2005 Annual report

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Annual report

2005

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ADMINISTRATION REPORT

The Annual General Meeting of Handelsbanken will be held at the Grand Hôtel, Vinterträdgården, Royal entrance, Stallgatan 4, Stockholm, at 10.00 a.m. on Tuesday, 25 April 2006.

NOTICE OF ATTENDANCE AT ANNUAL GENERAL MEETING

Shareholders wishing to attend the AGM must:

• be entered in the register of shareholders kept by VPC AB (the Swedish Central Securities Depository and Clearing Organisation), on or before Wednesday, 19 April 2006, and

• give notice of their attendance at the latest by 3 p.m. on Wednesday 19 April 2006 to Chairman’s Offi ce, Handelsbanken, Kungsträdgårdsgatan 2, SE-106 70 Stockholm, Sweden, telephone +46 8 701 19 84, or via the internet at www.handelsbanken.se/bolagsstamma.

To be entitled to take part in the AGM, any shareholders whose shares are nominee-registered must also request a temporary entry in the register of shareholders kept by the VPC. Shareholders must notify the nominee about this well before 19 April 2006, when this entry must have been effected.

DIVIDEND

The board of directors proposes that the record day for the dividend be Friday, 28 April 2006. If the AGM votes in accordance with this proposal, the VPC expects to be able to send the dividend to shareholders on Thursday, 4 May 2006.

PUBLICATION DATES FOR INTERIM REPORTS

January – March 24 April 2006

January – June 18 July 2006

January – September 24 October 2006

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SVENSKA HANDELSBANKEN ■ ANNUAL REPORT 2005

ADMINISTRATION REPORT SVENSKA HANDELSBANKEN ■ ANNUAL REPORT 2005 11

Handelsbanken in brief

HANDELSBANKEN’S GOALS

■ Handelsbanken’s fi nancial goal is to have higher profi tability than the average for its competitors.

■ The fi nancial goal should be achieved by the Bank having more satisfi ed customers and lower costs than its competitors.

■ Higher profi tability should benefi t the shareholders by greater growth in dividends than at the Bank’s competitors.

HANDELSBANKEN’S STRENGTHS

■ For the past 34 years, Handelsbanken has had higher profi tability than the average for its competitors.

■ For the past 16 years, Handelsbanken has had the highest level of customer satisfaction in Sweden.

■ For many years, Handelsbanken has been one of the most cost-effective universal banks in Europe.

■ For a long time, Handelsbanken has had a lower loan loss ratio than its competitors.

■ No Nordic bank has a higher rating than Handelsbanken.

HANDELSBANKEN’S CORPORATE PHILOSOPHY

■ A strongly decentralised organisation – the branch is the Bank.

■ Focus on the customer – not individual products.

■ Profi tability always has higher priority than volume.

■ A long-term perspective.

■ The Oktogonen Foundation – the Bank’s profi t-sharing system.

HANDELSBANKEN TODAY

■ Handelsbanken conducts universal banking operations with 455 branch offi ces in Sweden, 37 in Norway, 36 in Finland, 35 in Denmark and 20 in Great Britain. In addition, the Bank has units in 13 countries to support the branch offi ce operations in its domestic markets.

■ Total assets SEK 1,581bn.

■ Operating profi t SEK 15.7bn.

■ Number of employees 9,395.

SVENSKA HANDELSBANKEN ■ ANNUAL REPORT 2005 HANDELSBANKEN IN BRIEF

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SVENSKA HANDELSBANKEN ■ ANNUAL REPORT 2005 3

Highlights of 2005

■ Profi ts were SEK 15.7bn.

■ Return on shareholders’ equity was 18.0%.

■ The board proposes a dividend increase of 17% to SEK 7.00.

■ Sixteen new branches were opened: four in Sweden, fi ve in Great Britain, three in Norway, one in Finland, one in China, one in Russia and one in France.

■ Handelsbanken was the only bank of the major players in the Swedish mutual fund market to continue to have a considerably larger proportion of net savings than its share of the total volumes. The Bank’s share of net savings was 18%.

■ Handelsbanken has the most satisfi ed customers in the Nordic region when weighing together the surveys in Sweden, Norway, Denmark and Finland.

■ Handelsbanken Liv’s customers received 10.49% return on their insurance assets. This was the third year running that Handelsbanken Liv paid a much higher return on the insurance assets compared to its major competitors.

■ On 1 January 2006, SPP was demutualised to become a profi t-distributing life insurance company.

HIGHLIGHTS OF 2005 3

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4

The group chief

executive’s comments

THE GROUP CHIEF EXECUTIVE’S COMMENTS

Last year was a record year for Handelsbanken. In 2005, we boosted our profi ts by 16% and reported our best ever results, SEK 15.7 billion.

But perhaps even more important was that, for the 34th year running, we again achieved our corporate goal: higher return on equity than the sector average. It is true that the gap to the average has shrunk, but it has always been that way when times have been good for banks.

Our superiority has always been based on two strengths:

more effi cient operations and lower loan losses. The ratio between expenses and income is a good measure of a bank’s cost-effectiveness. We are still by far the most cost-effective, being the only major bank in the Nordic region with a cost/

income ratio before loan losses below 50%. For 2005, this fi gure dropped to 41.5%.

It is always possible to be more effi cient and this is some- thing we must always be. But when the economy is booming and interest rates are low, it can be diffi cult to have much lower loan losses than our competitors. 2005 was such a year – overall for the whole Swedish banking sector, recoveries were larger than the sum of new write-offs.

Of course, a situation like this cannot last for ever. It is too late to build up a good credit portfolio in economic down- turns. That can only be done when times are good. Then it is important not to let yourself be rushed by competitors or the market. Handelsbanken’s credit policy has been unchanged for a very long time.

SUCCESS IN THE MARKETS

We experienced a strong increase in volumes in almost every product area. In the Swedish market, our household deposits grew by 7% and we raised our market share. In mutual fund savings, 2005 was the seventh year in a row that our share of new savings was larger than our proportion of the total volume in Sweden. The strong growth in the mortgage market meant that our mortgage loan portfolio grew by SEK 32 billion, or 12%. This may be slightly slower than the market as a whole, but our share of new sales rose gradually throughout the year.

The upgrading of our card products meant that the number of outstanding Allkort cards increased by 31%; at the same time, the purchase volume grew by 70% and the price was

reduced by 30%. The bonus that we have linked to using the card has worked very well and we contribute to reducing the use of cash in society, which is also an important task.

During the 2003–2005 period, Handelsbanken was the leading adviser for completed M&A transactions in Sweden, with by far the greatest number of transactions and also the highest overall transaction value.

Market shares and volumes increased signifi cantly in each of our other four domestic markets.

THE NORDIC COUNTRIES AND GREAT BRITAIN – OUR DOMESTIC MARKET

Today our domestic market consists of fi ve countries: Sweden, Norway, Finland, Denmark and Great Britain. Operations in the regional banks outside Sweden have approximately the same return on equity as in the Swedish operations, but naturally, a much higher rate of growth. At the end of the year, the Bank had 455 branches in Sweden and 128 branches in its four other domestic markets.

So far, when starting a branch network outside Sweden, we have applied the same model. First, a fairly large number of years in the country, but only dealing with business related to our domestic markets. Then a cautious start with local corporate business from one single location. Then we open more branches and do more local business – not just with companies but also with private individuals. Then, our Swedish origin is no longer particularly useful – there is no country with so many Swedish contacts that these alone can underpin a broad-based branch operation. When we open branches in new locations, we quite simply have to be better than any other bank in town.

Just being more Swedish than others isn’t any help.

Where growth in the branch offi ce network in the other Nordic countries is concerned, our expectation is that around fi fty branches in each country should be enough when you build up the operations yourself. If you acquire profi table, old branches, of course you should keep them. Fifty branches per country is therefore not an absolute upper limit – it is more a refl ection of our view that normally the locations left are too small to become profi table in a reasonable period of time.

In each of the other Nordic countries we now have around forty branches, so we have achieved 80% of our branch- opening phase. This doesn’t mean that our phase of income growth has come to an end in the Nordic countries – far from it. We know that a new branch increases its profi ts by around three million Swedish kronor each year, at least as far as we can foresee. But it also means that if the Bank’s branch network is to continue growing, we must start looking at other

But perhaps even more important was that, for the 34th year running, we achie- ved our corporate goal: higher return on equity than the sector average. It is true that the gap to the average has shrunk, but it’s always been that way when times have been good for banks”

Our superiority has always been based on two strengths: more effi cient opera- tions and lower loan losses”

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countries. In this case, we will need other ways of growing than solely the method we have chosen until now. Since we have more experience today, we can build up branch operations in many more countries than the ones we are in today.

We can also reduce the time between starting up and when we do business with local customers too. Our geographic expansion will therefore be quicker and look different in the future. We made some important decisions in this area in 2005.

EXPANDING IN EASTERN EUROPE

We have received all the required permits to conduct banking operations in Estonia. Our Tallinn branch will open in the second quarter of 2006. In Tallinn, we will immediately take outright Estonian risks as well, among both corporate and private customers. The branch in Tallinn is being opened in close collaboration with our Finnish operations. Since Tallinn will be able to draw on our Finnish regional head offi ce, our new operations in Estonia will be much cheaper than is usually the case when setting up in new countries.

We have also become a key investor in the East Capital Explorer Financial Institutions Fund. This will give us unique insights into how to acquire and run banks in Eastern Europe. This collaboration may become very important for our future growth. But we are also using our normal tactics to build banking operations in a new country. In 2006, we are starting to build up a branch network in Poland. We have been present in Poland since 2001, doing Nordic-related business. Poznan and Gdansk will be the fi rst places outside Warsaw where we will begin doing local, Polish business.

SPP BECAME A PROFIT-DISTRIBUTING COMPANY In 2005, the fi nal decisions were taken for the demutualisation of SPP, and this was implemented as planned at the year-end.

In April, the Finansinspektionen (the Swedish Financial Super- visory Authority) gave permission to demutualise the company in accordance with the guidelines that a large majority of the policyholders had already accepted in 2004. During the autumn, the board of the Bank decided that it was also in the interests of the shareholders to demutualise.

This took us another step along the path we had chosen when we acquired the life insurance company RK A in 1992.

The occupational pensions market is one of the fastest growing areas in the fi nancial sector and it can be expected to continue its rapid pace of growth. There is a genuine, long-term need for savings and it is natural for a bank to meet this need.

Since insurance in Sweden is mainly sold by mutually-run companies, this is also a sector with major opportunities for increased effi ciency and better risk management. Effi ciency and risk are two areas where we are true experts. We have proven this for many years in the area of banking. In 2005, we were also able to demonstrate that we could transfer this know-how to the insurance fi eld. Handelsbanken Liv reported profi ts of SEK 580 million, which can be compared with what we paid for the company back in 1992: SEK 150 million and SEK 150 million as a capital contribution.

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Our customers also like the profi t-distributing concept.

It is not surprising that in the past few years they have mainly valued the guarantee aspect, a guarantee where the guarantor is actually someone with money. In more normal times, I be- lieve that effi ciency, transparency and fairness will be increas- ingly important. And of course, successful management of the assets which is one of the reasons that we enhanced our asset management during the year.

STRONG CAPITAL SITUATION

The Bank’s capital situation was already good at the begin- ning of the year. But we wanted to be prepared for the growth we suspected would come on our more recent markets and we also wanted to be able to inject adequate capital into SPP in conjunction with the demutualisation of the company.

Our credit volume grew by a total of SEK 123 billion, or 14%. SEK 53 billion of this came from our new markets, a growth of 31%. In Sweden, our credit volume grew by 9%.

We were able to use tier II capital to capitalise SPP and were therefore able to resume buybacks of our own shares during the fourth quarter.

My assessment is that the capital situation remains bright – brighter than for other Nordic banks, which to a much greater extent have already used up what they have available for share buybacks. This gives us scope for further buybacks in 2006.

HANDELSBANKEN HAS THE MOST SATISFIED CUSTOMERS IN THE NORDIC COUNTRIES

Satisfi ed customers are central to our growth. That is why we closely follow the survey of how satisfi ed the Bank’s customers are. In 2004, the surveys already showed that Handelsbanken had the highest customer satisfaction levels in the Nordic region. In 2005, we increased our lead even more.

We won the following “events” among the nationwide fi nancial institutions:

• household customers – banks, Sweden

• corporate customers – banks, Sweden

• household customers – mortgages, Sweden

• corporate customers – mortgages, Sweden

• household customers, Denmark

• corporate customers, Norway

• household customers, Finland

• corporate customers, Finland

Last year I wrote that we would do our utmost to come fi rst in the areas where we don’t yet have the absolutely most satisfi ed customers. Through our successes in Denmark, Finland and Norway, we are now well on our way to achieving this goal.

Our customers are satisfed when the IT systems work and we meet them with respect and take pleasure in our work. It is the Bank’s employees who achieve this and I would like to offer my warm thanks to all my colleagues for their efforts during 2005.

Thanks to you we have been able to increase our effi ciency, make our customers even more satisfi ed and thus increase our return on equity. It is with great confi dence that I am now passing over the job of leading Handelsbanken to Pär Boman.

I have always been proud to work for Handelsbanken. With Pär Boman at the helm, I know I will remain so.

Stockholm, February 2006

Lars O Grönstedt

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Handelsbanken’s goals and methods

GOALS GOAL ACHIEVEMENT

Handelsbanken’s overall fi nancial goal is to have higher return on equity than a weighted average of comparable listed Nordic and British banks.

Handelsbanken’s return on equity after standard tax was 17.8%. Return on equity for a weighted average of comparable banks was approximately 17.0%. This means that 2005 was the 34th consecutive year that Handelsbanken met its overall fi nancial goal.

METHODS

The Bank will achieve this goal by having the most satisfi ed customers in the Nordic countries.

Therefore the quality of the Handelsbanken Group’s services must meet the expectations of demanding customers.

OUTCOME

Once again in 2005, Handelsbanken had the most satisfi ed customers in Sweden – both private and corporate – when compared to the Swedish universal banks with nationwide branch networks. An overall weighting of the results of the surveys in Denmark, Finland and Norway showed that Handelsbanken had the most satisfi ed customers in the Nordic countries.

Cost-effectiveness should be higher than in comparable banks.

Costs as a proportion of income fell to 41.5% during the year. As in previous years, Handelsbanken was the listed Nordic bank with the highest cost- effectiveness level.

Profi tability is always more important than volume.

When granting credits, this means that the quality of the credits must never be neglected in favour of achieving higher volume.

Handelsbanken reported net recoveries on loan losses and no loan losses. The loan loss ratio was thus -0.03%. The corresponding fi gure for other Swedish banks was 0.00%.

Handelsbanken’s higher profi tability should benefi t the shareholders through greater growth in dividends than the average for other listed Nordic banks.

The board proposes a dividend for 2005 of SEK 7.00 per share, an increase of 17%. If the annual general meeting resolves in accordance with the board’s proposal, this means that Handelsbanken’s dividend will have increased by 75% during the last fi ve years.

The corresponding increase for comparable Nordic banks was 56%.

Handelsbanken seeks to employ the best people and develop them within the Group. The general rule is to recruit managers internally.

96% of all managers in Sweden were recruited internally. For the whole Group, including the markets where the Bank is relatively new, the corresponding fi gure was 91%.

GOALS AND METHODS

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8 HANDELSBANKEN’S GOALS AND METHODS

WORKING METHODS

Overall responsibility close to the customer

The Bank’s working methods are based on overall customer responsibility as close to the customer as possible. This means that the Handelsbanken Group’s business operations are highly decentralised. The most important means of control are the corporate policy and corporate culture, which are deeply rooted throughout the entire Group, and an effective fi nancial control system.

A basic concept is that the organisation and working methods should be based on the branch offi ces’ responsibility for individual customers and not on the central units’ responsibility for product areas or market segments.

For every single customer – individual or corporate – there is total responsibility at one point in the Handelsbanken Group: at the customer’s local branch of the Bank. The branch is responsible for:

• ensuring that the customer obtains high-quality and co-ordinated services from all units of the Group

• managing all loans by the Handelsbanken Group to individuals, companies or corporate groups

• the customer paying the right prices for the services used

• the Bank’s profi tability on the overall business relationship with the customer.

Consequently, the individual branch offi ce is responsible for the Group’s marketing. There is no central marketing depart- ment. The Bank does not make central marketing plans, nor does it control the branches’ marketing activities at the central level by giving priority to certain customer categories or product areas. For many years, Handelsbanken has consistent- ly and successfully applied and developed this basic concept.

Universal banking

Handelsbanken is a universal bank; in other words, the Bank provides services in the whole banking area. This comprises traditional corporate business, investment banking and trading as well as consumer banking and life insurance.

With 455 branches, Handelsbanken is strong in the Swed- ish market. Over the past 15 years, universal banking operations have been developed in Denmark, Finland and Norway, and since 2000 also in Great Britain. Handelsbanken had a total of 128 branches in Denmark, Finland, Norway and Great Britain. The Bank views these markets as domestic markets.

The Bank’s units in other countries are adapted to offer Nordic and British customers good service and to conduct Nordic- and British-related business with international customers.

ORGANISATION

Handelsbanken’s organisation aims at promoting the interplay between branches, specialists and support functions.

The Bank’s organisation should be viewed as a single unit focusing on the individual customer and with the branch offi ce at the forefront.

Branch Regional

head offices

Central head office and subsidiaries Customer

THE HANDELSBANKEN GROUP’S ORGANISATION

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THE MARKET, COMPETITORS AND CUSTOMERS

The market, competitors and customers

Handelsbanken’s domestic markets are the Nordic countries and Great Britain. The Bank’s focus is profi tability and satisfi ed customers.

MARKETS

Handelsbanken conducts universal banking operations with branches in Sweden, Norway, Finland, Denmark and Great Britain. Handelsbanken regards these markets as its domestic markets where it offers a complete range of fi nancial products and services: traditional banking business for private individuals and companies, including insurance products, investment banking and trading.

MARKET CONDITIONS

After a slight slowdown during the early months of 2005, the global business cycle accelerated during the summer.

The upswing was driven by the pick-up in domestic demand in the major Asian economies, led by China.

The Nordic economies appear to be benefi ting from increased globalisation, with new industrialised countries and the growth of world trade. One effect of this trend was a sharp jump in the demand for oil, and rising crude oil prices naturally gave the Norwegian economy a boost. Growing oil company profi ts led to increased investment activity, a stronger labour market and rising household incomes. Thus the period of record low interest rates came to an end, and during the summer, Norwegian monetary policy tightened.

The other Nordic countries also benefi ted from the global growth. The engineering sector in Finland and Sweden has a product mix that ties in well with the increasing global demand for investment goods and transportation. The upturn in the telecom sector was also maintained in 2005. Increasing global trade caused freight prices to soar, which benefi ted the Danish and Norwegian shipping companies. Like the Norwe- gian economy, the Danish economy has received a boost from the low interest rates. House prices increased dramatically, and the ECB’s key rate hike in December gave the Danish central bank some welcome scope to follow suit.

It would appear as if the low interest rates have had a much greater effect on the Nordic economies than on continental Europe, with rising house prices and an upswing in new con- struction. This was one factor behind the Swedish Riksbank’s decision in the autumn to indicate that it was time to normal- ise interest rates, following the sharp repo rate cut in the summer. One pan-Nordic tendency was that government fi nances showed a signifi cantly stronger trend than in the major euro- zone countries. This created scope for both tax cuts and public expenditure increases. Since the Norwegian parliamentary election there has been fi scal expansion, and Sweden is likely to follow suit in 2006, its election year. Thus it would not be very appropriate if monetary policy was also expansive.

In the UK, the fi nancial sector benefi ted particularly from the major changes in the global economy. Time-wise, the UK was ahead of the Nordic region in terms of economic policy.

British government fi nances showed a positive trend for a number of years as a result of the country’s healthy economic growth; this paved the way for the public sector expansion of the past few years. Monetary policy was shifted as early as 2003, to reduce the risk of infl ation and restrain the rapid increase in house prices. Thus the Bank of England achieved what now looks to be a soft landing for the housing market, and after a slight rate cut in the summer of 2005, house prices and credit growth seemed to have started climbing again during the autumn.

The Nordic region and the UK were both part of the wave of mergers and acquisitions (M&A) which began in earnest in 2005. Globalisation is contributing to good returns on corporate capital, while interest rates are being kept low. Strong cash fl ows allowed companies to strengthen their balance sheets substantially and create good conditions for M&A activity. Corporate investments also took off in 2005. Thus the rapid growth in household credits of the past few years was followed by an increase in lending to companies. Low interest rates, robust earnings growth and rising M&A activity therefore made up the foundation of the strong stock market performance during 2005.

MARKET TRENDS

As a universal bank, Handelsbanken operates in the various segments of the fi nancial area, the most important ones being the credit market and the savings market. Handelsbanken has no volume goals – either in absolute fi gures or as market share – and instead always gives higher priority to profi tability than volumes.

The savings market

Swedish households’ total savings in mutual funds, retail bonds, insurance products and bank deposits were SEK 3,707bn. Handelsbanken’s market share was almost 11%, making it the fourth largest player in the Swedish savings market. This market has expanded substantially in recent years. Between 2000 and 2005 new savings totalled SEK 563bn. Some 18% of this was deposited with

Handels banken, which means that the Bank had the highest proportion of new savings during this period.

Handelsbanken’s share of household deposits in Sweden rose slightly during the year to almost 16% while in the other Nordic countries it was under 2%.

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10 THE MARKET, COMPETITORS AND CUSTOMERS

Lending

The Swedish mortgage market continued to grow. The household mortgage lending market in Sweden grew by 14% to SEK 1,102bn (963). Competition continued to be intensive.

In a market with relatively similar products, price is often the most easily available weapon in the hunt for a greater share of the market. Handelsbanken’s market share for Swedish household mortgage loans was just over 27%.

Total lending to non-fi nancial companies in Sweden rose to SEK 1,143bn (1,031). Handelsbanken’s market share was 30%. Handelsbanken’s market share for corporate lending in the other Nordic countries was largest in Finland at some 15%

and in Norway at around 8%. In Denmark it was lower.

Household deposits

Market shares in Sweden

10 11 12 13 14 15 16 17 18

-05 -03 -01 -99 -97 -95 -93 -91

%

Source: Statistics Sweden.

Previously the total market was reported excluding small savings banks.

These have been included since January 1998.

Lending to companies

Market shares in Sweden

■ Handelsbanken 30%

■ FöreningsSparbanken 20%

■ Nordea 17%

■ SEB 13%

■ Others 20%

Source: Statistics Sweden. Total lending (bank and mortgage) to non-financial companies in total currency.

COMPETITORS

The Nordic banking market has long been undergoing a proc- ess of consolidation, where a few large banks have achieved strong market positions through mergers and acquisitions.

For the past couple of years, the market has been dominated by six major players: Handelsbanken, SEB, Nordea, Förenings- Sparbanken, Danske Bank and DnB NOR.

Competition on the Nordic banking market is fi erce, and this applies to both the big banks and the niche players.

Major international fi nancial groups are also active on the Nordic market and have won considerable market shares within, for example, investment banking. However they have been less successful in more traditional banking business, which is partly due to the high effi ciency of the domestic banks. Compared with most other European banks, the Nordic banks have considerably lower costs in relation to both income and business volumes.

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THE MARKET, COMPETITORS AND CUSTOMERS

THE BANK’S CUSTOMERS

Handelsbanken is a service company that focuses on its customers – not on individual products. Handelsbanken’s organisation and methods of work are based on the branches’

responsibility for individual customers and not on the central units’ responsibility for product areas or market segments.

The local branch has business and profi tability responsibility for the Group’s overall exchange of business with the customer. The branch is responsible for providing the customer with expert and co-ordinated services from all units in the Handelsbanken Group.

Customer satisfaction

Handelsbanken aims to have the most satisfi ed customers of the Nordic banks. The Bank therefore attaches great importance to customer satisfaction surveys and acts on the results.

In Sweden, independent surveys of customer satisfaction in the banking fi eld have been performed every year since 1989.

They are carried out by a company called Svenskt Kvalitetsin- dex (Swedish Quality Index), one of whose sponsors is the Stockholm School of Economics. The index weighs together a number of variables such as image, expectations, product and service quality and value for money. The Swedish survey for the year showed that, once again, Handelsbanken was the universal bank with a nationwide branch network which had the most satisfi ed customers, both private and corporate.

Since the survey started, Handelsbanken has been in top position every year for private customers and every year but one for corporate customers.

In the equivalent survey in Finland, Handelsbanken de- fended its top position from previous years for private customer satisfaction. For the fi rst time, corporate customer satisfaction was also measured and Handelsbanken was also in fi rst place there.

In Denmark, only private customer satisfaction was measured, and there, Handelsbanken was best. In Norway, the Bank improved its results signifi cantly, being fi rst in terms of both satisfaction and loyalty among corporate customers, and coming a close second among private customers.

Svenskt Kvalitetsindex’s survey also covered satisfaction among mortgage and life insurance customers. Handelsbank- en Liv had the most satisfi ed life insurance customers. The Bank also had the most satisfi ed corporate customers among the mortgage players.

Customer satisfaction index

Private customers

50 55 60 65 70 75 80

05 04 03 02 01 00 98/99 97 96 95 94 93 92 91 Index

Handelsbanken SEB, Nordea and FSB

Customer satisfaction index

Corporate customers

50 55 60 65 70 75 80

05 04 03 02 01 00 98/99 97 96 95 94 93 92 91 Index

Handelsbanken SEB, Nordea and FSB

Responsibility for fi nancial advice

Handelsbanken’s fi nancial advisory services are based on the individual customer’s needs. The adviser obtains an overall picture of the customer’s circumstances and fi nancial situation, and the Bank can then make an investment proposal which is individually adapted to the customer’s needs, investment horizon and risk level. As in other areas, the customers are themselves responsible for the actual decision.

Many of Handelsbanken’s employees have long experience and excellent knowledge of the investment area. The Bank’s investment advisers are licensed by the Swedish Security Dealers’ Association.

In 2004, legislation on consumer fi nancial advice was implemented in Sweden. The law states that by 1 July 2005, at the latest, the Bank must show that its employees who provide advice on fi nancial instruments have relevant knowledge appropriate to their work tasks. Handelsbanken produced a licensing course which complies with these requirements.

During spring 2005, some 3,800 employees received their licence. In addition, employees are regularly trained and authorised in the investment and insurance fi eld, so that they can meet the requirements of customers and also their own and external competence demands.

Customer complaints

Handelsbanken takes customer complaints very seriously.

This is one way of focusing on routines and services that do not function as they should. Complaints are registered by the branches in a special database. The management of the Bank and the units concerned are regularly informed about the situation concerning customer complaints. The Bank’s website has information for customers who want to draw the Bank’s attention to any problems. Customers should fi rst talk to their local branch, where the problem will normally be solved directly. The Bank also has a designated complaints manager to whom customers can turn if they wish to have their case reconsidered.

For several years, Handelsbanken has had the lowest proportion of complaints submitted to the National Board for Consumer Complaints of all the major banks.

In addition, in the past few years, the Bank has developed a special procedure for managing complaints, and branch employees are given a special course every year in dealing with complaints.

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ADMINISTRATION REPORT SVENSKA HANDELSBANKEN ■ ANNUAL REPORT 2005

12

Review of operations

Handelsbanken’s operating profi t rose by 16% to SEK 15,665m (13,553). Return on shareholders’ equity was 18.0% (16.6), and for the 34th year running, the Bank achieved its corporate goal of having higher return on equity than comparable banks. The cost/income ratio improved further, falling to 41.5% (42.8). Earnings per share rose to SEK 17.00 (14.55).

The parent company’s operating profi t was SEK 7,559m (6,677). For further information about the parent company, see pages 88–118.

INCOME AND EXPENSES

Income increased by 10% to SEK 26,338m (23,963). Net interest income, net fee and commission income and net gains/

losses on fi nancial items at fair value were all income categories which increased. Net interest income, which is by far the largest income item, increased by 2% to SEK 15,090m (14,808) despite pressure on margins in most of the Bank’s markets. Net fee and commission income rose by 18%, mainly due to higher insurance commissions and equity-related commissions. Net gains/losses on fi nancial items at fair value improved by 45%, mainly because the Bank realised most of the increase in value arising during the year in its equity portfolio. This is reported according to the “available-for-sale” rules.

Expenses rose by 7% to SEK 10,938m (10,245). Higher IT costs, expansion outside Sweden, the acquisition of SPP Liv Fondförsäkring AB and exchange rate differences accounted for over half of the increase. The remainder of the increase was due to higher staff costs, in particular performance-related re- muneration. The Bank had no loan losses. Instead it reported net recoveries.

The Bank does not conduct research and development as such, but limited resources are invested in monitoring technical progress in areas which may be of future importance for banking operations. For further information see note 7 on page 59.

BUSINESS AREAS

Branch offi ce operations, Asset Management and Pensions

& Insurance reported higher profi ts, while Handelsbanken Markets’ earnings decreased. Within Pensions & Insurance, Handelsbanken Liv increased its profi ts by 156% to SEK 580m (227). The administration, risk and fi nancial results all increased and the policyholders received 10.49% in return on their assets. Branch offi ce operations’ profi ts rose by 12%

to SEK 12,416m (11,108). Income rose by 6%, while costs increased by 4%. Loan losses in 2004 turned into recoveries, which further increased earnings. Branch offi ce operations boosted their profi ts, both in Sweden and abroad. Cost increases in Sweden were low while the regional banks outside Sweden were affected by the gradual opening of new branches. Profi ts of branch offi ce operations in Sweden rose by 9% to SEK 10,238m (9,420) and outside Sweden profi ts increased by 45% to SEK 1,735m (1,193).

CAPITAL RATIO

The Group’s capital ratio was 11.6% (10.0) and the Tier 1 capital ratio was 7.6% (7.6). Tier 1 capital rose by SEK 8.5bn to SEK 58.4bn (49.9). The increase was due to profi ts gener- ated during the year and subordinated loans issued, including

subordinated loans classifi ed as tier 1 capital contributions, reduced by the proposed dividend and the repurchase of the Bank’s own shares.

RATING

The Bank is rated by three agencies: Standard & Poor’s, Moody’s and Fitch Rating. These companies analyse the Bank, which results in a rating. During 2005, the Bank’s rat- ings were unchanged and no other Nordic bank has a higher rating than Handelsbanken. Moody’s rating was Aa1, while the rating from both Standard & Poor’s and Fitch Rating was AA-. One of the advantages of having a high rating is that funding costs in the international markets are less than those paid by a bank with a lower rating.

SPP BECAME A PROFIT-DISTRIBUTING COMPANY After the policyholders in SPP in early summer 2004 voted in favour of demutualising the company, the Finansinspektionen gave its permission in April 2005. In October, the board of the Bank decided that it was also in the interests of the shareholders to demutualise. At its December meeting, the board resolved on the capital contribution to SPP required for the demutualised company. As previously announced, in January 2006, the Bank injected SEK 11.2bn as a shareholders’ contribution, of which SEK 3.5bn was used to cover the shortfall in the insurance portfolios.

BUYBACK AND CANCELLATION OF SHARES

The AGM in 2005 resolved to cancel 23.7 million shares that the Bank had repurchased during 2004 and by means of a bonus issue to increase the nominal value of the Bank’s shares from SEK 4.15 to SEK 4.30. The board also received a mandate to repurchase a maximum of 40 million shares during the period until the 2006 AGM. This mandate was used during the period 26 October 2005 to 9 January 2006, when the Bank repurchased 14.7 million shares; 13.2 million of these were repurchased in 2005. The board is requesting the 2006 AGM to cancel the repurchased shares and, with the purpose of adjusting the capital structure, to authorise the board to repurchase a maximum of 40 million shares.

EARNINGS PER SHARE AND APPROPRIATION OF PROFITS

Earnings per share were SEK 17.00 (14.55). The board recommends that the AGM resolve on a dividend of SEK 7.00 (6.00) per share for the class A and B shares, an increase of 17%. The rec- ommendation for appropriation of profi ts is shown on page 119.

MANAGEMENT CHANGES

In autumn 2005, the chairman of the board, Arne Mårtens- son, announced that he would be declining re-election to the board of Handelsbanken at the 2006 AGM and thus would be leaving his post as chairman of the board. The nomination committee has proposed that the present CEO, Lars O Grönstedt becomes the new chairman. The board intends to propose Pär Boman, Executive Vice President of the Bank and most recent- ly head of Handelsbanken Markets, as the new CEO. All these changes will be made in connection with the 2006 AGM.

Operating profi t rose by 16% to SEK 15.7bn (13.6). The return on shareholders’ equity was 18.0% (16.6).

ADMINISTRATION REPORT

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ADMINISTRATION REPORT 13

Key fi gures and quarterly performance

Quarterly performance for the Handelsbanken Group

SEK m 2005:4 2005:3 2005:2 2005:1 2004:4

Interest income 12 904 11 492 12 302 11 166 11 044

Interest expense -9 111 -7 730 -8 572 -7 361 -7 369

Net interest income 3 793 3 762 3 730 3 805 3 675

Fee and commission income 2 284 1 997 2 032 1 869 1 891

Fee and commission expense -305 -287 -282 -253 -230

Net fee and commission income 1 979 1 710 1 750 1 616 1 661

Net gains/losses on financial items at fair value 1 517 801 682 459 674

Risk result - insurance 39 62 80 28 49

Other dividend income 0 4 149 5 2

Share of profit of associated companies 4 19 22 14 61

Other income 81 62 53 112 89

Total income 7 413 6 420 6 466 6 039 6 211

General administrative expenses

Staff costs -1 775 -1 651 -1 615 -1 637 -1 588

Other expenses -995 -897 -969 -886 -960

Depreciation, amortisation and write-downs of property and equip-

ment and intangible assets -70 -149 -148 -146 -77

Total expenses -2 840 -2 697 -2 732 -2 669 -2 625

Profit before loan losses 4 573 3 723 3 734 3 370 3 586

Loan losses/recoveries 37 252 2 -30 -175

Gains/losses on disposal of property and equipment and intangible

assets 0 0 4 0 0

Operating profit 4 610 3 975 3 740 3 340 3 411

Taxes -1 289 -1 072 -997 -942 -887

Profit for the year 3 321 2 903 2 743 2 398 2 524

Attributable to

Ordinary shareholders 3 321 2 903 2 743 2 398 2 524

Minority interest - - - - -

Earnings per share, SEK* 4.99 4.33 4.10 3.58 3.77

* No dilution.

Key figures for the Handelsbanken Group

2005 2004 2003 2002 2001

Profit before loan losses, SEK m 15 400 13 718 11 843 10 781 11 360

Loan losses/recoveries, SEK m 261 -167 -492 -392 -152

Write-downs/reversed write-downs of financial

non-current assets, SEK m 199 -199 -

Operating profit, SEK m 15 665 13 553 11 550 10 190 11 208

Profit for the year, SEK m 11 365 9 860 8 116 7 282 8 290

Total assets, SEK m 1 580 733 1 316 789 1 260 454 1 277 514 1 174 521

Shareholders’ equity, SEK m 65 651 61 372 56 835 52 192 48 112

Return on shareholders’ equity, % 18.0 16.6 14.9 14.6 18.4

Return on shareholders’ equity after standard tax, % 17.8 16.4 15.3 14.6 17.8

Return on total assets, % 1.08 1.05 0.90 0.83 0.99

Cost/income ratio, % 41.5 42.8 46.9 50.2 47.5

Loan loss ratio, % -0.03 0.02 0.06 0.05 0.02

Bad debt reserve ratio, % 65.9 53.4 51.4 60.9 59.4

Proportion of bad debts, % 0.12 0.21 0.28 0.23 0.25

Capital ratio, % 11.6 10.0 10.2 9.3 9.9

Tier 1 capital ratio, % 7.6 7.6 7.3 6.4 6.1

Average number of employees 9 395 9 150 9 258 9 752 9 239

No. of branches in Sweden 455 453 453 456 458

No. of branches in other Nordic countries and Great Britain 128 120 101 96 93

For definitions, see inside back cover.

2004 has been restated in accordance with IFRS. For 2001 to 2003 the figures are presented according to the previous format.

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ADMINISTRATION REPORT SVENSKA HANDELSBANKEN ■ ANNUAL REPORT 2005

14

Handelsbanken’s shares and shareholders

Handelsbanken aims for its higher profi tability to benefi t shareholders by means of higher dividend growth than the average of the other listed Nordic banks.

Shares per shareholder

31 December

Shareholders Shareholdings

Number of shares Number

% of all shareholders

Number of shares in thousands

% of share capital

Average number per holder

1 – 500 shares 58 816 59.7 10 568 1.6 180

501 – 2 500 shares 29 105 29.5 33 660 5.0 1 157

2 501 – 25 000 shares 9 830 10.0 57 684 8.6 5 868

25 001 – 250 000 shares 622 0.6 44 504 6.6 71 549

250 001 – shares 209 0.2 510 055 76.2 2 440 454

Shares repurchased by Handelsbanken 13 170 2.0

Total 98 582 100.0 669 641 100.0 6 659

The major Swedish shareholders

31 December

% of votes

% of capital

Industrivärden 10.3 10.0

Oktogonen Foundation 10.2 9.9

Alecta 5.0 4.8

Robur funds 3.4 3.3

AMF and funds 3.2 3.1

2nd National Swedish Pension Fund 2.4 2.3

Handelsbanken’s funds 2.3 2.3

AFA 2.1 2.3

SEB funds 1.9 1.8

Skandia Liv 1.8 1.7

4th National Swedish Pension Fund 1.7 1.7

Nordea funds 1.7 1.6

Lundbergföretagen/F Lundberg etc 1.3 1.3 1st National Swedish Pension Fund 1.0 0.9 3rd National Swedish Pension Fund 0.9 0.8

Key figures

2005 2004 2003 2002 2001

Earnings per share, SEK 17.00 14.55 11.70 10.50 11.99

Dividend per share, SEK 7.00 * 6.00 5.25 4.75 4.50

Dividend growth, % 16.7 14.3 10.5 5.6 12.5

Adjusted shareholders’ equity per share, SEK 100.07 92.30 82.61 75.48 69.50

Price of class A share, 31 Dec, SEK 197.00 173.00 147.00 116.00 154.00

Average daily turnover on Stockholm stock exchange

Class A, number of shares 2 573 108 2 550 130 2 663 856 2 488 517 1 892 366

Class B, number of shares 59 610 154 003 57 964 52 986 85 252

Highest/lowest price paid, class A shares, SEK 199.5/156.5 174.5/136.5 148.5/103.5 162.5/97 170/132

Dividend yield, % 3.6 3.5 3.6 4.1 2.9

P/E ratio 11.6 11.9 12.6 11.0 12.8

Stock exchange price/equity, % 197 187 178 154 222

* Dividend as recommended by the board.

In all essential respects, the figures have been adjusted to take account of current accounting policies and definitions, see inside back cover.

Shares divided into share classes

31 December

Share class Number

% of capital

% of votes

Average prices/

Repurchased amount

Nominal value

Class A 649 949 219 97.06 99.70 2 794 781 642

Class B 19 692 243 2.94 0.30 84 676 645

669 641 462 100.00 100.00 2 879 458 287

Total repurchases in 2005

Class A 7 805 900 1.17 1.20 at 189.26 33 565 370

Class B 5 364 400 0.80 0.08 at 184.64 23 066 920

13 170 300 1.97 1.28 2 467 815 969 56 632 290

After repurchases

Class A 642 143 319 97.82 99.78 2 761 216 272

Class B 14 327 843 2.18 0.22 61 609 725

Total after repurchases 656 471 162 100.00 100.00 2 822 825 997 As at 24 May 2005, 23,745,953 class B shares were cancelled. At the same time, the nominal value of the shares was raised from SEK 4.15 to SEK 4.30 by means of a bonus issue. During the year, 7,805,900 Class A shares were repurchased and 5,364,400 class B shares were repurchased.

The average number of outstanding shares in 2005 was 668,573,671.

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ADMINISTRATION REPORT 15

THE SHAREHOLDERS

Handelsbanken has nearly 105,000 shareholders, including the Danish shareholders who received one share each in connection with the Bank’s acquisition of Midtbank. Some 50%

of the total number of shares were owned by major Swedish institutional holders. As at 31 December 2005, international investors owned 25% (22%) of the number of outstanding shares.

THE HANDELSBANKEN SHARE

Handelsbanken’s shares are listed on the A list of the Stock- holm stock exchange and are among the most traded shares.

One trading unit is equivalent to 100 shares. The Bank’s share capital is SEK 2,879m and the nominal value is SEK 4.30 per share.

There are two classes of shares: A and B. In terms of both number and turnover, the class A shares are by far the most important. Class A shares each carry one vote, while class B shares carry one-tenth of a vote each. Of the outstanding shares, class A shares represent 97.8% of the capital and 99.8% of the votes.

REPURCHASE OF OWN SHARES

Since the 2000 annual general meeting, Handelsbanken has been able to repurchase its own shares. This opportunity was used in 2000 and 2001. A net total of 21.4 million shares were then repurchased and subsequently cancelled on 5 July 2004. In 2002 and 2003, the Bank neither repurchased nor divested any shares. During 2004, 23.7 million class B shares were repurchased. The 2005 AGM resolved to cancel these shares. At the same time, the nominal value was increased to SEK 4.30 per share.

At the AGM on 26 April 2005, the board of the Bank was given a mandate to repurchase 40 million shares until the next AGM, and also to sell previously repurchased shares with the purpose of fi nancing possible acquisitions. During the fourth quarter of 2005, the Bank repurchased 7.8 million class A shares and 5.4 million class B shares. The Bank’s total holdings of repurchased shares was thus 13.2 million shares.

The shares are to be repurchased on the Stockholm stock exchange, at the prevailing market price. Current information about the number of repurchased shares is available on the Bank’s website at www.handelsbanken.se/ireng

Net earnings and dividend per share

0 2 4 6 8 10 12 14 16 18

2005 2004 2003 2002 2001 2000 1999

Net earnings per share Dividend per share

(For 2005, as recommended by the board) SEK

Share price performance

0 50 100 150 200 250 300 350

■ SHB A

■ AFGX Bank & Insurance

■ AFGX Index

1997 1998 1999 2000 2001 2002 2003 2004 2005

Market capitalisation

31 December

0 20 40 60 80 100 120 140

2005 2004 2003 2002 2001 2000 1999 SEK bn

DIVIDEND POLICY

Handelsbanken’s dividend policy is to be competitive relative to other Nordic banks. The board recommends a dividend for 2005 of SEK 7.00, an increase of 17%, corresponding to a payout ratio of 41% (41%). The board proposes that the record day for dividend be 28 April 2006, implying that the share will be traded ex-dividends from 27 April 2006.

If the AGM decides in accordance with the board’s proposal, Handelsbanken’s dividends will have increased by 75%

during the last fi ve-year period. The corresponding rate of increase for comparable Nordic banks was 56%.

MARKET CAPITALISATION AND SHARE PRICE PERFORMANCE

On 31 December 2005, Handelsbanken’s market capitalisation was SEK 129bn (116), an increase of 11%.

The Swedish stock market grew by 33% during the year.

Virtually all industrial sectors experienced rising share prices. The Affärsvärlden Bank and Insurance Index went up by 24%. Handelsbanken’s Class A shares increased by 14%

When comparing over a longer period of time, Handels- banken’s shares have substantially outperformed the General Index and the Bank and Insurance Index. Since 1997, Handelsbanken’s shares have increased by 204% while the General Index has risen by 115% and the Bank and Insurance Index by 189%.

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2005 Annual report

Annual report

2005

Contents

Handelsbanken in brief

Highlights of 2005

The group chief

executive’s comments

But perhaps even more important was that, for the 34th year running, we achie- ved our corporate goal: higher return on equity than the sector average. It is true that the gap to the average has shrunk, but it’s always been that way when times have been good for banks”

Our superiority has always been based on two strengths: more effi cient opera- tions and lower loan losses”

Handelsbanken’s goals and methods

Branch Regional

head offices

Central head office and subsidiaries Customer

The market, competitors and customers

Handelsbanken’s domestic markets are the Nordic countries and Great Britain. The Bank’s focus is profi tability and satisfi ed customers.

Review of operations

Operating profi t rose by 16% to SEK 15.7bn (13.6). The return on shareholders’ equity was 18.0% (16.6).

ADMINISTRATION REPORT

Key fi gures and quarterly performance

Handelsbanken’s shares and shareholders

Handelsbanken aims for its higher profi tability to benefi t shareholders by means of higher dividend growth than the average of the other listed Nordic banks.