Risk and Capital Adequacy 2012

120 Pages·2013·1.37 MB·English

Risk and Capital Adequacy
2012
Contents
1 Introduction - Risk overview 2012– Swedbank in brief
4 1. Enterprise risk management
10 2. Regulation
15 3. Credit risks
70 4. Liquidity risks
82 5. Market risks
91 6. Operational risks
97 7. Capital base and capital requirement
111 8. Internal capital adequacy assessment process – ICAAP - Pillar 2

About this report
This report comprises the Swedbank Financial Companies Group (FCG) and pertains to conditions as of
31 December 2012. It provides information on the capital base, capital requirements and risk
management of the most significant companies, subsidiaries and financial company groups within the
Swedbank Group. It also provides some information for the Swedbank Group. Information about
Swedbank’s corporate governance structure and philosophy is presented in its Corporate governance
report which is updated annually. Information about risk implications of the remuneration process and
aggregate as well as granular quantitative information on remuneration are disclosed in Information
about remuneration in Swedbank 2012 which is published in conjunction with the General Shareholders
Meeting. All of the documents mentioned above are available on www.swedbank.com
Hereinafter, full company names will be given when referring to the relevant legal unit. With reference to
Swedbank AB, the term “Parent Company” may also be used. The term “Swedbank” will be used for the
Swedbank Financial Companies Group. The term “Swedbank Baltic” will be used to denote Swedbank AS
(Estonia), Swedbank AS (Latvia), and Swedbank AB (Lithuania), while “Swedbank Ukraine” will be used for
JSC Swedbank, and “Swedbank Russia” will be used for OAO Swedbank and OOO Swedbank Leasing.
This document has not been audited and does not form part of Swedbank’s audited financial statements.

Swedbank Financial Companies Group
The difference between Swedbank Group and Swedbank Financial Companies Group (FCG) is shown below,
where  means 100% consolidation. When percentages are shown under ”Swedbank Group” the company
is included using the equity method. Any changes in legal entity structure are reflected on www.swedbank.com
Legal entity name Countries Swedbank Group Swedbank FCG
Swedbank AB Sweden  
Swedbank Mortgage AB Sweden  
Swedbank Finance AB Sweden  
Swedbank Robur AB Sweden  
Swedbank Luxembourg S.A. Luxemburg  
Swedbank Franchise AB Sweden  
Swedbank BABS Holdong AB Sweden  
FR&R Invest AB Sweden  
First Securities AS Norway  
Swedbank First Securities LLC USA  
Sparia Insurance Company Sweden 
Ölands Bank AB Sweden  
Ektornet AB Several countries  
Swedbank Försäkring AB Sweden 
OAO Swedbank Russia  
OAO Leasing Russia  
JSC Swedbank Ukraine  
Swedbank AS Latvia  
Swedbank AB Lithuania  
Swedbank AS Estonia  
ATM Holding AB Sweden 70% 
Bankomat AB Sweden 20% 
Entercard HoldingAB Sweden, Norway, Denmark 50% 50%
Swedbank Sjuhärad AB Sweden 47.5% 
Sparbanken Rekarne AB Sweden 50% 
Färs & Frosta Sparbank AB Sweden 30% 
Vimmerby Sparbank AB Sweden 40% 
UC AB Sweden 20% 
BDB Bankernas Depå AB Sweden 20% 
BCG Holding AB Sweden 29% 
Finansiell ID-Teknik AB Sweden 28% 
Rosengård Invest AB Sweden 25% 
RISK OVERVIEW 1

Risk overview 2012

Economic environment
2012 started with a dawning hope of economic recovery following liquidity stimulus from the
European Central Bank (ECB) and subsequent refinancing of weakened European banks.
Despite resolute ECB actions the real economy continued to deteriorate. During August the
ECB announced additional stimulus targeting the weaker member countries of the European
monetary union (EMU). The perceived tail risk in Europe was diminished and the confidence in
the financial markets strengthened. Tangible effect on the real economy has however not yet
visualised and the macro economic development remains uncertain.
Meanwhile, in Sweden, government finances remained robust and well balanced, which helped
give the country a stronger relative position in the credit markets. Swedbank’s home markets
remained largely unaffected during the first half year thanks to the strong government
finances and a well capitalised corporate sector. During the second half of the year the region
began to feel the impact of a bleaker economic outlook, driven by a significant decrease in
export growth. Swedbank’s credit quality however remained solid and profit generation was
strengthened on the back of successful repricing activities.
Swedbank in 2012
In 2012 Swedbank continued to reduce its overall risk level. Credit risk was lowered through a
decrease of high risk credit exposures and through improved asset quality. During the year
exposures to Russia and Ukraine declined by SEK 7.4bn (4.8bn). Despite turbulent market
conditions, Swedbank’s exposure to market risk remains low with stable income generation
from its market making- and customer sales operations.
Liquidity risk was reduced further from already conservative levels through continued
prolongation of the maturity profile, additional diversification of funding base and increased
liquidity reserves. By the end of 2012 Swedbank had a survival horizon of more than 12
months with the capital markets completely shut down. This applies to the Group’s total
liquidity as well as liquidity in USD and EUR. The capital base increased thanks to strong profit
generation; by the end of the fourth quarter, Swedbank’s Common Equity Tier 1 (CET1) ratio
was 17.4% (15.7%), making it one of the most well capitalised banks in Europe.
Credit risks
Swedbank’s credit and asset quality further improved during 2012, mainly driven by the
continued decrease in problem loans in its Baltic operations and the divestment of parts of its
Ukrainian credit portfolio. The Swedish operations continued to report low credit impairments.
The Baltic operations reported increased recoveries during the fourth quarter thanks to the
completion of a number of major reconstructions with positive results. Compared with 2011
recoveries were lower in Baltic Banking. In Ukraine, credit impairments increased during the
year, mainly due to Swedbank’s decision to exit the retail segment, where portions of the retail
portfolio were sold off.
Global financial tension during the year has not had a major impact on the bank’s balance
sheet. This was partly the result of careful credit analysis, and also because customers have
been quick to adapt to market uncertainty and shown great resilience.

Swedbank Risk and Capital Adequacy 2012
RISK OVERVIEW 2

Liquidity risks
Swedbank saw strong demand from domestic and international debt investors in 2012, which
allowed it to attract new investors and broaden its investor base. Through public and private
transactions executed in various markets, currencies and maturities, Swedbank issued a total
of SEK 142bn in long-term debt instruments in 2012, primarily covered bonds and senior
unsecured funding.
Looking forward, Swedbank has entered a phase where its need to refinance long-term debt is
significantly lower than it has been in recent years. Over the next few years the maturities of
long-term funding will be substantially smaller.
Market risks
The ongoing European debt crisis directly affected interest and currency rates, as well as
equity and fixed income asset prices. In addition, the Riksbank’s three repo rate cuts in 2012
added to increased market activity in trading as well as hedging. In this backdrop, Swedbank’s
trading book kept risks lower than the previous year, experienced very few large-scale losses,
and yet still generated stable earnings.
Overall, the most significant risk factors for Swedbank’s market risk profile remains to be
interest rate risk in the lending operations and the currency risk from its holdings in foreign
subsidiaries in Lithuania, Latvia, Russia and Ukraine.
Operational risks
Swedbank’s overall level of operational risk decreased during 2012 but is still considered
higher than normal. During the year, Swedbank implemented extensive stabilisation measures
to ensure its IT operations and accessibility through the Internet Bank and ATMs. The work to
modernise, consolidate and improve efficiency in the bank’s IT infrastructure has begun to
have a positive effect on operational risks.
Capital base and capital requirement
The quality of Swedbank’s capital base strengthened during 2012 following strong profit
generation; in addition the bank’s risk level was reduced, mainly in the corporate portfolio. As
a result, in Q4 2012 Swedbank boasted one of the strongest Common Equity Tier 1 ratios
among European peers. The strong capital position means that Swedbank is well prepared for
future regulations.
Based on internal stress tests and a conservative view of how pending regulations will
ultimately look, Swedbank’s executive management believes the bank will need a CET1 1 ratio
of 13 to 15 per cent when all the new rules have been fully implemented.

Swedbank Risk and Capital Adequacy 2012
RISK OVERVIEW 3

Swedbank in brief
B A C K G R O U N D – A B O U T S W E D B A N K
Swedbank is a bank for the many households and businesses. With over 7.8 million private customers and more than 600
000 corporate and organisational customers, Swedbank is the largest bank in Sweden based on number of customers. The
customers are served through more than 500 branches in 13 countries, principally the four home markets of Sweden,
Estonia, Latvia and Lithuania. To support business in these markets, Swedbank is also established in neighbouring markets
such as Finland, Norway, Denmark and Russia, as well as in important financial countries such as the US, China, Luxembourg
and Spain. Swedbank also conducts banking operations in Ukraine.
Swedbank consists of four business areas: Retail, Large Corporates & Institutions, Baltic Banking and Group Functions &
Other. Swedbank’s policy is to maintain a low risk level, with the majority of exposures in mature markets such as Sweden.
Good risk diversification is achieved through a broad base of customers and businesses from many different industries. The
bank also maintains a sustainable balance between lending and deposits in all its markets. Customers’ cash flow, solvency
and collateral are always the key lending variables.
Key Figures Operating Profit
2011 2012 SEK m
18,498
Return on equity, % 12.2 14.4 20 000
15,586 15,423
Earnings per share, SEK 9.52 12.19 13,819
15 000
Return on total assets, % 0.65 0.76 9,955
Credit impairment ratio, % -0.14 0.05 10 000
Common Equity Tier 1 ratio, % (Basel 2) 15.7 17.4
Common Equity Tier 1 ratio, %, Basel 3 incl. IAS19 14.3 15.4 5 000
Cost-income ratio, % 0.53 0.54
0
Loan-deposit ratio, % 213 212 2007 2008 2009 2010 2011 2012
Full-time employees 16 287 14 861 -5 000
-10 000
Balance sheet data (SEK bn) 2011 2012 -9,461
Loans to the public* 1 166 1 184
Deposits from the public* 547 558 Lending to the public
Total equity 98,133 106 070
SEK bn
Total assets 1 857,065 1 846 941 800
Risk-weighted assets, Basel 2 492 337 464 339 2011 2012
Total Income by Business Area 600
Asset Group
Management, Functions 400
4% & Other,
Baltic
8%
Banking, 15%
200
Retail, 56%
0
LC&I, 18% private corporate private corporate private corporate private corporate
Retail LCI Baltic Banking Russia & Ukraine
Risk and Capital
Capital base Risk-weighted assets by business area Risk-weighted assets by type
20 % 500 % 600 %
400 500
15
300 400
10 300
200
200
5
100
100
0 0
0
2011 2012 2011 2012
Retail 2011 2012
Common Equity Tier 1 ratio (Basel 2) Large Corporate & Institutions Operational risk
CET1 basel 3 incl IAS19 Baltic Banking Market risk
Asset management
Capital adequacy ratio Group Functions Credit risk

Swedbank Risk and Capital Adequacy 2012
1. ENTERPRISE RISK MANAGEMENT 4

1. Enterprise risk management

Preventing and managing risk is central to Swedbank’s
operations. Risk management begins with our business
operations – in meetings with customers, for example –
and encompasses every employee. In addition, an
independent risk organization ensures that risk
management is conducted efficiently and in accordance
with group-wide procedures in order to protect the bank
against unintentional or undue risk-taking.

D E F I N I T I O N
Swedbank defines risk as a potential negative impact on the value of the group that may arise
from current internal processes or from internal or external future events. The concept of risk
combines the probability of an event occurring with the impact that event would have on profit
and loss, equity and the value of the group.

Risk appetite and risk management strategy
Risk arises in all financial operations, and managing it well is central for success. A strong
common risk culture within the bank, with decision making and responsibility kept close to the
customer, serves as the foundation for efficient risk management and, by extension, a strong
risk-adjusted return.
The Board of Directors has the ultimate responsibility for Swedbank’s risk-taking and capital
assessment. Through an enterprise risk management (ERM) Policy, the Board provides
guidelines for the CEO on risk management and risk control, and how these functions support
the business strategy. This policy specifies the risk appetite, the concept of three lines of
defence, the risk universe (i.e. the risks Swedbank has identified, see table above), and the
fundamental principles of risk management, as well as roles and responsibilities.
For risk appetite, the policy states that Swedbank is to maintain a low risk profile, in terms of
both capital and liquidity. Swedbank’s long-term risk profile is to be managed so that a
severely stressed scenario, as defined in the annual internal capital adequacy assessment
process (ICAAP), should not have a significant impact the Common Equity Tier 1 ratio. If the
impact exceeds the level established by the risk appetite, preventive measures must be taken
to reduce the bank’s risk.
In order to ensure and improve risk control in different operations the Board has also

Swedbank Risk and Capital Adequacy 2012
1. ENTERPRISE RISK MANAGEMENT 5

formulated risk appetites for each main risk type.
For credit risk, the Swedbank shall maintain a well-diversified credit portfolio with a low risk
profile. All credit activities shall strive towards a long-term customer relationship and rest on
sound business acumen to achieve solid profitability and avoid credit expansion that may
endanger the long run stability of the Group. The overall risk appetite is broken down into
detailed risk tolerance limits and target levels for different industries, geographies and
products. If certain levels are reached, this will trigger pre-defined processes to take actions. In
addition, the CRO has established soft escalation limits which serve as early warning
indicators.
For market risk, the primary objective of Swedbank’s activities in financial markets shall be to
satisfy the long-term needs of its customers and the secondary to generate a return by means
of position taking. Risk shall always be weighed against expected return. Positions shall only
be taken in products or markets where the market risks are properly understood. No positions
shall be taken that could be deemed unethical or that could jeopardize the Group’s reputation.
For liquidity and funding, Swedbank shall maintain a conservative risk profile with resilience
to both short term and long term external stress and maintain an adequate buffer of highly
liquid assets to enable it to withstand a prolonged period of liquidity stress without relying on
forced asset sales or government intervention. The Group shall have a long term, stable, well
diversified funding and investor base with a wholesale funding that is well diversified across
markets, instruments and currencies. Maturity mismatch risk in assets funded by unsecured
wholesale funding shall be avoided. All non liquid assets, not eligible for covered bond
issuance, shall be funded either through customer deposits or through wholesale funding with
a maturity matching or exceeding that of the assets. The Swedish mortgage loan portfolio
shall be of such quality that sufficient collateral is available to sustain the Group’s covered
bond funding in a stressed scenario.
For operational risk, Swedbank shall not experience Operational risk related losses or
incidents that materially negative impact the funding, capitalization and third party credit
rating of the Group. The bank’s maximum level of operational risk is further defined in the
tolerance limits by a stated level of expected and unexpected financial loss, amount of capital
held as well as a number of specific qualitative statements which relate directly to the
operations of the Group.
R I S K D E S C R I P T I O N
Credit risk - The risk that a counterparty will not meet its financial obligations to the Group, and the Risk
that pledged collateral will not cover the claims of the Group. The credit risk includes counterparty risk,
concentration risk and settlement risk.
Market risk - The risk to value, earnings, or capital arising from movements of risk factors in financial
markets. This risk includes Interest rate risk (including real- and nominal interest rates, credit spreads and
basis spreads), Currency risk, Equity risk (including Dividend risk), and Commodity risk (including precious
metals) and risks from changes in volatilities or correlations.
Liquidity risk - The risk of not being able to meet payment obligations at maturity or when they fall due.
Operational risk - The risk of losses resulting from inadequate or failed internal processes, people and
systems, or from external events. The definition of operational risk includes legal risk and compliance risk.
Insurance Risk - The risk of a change in value due to a deviation of the actual claims payments from the
expected amount of claims payments (including expenses)
Other risks - Other risks Swedbank may face includes, but is not limited to, Pension risk, Business Risk,
Strategic risk and Reputational risk.

Swedbank Risk and Capital Adequacy 2012
1. ENTERPRISE RISK MANAGEMENT 6

Three lines of defense

Successful risk management requires a strong risk culture and a common approach that
permeates the entire bank. Swedbank builds its approach to risk management on the concept
of three lines of defence, which signifies a clear division of responsibilities between the risk
owner (the business units), the control functions (Group Risk), and the Internal Audit.
T H R E E L I N E S O F D E F E N C E
First line of defense Second line of defense Third line of defense
The Business is responsible for Risk Control and Compliance is Internal Audit tests, validates,
managing its risks and independent from the Business and is and assesses efficiency in
maintaining adequate internal responsible for identifying, measuring, governance, risk management
controls in its day-to-day assessing and reporting all risks that the and internal controls on
operations. bank is exposed to. behalf of the Board.

First line of defence – Risk management by operations
Each of Swedbank’s business units and subsidiaries bears full responsibility for the risks its
operations engender. The local branch offices are closest to our customers; they have the
primary knowledge about the customer and the specific markets where the customer
operates. As a responsible financial partner, it is in the bank’s interest that its customers do
not take unnecessary risks. Through personal meetings the bank can give customers advice on
their overall financial situation. In lending, our decisions are based on the customer’s cash flow,
solvency and collateral.
By keeping responsibility close to the customer, our staff can respond rapidly if problems arise.
Clear procedures and processes govern how credits are approved, reviewed and managed in
the event that the borrower experiences problems in meeting payments. When a company
has, or might have, financial problems, the bank’s special units for problem loans get involved
as early as possible to find a solution that helps the customer and decreases the bank’s risk.
Risk management is based on clear-cut targets and strategies, policies and guidelines
explaining how the bank operates in various contexts, an efficient operating structure, and a
simple and clear process for reporting and escalation. Standardised risk classification tools
provide support in the credit approval process.
Second line of defence – Independent risk control
The second line of defence, Group Risk, lies under the Chief Risk Officer (CRO), and consists of a
number of specialized units, essentially organized by risk type. Also included here is the bank’s
unit for problem loans (FR&R).
These functions are independent from the business. They are responsible for upholding
principles and frameworks for risk management and facilitating risk assessment. They also
work to promote a sound risk culture by supporting and training employees throughout the
bank.
The risk organisation is responsible for identification, measurement, analysis and reporting of
all risks. Group Risk shall ensure that each key risk the Group faces is identified and properly
managed by the relevant business owners and that a holistic view on all relevant risks is
submitted to the Board as well as the CEO. It provides relevant independent information,
analyses, and expert judgment on risk exposures and advice on proposals and risk decisions
made by management as to whether they are consistent with the Group’s Risk Appetite and
Risk Tolerance. Stress tests are carried out to assess the effects of more dramatic – but
nonetheless possible – macroeconomic or regulatory changes, such as the effects of falling

Swedbank Risk and Capital Adequacy 2012
1. ENTERPRISE RISK MANAGEMENT 7

home prices, rising unemployment and low or negative economic growth. These stress tests
help us assess whether measures need to be taken to mitigate risks.
Depending on the risk assessment Group Risk has different responsibilities. For the most
serious risks, Group Risk acts more directly to prevent and manage them.
A special credit risk unit issues internal regulations, such as mandate structures for credit
decisions, and minimum requirements for customer cash flow and collateral. Moreover, in
larger credit exposures, specialists from the risk organization are called upon to support the
business organization in the assessment of risk. For exposures above certain sizes, the
decisions are taken in credit committees in order to provide duality together with the business
organization; these committees are headed by a representative of the credit risk function.
Each major business unit has a local credit function and a function for compliance and
operational risk; the latter identifies and reports compliance risks and operational risks and
helps management to address these risks.
Third line of defense – internal audit
Internal Audit is a centralized, independent Group function, directly subordinated to the Board
of Directors. The role of Internal Audit is to review and evaluate whether Swedbank’s network
of governance, risk management, and internal control processes is adequate and functioning.
Internal Audit generates value by contributing to lasting improvements in operations and is
also tasked with identifying and minimizing activities that do not add value to Swedbank’s
business or support processes.
The work of Internal Audit is risk-based and process-based. The audit plan is established
through an annual risk assessment, and also considering specific audit activities stipulated by
the applicable regulatory framework under which the Group operates. Quarterly risk
assessments are performed to calibrate the audit plan and to optimize the utilization of
resources.
In fulfilling its role, Internal Audit performs compliance audits, operational audits and
governance audits and can also, under certain conditions, provide consulting services to Group
entities. Where deficiencies are identified, mitigating actions are agreed with management
and followed up on a quarterly basis until closed.
The conclusions from performed audit activities, including follow-up of agreed actions, are
reported to the Board of Directors, the Audit Committee, the CEO and Executive Management
on a quarterly basis.
Overview of Swedbank’s risk profile
Credit risk
At Swedbank, where the customer base consists mainly of private individuals and small and
medium-sized companies, credit risk is the dominant risk type. Credit risks lie on the asset side
of the balance sheet, mainly in the form of lending to customers.
The vast majority of Swedbank’s credit risk exposure is in Sweden. With a broad customer
base among private individuals and companies in many different industries, Swedbank has
good diversification of its credit risks.
Swedbank’s lending to the public consists largely of residential mortgages in Sweden, with
very low risk. This lending is primarily financed through borrowing from the capital market in
the form of covered bonds. Swedbank’s corporate lending is dominated by small and medium-
sized companies in Sweden and is largely financed through deposits from the public. The level
of risk in corporate lending is somewhat higher, though still relatively low.

Swedbank Risk and Capital Adequacy 2012
1. ENTERPRISE RISK MANAGEMENT 8

Risk in the bank’s other lending in the Baltic countries is higher, but with differences between
countries. Estonia, which joined the euro zone in 2011, has historically had lower default levels
than Latvia and Lithuania and also recovered faster from the economic downturn in 2008–09.
Swedbank Lithuania showed good recovery in 2012 while Swedbank Latvia is somewhat
lagging behind due to the lower quality of mortgage lending issued before the crisis and larger
share of the residential development portfolio. The ratio of deposit volume in relation to
lending continued to increase in the Baltic countries also during 2012.
The risk level in Russia and Ukraine is considerably higher than in Sweden and the Baltic
countries, and Swedbank continues to reduce its operations there. The process of exiting our
retail operations in Russia and Ukraine is progressing according to plan. During the second
quarter portions of the private portfolio in Ukraine were sold and the transfer of the
previously divested Russian private portfolio was completed. During the third quarter
Swedbank decided to close its last 10 branches in Ukraine.
Market risk
Swedbank’s market risks arise mainly in connection with funding operations and with financial
products that the bank offers to meet customer needs. Interest rate risk, which is Swedbank’s
largest market risk, arises as a natural element on both the asset and liability sides of the
bank’s balance sheet through, for example, customer demand for different interest terms on
deposits versus loans. The bank centralizes all interest rate risk to a limited number of business
units for the purpose of managing this risk efficiently, partly by matching maturities and partly
by using derivative instruments. Currency risk mainly arises through the bank’s business units
outside of Sweden.
1. Swedbank’s balance sheet
2000
SEKbn
1800
1600
1400 Other liabilities
Other assets Baltic Banking deposits
1200 Equity
Baltic banking lending Government guaranteed
1000 Seniorunsecured
Other Swedish and Subordinated debt
Nordic corporate lending
800
Other Swedish private lending
600
Covered bonds
400
200
Swedish mortgagelending Swedish and Nordic deposits
0

Liquidity risk
Liquidity risk arises because the maturity structure differs on the asset versus the liability side
of the balance sheet; lending is typically longer in duration than deposits. Thus, access to long-
term financing is imperative to manage liquidity risks. Swedbank has established a diversified
funding through a number of short- and long-term borrowing programs in a number of capital
markets. Along with customer deposits, the bank’s most important funding source is
Swedbank covered bonds, which are secured through the bank’s low-risk Swedish mortgage
lending. In addition, the bank holds a liquidity reserve consisting of securities with high
creditworthiness which can be pledged to central banks or divested on short notice.
The financial crisis of 2008 underscored the importance of liquidity management and
financing strategy and the fact that the public view of risk in the credit portfolio can have a
major influence on a bank’s ability to secure financing in the market.

Swedbank Risk and Capital Adequacy 2012