy and exposures, Basel 2. When the new rules take full effect, the capital requirement will be more closely linked to the institution’s risk profile. In addition to the capital requirement for credit risks and market risks, a capital requirement is introduced for operational risks as well. Due to the scope of these changes, they are being implemented gradually over a three-year period extending until the end of 2009. For Swedbank, the capital requirement gradually decreases, since the new capital adequacy rules better reflect the low risk in the credit portfolio. The full effect of the lower capital requirement will not be achieved until 2010.

The capital adequacy ratio, which is calculated for the financial companies group, was 12.7 percent as of 31 December 2007 according to the new rules (9.8 as of 31 December 2006 according to the old rules), of which the tier 1 capital ratio was 8.5 percent (6.5 as of 31 December 2006 according to the old rules). The leverage ratio amounted to 1.59 (1.22 as of 31 December 2006). Taking the transition rules into account, the tier 1 capital ratio was 6.2 percent, the capital adequacy ratio 9.3 percent and the leverage ratio was 1.16. The tier 1 capital ratio includes profit for the period after deducting the proposed dividend.

A specification of capital adequacy and a summary of the new rules are provided under facts in the Risks chapter.

Cooperation agreement with Folksam

During the first half of the year, Swedbank Robur and Folksam signed a cooperation agreement whereby Swedbank Robur took over management of insurance and mutual fund portfolios from Folksam. On 31 December, the managed portfolios amounted to SEK 175bn. In January 2008, Swedbank Robur acquired Folksam Fond AB, a fund management company with 22 funds and assets under management of SEK 27bn. A joint company for insurance administration has also been established.

Developments in Russia

An audit performed by the Central Bank of Russia in March and April found deficiencies in OAO Swedbank’s compliance with local regulations, due to which it restricted certain operations of Swedbank in Russia for a period of three months beginning 6 June. The restrictions applied to areas including correspondent banking, foreign exchange operations, new business development and interbank loans. The central bank ordered a number of measures that Swedbank then implemented, and the restrictions were lifted in early September.

The previously announced expansion in retail banking with new branch openings in Russia was delayed due to the actions of the central bank.

As of year-end, credit volume in Russia amounted to SEK 10bn with 386 employees.

Covered bonds

In September 2007, Swedbank Mortgage received authorization from the Swedish Financial Supervisory Authority to begin issuing covered bonds. Outstanding long-term liabilities will be converted during the second quarter of 2008. The investor base will be further expanded thanks to the higher rating, at the same time that funding costs will be reduced.

Sale of Norwegian primary capital certificates

In mid-April 2007, Swedbank sold its remaining holding of primary capital certificates in Norwegian savings banks. The sale had no material impact on earnings.

New head of Swedish Banking

In November 2007, Kjell Hedman was named the new head of Swedish Banking. CEO Jan Lidén previously also served as the head of Swedish Banking.

Swedbank opens branch in Poland

A decision was made to establish a representative office in Poland. The office will offer advisory services to business customers in the Nordic countries, the Baltic states, Russia and Ukraine.

Branch sales to savings banks

Swedbank and Sparbanken Alingsås announced in November that Swedbank’s operations in Lerum will be taken over by Sparbanken Alingsås. In November, it was also announced that Swedbank’s branches in the municipalities of Osby and Hässleholm will be taken over by Kristianstads Sparbank and Tyringe Sparbank, which will form the new Sparbanken N Ö Skåne.

Agreement with KP Pension & Försäkring

Swedbank Robur signed an agreement with KP Pension & Försäkring in November to manage slightly more than SEK 40bn of KP’s capital beginning in the first quarter of 2008.

Proposed dividend raised by 9 percent to SEK 9.00 per share

The Board of Directors proposes that the AGM 2008 approve a cash dividend of SEK 9.00 per share (8.25).

Guidelines for remuneration of senior executives

The most recent guidelines, adopted by the AGM 2007 apply until AGM 2008 and entail the following. The Remuneration Committee shall review the guidelines annually, and prepare a proposal for the Board. The Board, in turn, shall propose a remuneration guideline for senior executives for approval by the AGM. The CEO shall ensure that relevant decision-making bodies in each subsidiary establish rules in accordance with the guidelines. The guidelines cover remuneration agreements with Swedbank’s CEO (Level 1), members of the group executive management (Level 2) and persons in the top-level management team of each strategic business area, CEOs of major subsidiaries and heads of group staff units within Swedbank AB (Level 3) ("senior executives"), including each change in remuneration for senior executives decided after the adoption of the guidelines. Each year, based on the principles set out in the remuneration guidelines, the Board will, based on the proposal by the Remuneration Committee, decide on the specific remuneration terms for each senior executive covered by the guidelines. If, in the opinion of the Board, specific reasons apply in an individual case, the Board may decide to deviate from the guidelines. Remuneration to senior executives consist of the following components: base salary, short-term incentive programs (STI programs), long-term incentive programs (LTI programs), benefits and pensions. Each senior executive may be entitled to general benefits that the bank offers its employees, as well as certain additional extra benefits. Pension benefits in general comply with local laws, agreements and customs in each country. Pension benefits can be defined benefit or defined contribution schemes, and are vested. In addition to pension benefits (defined benefits) according to collective agreements (which apply to all Swedish employees), all top executives employed after 2006 in Sweden shall – if pension benefits are to be provided – be covered by a defined contribution pension.

The salary upon which a pension is based may not exceed a certain amount. The total remuneration cost covers the annual cost of base salary, STI, LTI, benefits and pension, including social security contributions and payroll tax. The total number of senior executives entitled, and the number of senior executives at each level may change. The following maximum benefit costs apply until the AGM 2008: Level 1; 400 income base amounts, Level 2; 350 income base amounts and Level 3; 300 income base amounts. When determining individual remuneration, each executive is evaluated in accordance with an established, structured benchmark procedure for determining and comparing salaries and benefit data.

STI programs are structured in accordance with the bank’s general policy for incentive programs. Relevant performance goals, which promote the interests of the bank and its shareholders, are established in advance. Relevant performance goals are connected to the business area of the senior executive in question. The goals also constitute a basis for an ongoing, structured evaluation and dialogue concerning goal achievement and remuneration between the bank and the senior executive. Any outcome is based on an assessment of how relevant performance goals have been achieved, and payment is made in cash after the end of each financial year. Each STI program is limited to a maximum amount based on a percentage of base salary, or a fixed amount. The performance goal for a STI program is normally based on the performance during a financial year. Due to market changes, the bank may from time to time want to adjust performance goals in order to achieve an efficient incentive structure prior to the beginning of an accounting year. Consequently, the Board may adopt STI programs running from the beginning of an accounting year subject to approval by the AGM. Currently, the bank has not adopted any LTI programs. Each LTI program is approved by the AGM. All fixed remuneration is paid by the bank in accordance with previous agreements. Payment of commission/bonus, in accordance with STI or LTI programs, is approved by the Board for each individual program in the form of a total amount per program.

Salary during a notice period and severance generally comply with the local laws, agreements and customs in each individual country. For senior executives employed after 2006, the following apply: In case of notice of termination of employment by the bank, salary can be paid for a notice period of 0–12 months. In addition, severance pay can be paid for 6–12 months. For certain senior executives employed prior to 2006, longer periods may apply.

The Board’s proposal for new guidelines to apply until the AGM 2009 reflects changes in that the circle of senior managers is adjusted to include Swedbank’s CEO and the members of the Group Executive Management.

Disclosures regarding the Swedbank share, etc.

When the EU takeover directive was implemented in Swedish law, certain new disclosure requirements regarding the Swedbank share took effect in 2007.

The total number of shares in Swedbank was 515,373,412 on 31 December. There is one class of shares, Class A, which means that each share carries one vote and all shares have equal rights to participate in the bank’s assets and profits. There are no limitations on the transferability of the Swedbank share by law or according to the articles of association.

There is only one shareholder with at least a tenth of the votes of all the shares, Sparbanksstiftelsernas Förvaltnings AB, which held 86,400,000 shares, or 16.76 percent of the total number of shares on 31 December. Employees owned 10,851,400 shares in Swedbank AB through the Kopparmyntet profit-sharing fund, 1,391,000 shares through the Kärven profit-sharing fund and 556,035 shares through the Guldeken profit-sharing fund. Voting rights for these shares may not be exercised directly by employees.

There are no limitations on how many votes each shareholder can cast at the AGM. There are no agreements between shareholders that the bank is aware of that would limit the right to transfer the shares. The articles of association do not contain any specific rules on appointing and dismissing Board members or on amending the articles of association. The Swedish Companies Act governs such cases.

The AGM 2007 resolved that, in its securities operations, the bank may, at any given time until the AGM 2008, acquire treasury shares to facilitate these operations. Such acquisitions shall be made in accordance with the Securities Business Act (1991:981), without restriction on the method of acquisition, at a price corresponding to current market value and such that the total holding of such shares at any given time does not exceed 1 percent of all shares in the bank. The bank may also divest shares that, in accordance with the resolution of the AGM, have been acquired in the securities operations at a price corresponding to current market value.

The AGM also authorized the Board to decide to acquire treasury shares in addition to those acquired in the securities operations. However, the bank’s holding of such shares, over and above those acquired in the securities operations, may not at any time exceed 5 percent of the total number of shares in the bank. The authorization was not utilized in 2007.

The company is not party to any significant agreements that take effect, are amended or cease to apply if control over the company changes as a result of a public takeover offer.

In accordance with an agreement with the Chair of the Board dated in September 2002, Carl Eric Stålberg shall receive a pensionable remuneration in an amount corresponding to prior salary for a period of 36 months, if the reason for Carl Eric Stålberg not being re-elected is that the company is the object of an acquisition or merger, however, not longer than for the period remaining until he becomes 60 years of age. The right to remuneration is conditional, among other terms, that 50 percent of his income from any new employment is deducted from the remuneration to the extent that the Board doe not decide otherwise.

There are no other agreements between the company and Board members or employees that prescribe remuneration at termination of employment as the result of a public purchase offer.

Accounting policies

No significant changes were made in the accounting policies during the year, with the exception that interest income and expenses related to trading assets and liabilities are now recognized in net interest income in the consolidated income statement. Previously they were recognized in net gains and losses on items at fair value in the consolidated income statement. Comparative figures for 2006 and 2005 have been restated.

During the first quarter of 2007, certain financial transactions were made to hedge the exposure to variations in future cash flows. They are recognized as cash flow hedges, meaning that the effective part of the change in the value of the hedging instruments is recognized directly in equity.

The group uses the option to irreversibly valuate separate portfolios of lending and deposits at fair value, since, together with derivatives they essentially eliminate the portfolio’s aggregate interest rate risk. As of 2007, the parent company has also chosen to use the valuation option. Comparative figures have been restated, due to which the opening balance of shareholders’ equity for 2006 has been adjusted.

The accounting policies applied are described in Note 2.

HIGHLIGHTS AFTER DECEMBER 31, 2007

Swedbank Robur named Fund Manager of the Year 2007

In January 2008, Swedbank Robur was named Fund Manager of the Year for 2007 by the business daily Dagens Industri and Morningstar. In the annual competition, Swedbank Robur won the award in the category Fund Management Company of the Year. Overall, Swedbank Robur received the most medal points, which led to its Grand Prix award as Sweden’s Fund Manager of the Year. The jury’s motivation was, "For strong fund performance in 2007."

Swedbank Robur acquires Folksam Fond AB

On 2 January 2008, Swedbank Robur acquired all shares in Folksam Fond AB. The acquisition was settled with a cash amount. The following acquisition analysis was prepared on the acquisition date. The initial account, presented below, is preliminary and may be updated within 12 months.

Recognized in the group on the acquisition date, SEKm Jan. 2, 2008
Assets 58
Liabilities 15
The subsidiary’s net asset 43
   
Intangible fixed assets, fund management assignment 583
Related deferred tax –163
Total 463
   
Cost, cash 463

The value allocated to the fund management assignment will be amortized on a systematic basis through the income statement during its remaining useful life, which is estimated at 20 years.