risk management and capital adequacy report pillar 3 - 2013

Risk Management and Capital Adequacy Report Pillar 3 - 2013

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SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2013

Contents

Introduction ................................................................................................................................................ 3 Swedbank in brief 3 Economic environment 4

1. Risk governance .................................................................................................................................... 6 Enterprise Risk Management Policy 6 Three lines of defence 6 Risk appetite and framework 7

2. Capital base and capital requirements ........................................................................................... 9 Highlights 2013 9 Capital base and minimum capital requirements 9 Capital planning 13 Regulatory environment – impact on Swedbank 14

3. Credit risks ........................................................................................................................................... 17 Highlights 2013 17 Credit risk exposures 18 Credit risk exposures - by business area 24 Credit risk exposures - by sector 28 Management of credit risk 36 Measurement of credit risk 38 Counterparty risk 42

4. Market risks ......................................................................................................................................... 45 Highlights 2013 45 Management of market risks 45 Measurement of market risk 46 Market risk exposures 47 Capital requirements for market risks 50

5. Liquidity risks...................................................................................................................................... 51 Highlights 2013 51 Funding and liquidity strategy 51 Management of liquidity risk 54 Measurement of liquidity risk 55

6. Operational risks ................................................................................................................................ 57 Highlights 2013 57 Management of operational risk 58 Capital requirements for operational risk 60

7. Internal capital adequacy assessment process – ICAAP – Pillar 2 ...................................... 61 Highlights 2013 61 Measurement 61 The adverse ICAAP scenario 62 Impact on Swedbank – simulation results 63 RWA and capital assessment results 64 Capital assessment in the adverse scenario 64

Appendix .................................................................................................................................. Appendix 1

Definitions ............................................................................................................................. Appendix 30

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Introduction This Risk Management and Capital Adequacy report is based on regulatory requirements set out in FFFS 2007:5, and pertains to conditions as of 31 December 2013 for the Swedbank Financial Companies Group (see Definitions at the very end of this report) if not otherwise stated.

The report is part of the capital adequacy framework that rests on three pillars:

• Pillar 1 provides rules for how to calculate minimum capital requirements for credit risk, market risk and operational risks. The calculation can either be done using prescribed standardised risk measures or based on the bank’s own internally used risk measures. Swedbank must fulfil certain requirements in order to use its own internally used risk measures and must seek approval from the Swedish FSA and local supervisors in other countries where it operates.

• Pillar 2 requires institutions to prepare and document their own internal capital adequacy assessment process (ICAAP). All relevant sources of risk must be taken into account, that is, not only those already included when calculating the minimum capital requirement for credit, market and operational risks. In cooperation with local supervisors, the Swedish FSA will make an assessment of the banks’ ICAAP and may impose additional capital requirements for “Pillar 2 risks”, meaning risks not covered by the Pillar 1 calculation.

• Pillar 3 requires institutions to disclose comprehensive information about their risks, risk management and associated capital. For Swedbank this is done in the form of this report.

Information about the Swedbank corporate governance structure is presented in the 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) is disclosed in the document “Information about remuneration in Swedbank 2013” which is published in conjunction with the Annual General Shareholders Meeting. All documents mentioned above are (or will be) available on www.swedbank.com.

This report is submitted by Swedbank AB, a public limited liability company with registration number 502017-7753. This document has not been audited and does not form part of Swedbank AB’s audited financial statements.

Swedbank in brief Swedbank is a full-service bank available to all households and businesses in its region. With over 8 million private customers and more than 600 000 corporate and organisational customers across its operations, Swedbank is the largest bank in Sweden based on number of customers. The customers are served through 486 branches in 11 countries. Swedbank has four home markets – Sweden, Estonia, Latvia and Lithuania – and a presence in neighbouring markets such as Finland, Norway and Denmark to support our client base in these home markets. We also operate in key financial hubs such as the US, China and Luxembourg. During 2013, Swedbank closed its banking operations in Ukraine and Russia.

Swedbank consists of four main business segments: (i) Swedish Banking, (ii) Baltic Banking (iii), Large Corporates & Institutions, and (iv) Group Functions & Other.

Swedish Banking is in turn divided into seven business areas which are: (i) Channels & Concepts, (ii) the Northern Region, (iii) the Central Region, (iv) the Stockholm Region, (v) the East Region, (vi) the West Region, and (vii) the South Region.

http://www.swedbank.com/

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Economic environment Global growth strengthened in 2013. Several major economies such as the US and the UK were positive surprises, while the trend in emerging economies was quite the opposite. In Europe, the EMU countries were able to leave the recession behind, and a growing number of indicators pointed during the autumn to a continued recovery.

Growth in the Swedish economy in 2013 was weaker than what Swedbank had forecast. Despite a brighter labour market outlook and positive wealth appreciation – with rising equity and home prices – consumer spending rose surprisingly little. Exports fell across the board. On the positive side, investments climbed, especially in housing. Low global inflation pressures and falling Swedish service prices contributed to significantly lower inflation than expected. The Riksbank cut the discount rate to 0.75% in December 2013.

Of the three Baltic countries, Latvia grew the fastest in 2013. Third-quarter GDP growth was 4.5% in Latvia, followed by 2.2% in Lithuania and 0.7% in Estonia. Strong Latvian consumption growth stood out. The rapid decline in unemployment, higher wage increases and very low inflation strengthened household purchasing power. Previously strong exports slowed in 2013. On 1 January 2014 Latvia joined the EMU. The effects are likely to be limited in the short term, but could reduce the country’s vulnerability to external disruptions in the longer run. Estonia joined the EMU on 1 January 2011, and Lithuania is also poised for EMU membership.

Growth in the Lithuanian economy is increasingly being driven by stronger domestic demand. In 2013, investments accounted for the biggest increase. Households benefited from the improved labour market at the same time as real wages rose at an accelerating pace due to low inflation. Growth in the industrial sector was slowed by weak external demand, but also for industry-specific reasons.

Slower growth in the Estonian economy is mainly due to weaker investment and export growth. Households also account for the majority of growth in the country, driven by a stronger labour market and rising wages. At the same time, rapidly falling unemployment and rising wage costs in Estonia, as well as in the other Baltic economies, are a challenge to the competitiveness of these countries.

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Transparency, low risk, and strong capital base

“During 2012 Swedbank lessened its emphasis on managing post-crisis

activities and increased its commercial focus – an important milestone was

restructuring the bank’s organisation in late 2012 to empower our branch offices and

regions in Sweden, and to provide for better customer service via digital channels. To

facilitate this strategy, Group Risk aligned its organisation in early 2013 to the new

structure, with the aim to further strengthen Swedbank’s risk- and business culture,

and to support more streamlined and efficient business processes – while

maintaining vigilant and relevant monitoring and steering of risks.

I am proud to say that Swedbank continued to reduce its overall risk level

during 2013. We closed our banking operations in Ukraine and Russia during the

year, and through our Ektornet subsidiary (which handles repossessed real estate

properties), we sold off a large proportion of our real estate portfolio there.

Moreover, impaired loans have decreased substantially. Thus we have now disposed

of a great majority of the legacy portfolios from the financial crisis.

Swedbank’s capital base continued to strengthen on the back of stable profit

generation and reduced risk-weighted assets – as a result, the bank boasted one of

the strongest CET1 capital ratios among European peers in Q4 2013. We maintained

a low credit risk level with very low loan loss levels; our largest portfolio, private

mortgages, showed continued high resilience – customers’ payment ability is strong

and collateral values have improved.

Market risk exposures were also kept low and stable without large

fluctuations, and market volatility was lower during much of 2013. Our liquidity

position remained strong thanks to continued proactive funding activities and solid

investor demand for our bond offerings. In a hypothetical scenario of closed markets,

our survival horizon stretched beyond 12 months. Operational risks have decreased

as a consequence of management actions to increase stability in IT and due to the

discontinued operations outside Swedbank’s home markets.

Looking at 2014, Group Risk will maintain focus on supporting the Business

Areas in building a strong and embedded business and risk culture and supporting the

bank as it continues to improve internal processes. Key challenges ahead are the new

regulatory environment as well as global macroeconomic trends.

In compiling this report, our watchword has been Transparency; we aim to

provide readers with an open, clear, and relevant overview of how we work to assure

an adequate capital base and to manage risk at Swedbank.”

Anders Karlsson

Chief Risk Officer

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1. Risk governance

By maintaining an independent risk organisation that ensures proper risk management, Swedbank protects itself from unintentional and unnecessary risk-taking.

Enterprise Risk Management Policy 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 such an event would have on profit and loss, equity and the value of the Group.

Risk arises in all financial operations, and managing it well is central for success. A strong common risk culture within Swedbank, with decision-making and responsibility kept close to the customer, serves as the foundation for efficient risk management and, consequently, a strong risk-adjusted return.

The Board has the ultimate responsibility for Swedbank Group’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 should support the business strategy. The ERM policy specifies the risk appetite, the concept of three lines of defence, the fundamental principles of risk management, and roles and responsibilities.

Three lines of defence Successful risk management requires a strong risk culture and a common approach that permeates the entire Group. Swedbank builds its approach to risk management on the concept of three lines of defence, signifying a clear division of responsibilities between the risk owner (the business units), the control functions (Group Risk) and the Internal Audit.

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Risk appetite and framework The ERM Policy states that Swedbank Group is to maintain a low risk profile, in terms of both capital and liquidity. The long-term risk profile is to be managed so that a severely stressed scenario, as defined in the annual ICAAP, should not have a significant impact on the CET1 capital ratio. If the impact exceeds the level established by the risk appetite, preventive measures must be taken to reduce the risk.

The Board establishes the main principles for the Group’s risk management and decides on the overall risk appetite. In order to ensure and improve risk approach in different operations, the Board has also formulated risk appetites for each main risk type (see below).

The Group Risk organisation is tasked with ensuring that each key risk the Group faces is identified and properly managed by the relevant business owners, that decisions made on the aggregate level are in line with the Group’s risk appetite, and that a holistic view on all relevant risks is submitted to the Board as well as the CEO. The Risk organisation is also responsible for providing the business organisation with operational guidance and support, in part by developing and maintaining internal rules and guidelines in each risk category.

The CEO has established a special committee on Group level, the Group Risk and Compliance Committee (GRCC), to assist him in matters related to all categories of risk and compliance. The committee meets monthly to review, monitor and challenge the Group Risk profile in terms of significant exposures, risk trends, stress tests, losses, management actions and performance versus risk appetite, including compliance with the risk-limit framework. The GRCC also reviews and monitors the management of findings by Compliance, Risk units, Internal Audit and External Audit to secure that these are appropriately implemented and /or rectified.

Credit risk Swedbank maintains a well-diversified credit portfolio with a low risk profile. All credit activities strive towards a long-term customer relationship and rest on sound business acumen to achieve solid profitability and avoid credit expansion that may endanger long-term stability.

A basic principle in Swedbank’s lending operations is that each business unit bears full responsibility for its transactions and its associated credit risks. Each business unit develops and maintains a balanced credit risk, which is achieved by lending to customers with a high debt-service coverage ratio, by maintaining a strong collateral position and by having a diversification within and between sectors and regions.

As regards the counterparty risk, the implementation of an evolved internal framework will start during 2014. The framework includes new measures to better capture the expected change in counterparty exposures, improved integration with market risk, new stress tests, and enhanced reporting.

Market risk The bank’s primary objective in financial markets is to satisfy the long-term needs of its customers, and its secondary objective is to generate a return by means of position-taking. Risk must always be weighed against expected return. Positions will only be taken in products or markets where the market risks are properly understood, and no positions will be taken that could be deemed unethical or that could jeopardise the bank’s reputation.

Only risk-taking units, meaning units assigned a risk mandate or tolerance limits by the CEO, are permitted to take market risks. Group Risk is responsible for measuring, monitoring and reporting limit usages at all levels of the limit structure.

Liquidity and funding risk Swedbank will maintain a conservative risk profile with resilience to both short-term and long-term external stress and will maintain an adequate buffer of highly liquid assets to enable it to

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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, and therefore maturity mismatch risk in assets funded by unsecured wholesale funding will be avoided. Similarly, 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.

In this context, management of liquidity risks is an integral part of Swedbank’s business operation, and the risks are monitored in accordance with limits set by the Board and CEO. Liquidity risk is measured, forecasted and analysed continuously, using various time horizons, to ensure that the Group has adequate cash or cash-equivalents to meet its obligations in a timely manner, without incurring substantially higher costs. The responsibility for managing the Group’s liquidity lies with Group Treasury. Group Risk works independently to identify all relevant aspects of liquidity risks, and is responsible for control, measurement, monitoring and reporting liquidity risk exposure across the Group.

Operational risk Swedbank must not experience operational risk-related losses or incidents that have materially negative impact on the Group’s funding, capitalisation and third-party credit rating. The maximum level of operational risk is further defined in the risk tolerance limits by a stated level of unexpected financial loss, tolerable errors in the financial statement and as specific qualitative statements which relate directly to the operations of the Group.

The main objectives are: (i) operational risk is to be kept at the lowest possible level taking into account business strategy, market sentiment, regulatory requirements, rating ambitions and the capacity to absorb losses through earnings and capital, and also, operational risks are to be considered in business decisions and, as far as possible, in the pricing of products and services, and (ii) managers are to ensure the identification, assessment and treatment of the operational risks inherent in their respective areas. Security measures must be implemented throughout the Group. Dual controls and segregation of duties must be present in relevant processes.

ALM and Capital management In addition to the ERM Policy, Swedbank’s Asset, Liability and Liquidity Policy sets out the fundamental principles that apply for the Group’s processes and structures to identify and manage the Group’s assets and liabilities to build an optimal balance-sheet structure, in order to meet liabilities, absorb losses, safeguard shareholder returns and maintain public confidence. The Group’s capital, funding and liquidity shall be managed in a way that does not create disproportionate constraints on the governance or management of the Group.

The CEO has established a special committee on Group level, the Group Asset Allocation Committee (GAAC), to assist him in issues related to the management of assets, liabilities and the balance sheet structure. He has also established a central Treasury department in the Group to operationally manage issues related to capital, liquidity and funding. Treasury works as an internal bank and provides funding to the BAs, retains capital at Group level or, as directed by shareholders or the Board, returns it to shareholders. To ensure that Treasury can act as an internal bank, an adequate framework comprising principles and instructions for capital allocation and internal fund-transfer pricing is maintained.

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2. Capital base and capital requirements

Swedbank’s capitalisation continued to strengthen during 2013 due to stable profit generation and reduced risk-weighted assets. As a result Swedbank boasted one of the strongest CET1 capital ratios among European peers in Q4 2013. This strong capital position makes Swedbank well prepared for future regulations and able to support our customers.

Highlights 2013 Thanks to a stable earnings generation, combined with reduced risk-weighted assets, Swedbank’s already strong capitalisation has further improved. Swedbank’s CET1 capital ratio is 18.7% according to Basel 2 and 18.3% according to Basel 3 (fully phased in and according to Swedbank’s current calculation), which makes the bank well-positioned to meet the expected future Swedish capital requirements. Internal and external stress tests also show that Swedbank remains resilient to crises, even in extremely negative scenarios. Recent reports from the Swedish FSA and the Riksbank also substantiate Swedbank’s strong capital position.

Capital base and minimum capital requirements Capital adequacy rules express the legal requirement as to how much capital a credit institution (such as a bank) must have in relation to the risk the institution faces. When assessing its capital needs, Swedbank takes into consideration its current and future risk profile, internal risk measurement and assessment of the risk capital needed. In addition to capital requirements for credit, market and operational risk (i.e. Pillar 1), all other risks, such as concentration risks, earnings volatility risk and strategic risk, must be taken into account when assessing the total capital need (i.e. as part of the Pillar 2 assessment; see chapter on ICAAP).

Under the Swedish Capital Adequacy and Large Exposures Act, a bank’s capital base must be equivalent to at least the sum of the capital requirements for credit, market and operational risks. Swedbank’s capital quotient (capital base in relation to capital requirement) of 1.44 including, and 2.51 excluding Basel 2 transition rules, is well above the minimum level of 1.0.

Other laws and regulations also apply; for example, the Swedish Banking and Finance Business Act requires a minimum initial capital of EUR 5m. This Act also requires that the institution’s qualified holdings in non-financial companies (as defined in the Act) may amount to a total maximum of 60% of the capital base, whereas each individual holding in such a company may amount to a maximum of 15% of the capital base. Considering the size of Swedbank’s capital base, it also complies with these regulations.

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Furthermore, Swedbank complies with the rules in the Capital Adequacy and Large Exposures Act regarding the limitation of exposures to individual customers or groups of customers in relation to its capital base.

In brief, the capital base is the sum of CET1 capital, Tier 1 capital contributions and Tier 2 capital, minus the value of shares in insurance companies (since they are subject to separate capital requirements). CET1 capital mainly comprises shareholder equity after various adjustments, while Tier 1 capital contributions and Tier 2 capital are mainly made up of subordinated debt. A reconciliation of shareholders’ equity (according to IFRS) and the capital base is presented below.

Link between shareholders’ equity and capital base

Development during 2013 The CET1 capital ratio according to Basel 3 (fully phased in) continued to strengthen during the year to 18.3% (15.4% on 31 December 2012) according to Swedbank’s current calculation, which is based on the new capital regulations that came into force on 1 January 2014. The CET1 capital ratio according to Basel 2 was 18.7% on 31 December 2013 (16.7% on 31 December 2012).

The CET1 capital (Basel 2) increased by SEK 7bn during the year to SEK 84.6bn. The increase was mainly due to the net profit realised in 2013, after deducting the anticipated dividend, and includes dividends of EUR 125m from Swedbank’s Baltic insurance companies. The sale of Swedbank’s Ukrainian operations was finalised in late April, in connection with which a negative cumulative exchange-rate difference of SEK 1.9bn was reclassified from other comprehensive income to the result for the period. However, equity and CET1 capital were not affected, and the reclassification has no bearing on the Board of Directors’ dividend proposal for 2013.

As of 1 January 2013, new rules entered into force on the recognition of pensions (accounting standard IAS 19). As a result, CET1 capital decreased by about SEK 3.2bn, a one-time effect included in the comparative figures for 2012. Due to rising discount rates, CET1 capital increased by approximately SEK 1.8bn during 2013. The revisions of IAS 19 will create volatility in the estimated pension liability, which will also affect equity through other comprehensive income.

Subordinated loans included in the capital base decreased by SEK 4.1bn, mainly due to redemptions. Of this decrease, SEK 3.4bn relates to loans included in Tier 2 capital, and the rest of the decrease relates to loans included in Tier 1 capital.

109.5

84.6 88.6

5.5 4.6

-11,1

-13,1

-0,7

-1,5 -2,5

90.8

70

75

80

85

90

95

100

105

110

115

Shareholders'equity

Proposeddividend

Goodwill &intangible

assets

OtheradjustmentsCET1 capital

Total CET1Capital

Tier 1 capitalcontribution

Deductionsfrom Tier 1

capital

Total Tier 1Capital

Tier 2 capital Deductionsfrom Tier 2

capital

Total capitalbase

Increase Decrease

SEK bn

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CET1 capital - changes during 2013

Risk-weighted assets (Basel 2) decreased by SEK 12bn to SEK 452bn during the year. The risk-weighted amount for credit risks decreased by SEK 14bn. The reduction in risk-weighted amount is primarily attributable to positive rating migrations, mainly private individuals and tenant owner associations in Swedish Banking and corporate customers in Baltic Banking, reducing the risk-weighted amount by SEK 14.5bn.

Increased exposures to corporate customers in the Swedish Banking and Large Corporates & Institutions business areas raised the risk-weighted amount by SEK 9bn, while reduced exposures in Russia and Ukraine and towards credit institutions lowered the risk-weighted amount by SEK 8.2bn during the year. Fluctuations in exchange rates, mainly attributable to the Baltic credit portfolio, increased the risk-weighted amount for credit risks by SEK 2.7bn due to the depreciation of the Swedish krona against the euro.

The risk-weighted amount for market risks was essentially unchanged compared with the previous year-end. The sale of Swedbank’s Ukrainian operations decreased the risk-weighted amount for market risks by SEK 1.2bn, while market risks within Large Corporates & Institutions increased slightly.

The risk-weighted amount for operational risks increased by SEK 2bn compared with the previous year-end. Swedbank’s income was higher in 2012 than in 2009, which increased the risk-weighted amount for operational risks by SEK 2.6bn (calculated on a rolling three-year average), while the disposal of Swedbank’s Ukrainian operations decreased the risk-weighted amount by SEK 0.6bn.

Risk-weighted assets, SEK bn - changes during 2013

Basel 3 75.2

Basel 3 80.7

1.8 0.9

15.4

- 11.1 Basel 2

77.5

Basel 2 84.6

40

50

60

70

80

90

100

2012 Profit (FCG) Anticipated dividend IAS 19 Other CET1 changes 2013

SEKbn

Basel 2 464.3

0.8

2.7 2.0

- 14.5 - 0.7 - 2.3 - 0.4

Basel 3 487.1

Basel 3 440.6

Basel 2 451.9

400

410

420

430

440

450

460

470

480

490

500

Q4 2012 Exposurechange

Ratingmigration (PD)

LGD changes Credit risk FXeffects

Other creditrisk

Market risk Operational risk Q4 2013

Increase Decrease

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Changes in Basel 3 estimate during 2013 In December 2013, the SFSA published new regulations applicable from 1 January 2014 which complement the EU Regulation (CRR). Through the new regulations, the consolidation method for associated companies will be changed so that, in standard cases, the companies will be consolidated using the equity method, rather than via full consolidation in accordance with previous Swedish regulations. From 1 January 2014, Sparbanken Rekarne AB, Färs och Frosta Sparbank AB, Swedbank Sjuhärad AB, Vimmerby Sparbank AB, Bankernas Depå AB and Bankernas Automatbolag AB will thus be consolidated using the equity method.

The change in consolidation method means that both capital and risk-weighted amount for the financial group will decrease slightly, which will entail a slightly positive effect on the CET1 capital ratio.

During the year, other major changes in the Basel 3 estimate were made due to clarifications in the final version of CRR with regard to capital requirements for small and medium-sized enterprises (SME), OTC derivatives and for currency risks.

The abovementioned changes are included in the reported Basel 3 figures as of 31 December 2013 and explain why the negative impact of implementing Basel 3 in comparison with Basel 2 was smaller than the assessment reported as of 31 December 2012.

CET1 capital ratio Tier 1 capital ratio Total capital ratio

* Incl. entire new share issue As the new capital regulations came into force on 1 January 2014, Swedbank's capital adequacy reporting under Basel 2 will cease from that date.

Swedbank’s efforts to further improve its capital efficiency are estimated to have a positive effect on its CET1 capital ratio going forward. Swedbank is working to introduce an advanced internal risk classification model (IRBA) to calculate credit risks for corporate exposures. In December 2012 Swedbank submitted an application to the SFSA to use the IRBA; we are still awaiting the announcement of the SFSA’s approval.

0

2

4

6

8

10

12

14

16

18

20

22

2008* 2009 2010 2011 2012 2013

Transition rules Basel 2 Basel 3

%

0

2

4

6

8

10

12

14

16

18

20

22

2008* 2009 2010 2011 2012 2013


%

0

2

4

6

8

10

12

14

16

18

20

22

2008* 2009 2010 2011 2012 2013


%

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Capital planning All banks are affected by macroeconomic changes that cannot be fully mitigated by a strong risk culture and risk management. To ensure a going concern even under adverse conditions, Swedbank maintains an extra capital buffer on top of what is legally required. Swedbank conducts stress tests to identify the potential effects of possible, though unlikely, negative scenarios and to assess whether the capital buffer is satisfactory at any given point in time. Capital planning and efforts to sustain satisfactory capitalisation are critical for Swedbank’s ability to maintain the market’s confidence, and consequently to retain access to funding in the capital market.

The financial crisis dramatically changed the way regulators, rating agencies and debt investors perceive banks' capitalisation. A large number of regulatory changes, in part with uncertain final outcome, are collectively aimed at increasing both the size and quality of the banks' capital base.

Swedbank’s objective is to uphold an effective capital base which, by its size and structure, ensures a high return on shareholder equity. At the same time, the capital base must ensure that, at all times, Swedbank meets the minimum legal capital requirement and maintains access to cost-efficient funding in the capital markets, even under adverse market conditions.

Swedbank's capitalisation continued to increase during 2013 as a result of a stable earnings generation, combined with reduced risk-weighted assets. The bank's strong capital position means that Swedbank is well prepared for future regulations. Reports from the Swedish FSA and the Riksbank substantiate Swedbank's strong capital position.

Swedbank’s Board of Directors decided in February 2012 to withdraw the previous capital target and await further details on the new requirements before announcing a new target. In early 2013 the Board of Directors changed its dividend policy so that it amounted to 75% of after-tax profit for the year. The dividend policy reflects Swedbank’s robust earning capacity and low risk, coupled with the fact that lending growth is expected to be limited for the foreseeable future.

Swedbank Group, as well as legal entities within the Group, must be adequately capitalised; in case of a potential shortfall, a capital injection or other measures may be performed. In addition to injection of equity capital, the capital base in a subsidiary may also be strengthened through subordinated loans from within the Group. To the extent that non-restricted equity is available in subsidiaries, funds can be transferred back to the parent company as dividends. Swedbank regularly reviews the capitalisation of both the Group as a whole and of its various legal entities. The outcome of such reviews may trigger adjustments deemed necessary to ensure compliance with regulatory requirements and an efficient capital management within the Group.

Adequate and comprehensive capital allocation is an essential tool in measuring profitability, from the level of the business area and all the way through to each customer. At Swedbank, shareholder value is seen as an excess return over the cost of capital and is measured by economic profit and RAROC. The principles of capital allocation reflect Swedbank's risk tolerance and capital strategy. Consolidated shareholders' equity is allocated to each business based not only on regulatory requirements, but also on an internal assessment of risk in individual transactions. It aims to provide an adequate risk differentiation, consistent with Swedbank's ICAAP methodology. In the operating segment report (note G5 in Annual Report), the allocated capital to business areas and the key ratios based on the capital allocation are presented.

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Regulatory environment – impact on Swedbank The regulation of banks is changing rapidly as a consequence of the recent crisis. These efforts are coordinated worldwide by the Financial Stability Board (FSB) and the Basel Committee. In Europe this is accentuated by a push to harmonise regulations and supervision practices through the development of a single rulebook and pan-European supervisory institutions. An additional feature that has recently emerged is that the European capital adequacy legislation includes a framework for macro prudential supervision, aimed at detecting and containing systemic risks. As a consequence the banks’ capital requirements may in the future be shifted quite frequently by the national authorities when deemed necessary to contain systemic risk.

Capital requirements As from 1 January 2014 the Swedish capital adequacy framework will be based on CRR (the EU capital requirements regulation) and CRD IV (the EU capital requirements directive). CRR will as of 1 January 2014, word for word, become Swedish law, while CRD IV will be implemented in Sweden during 2014 through amendments of the Swedish legislation and SFSA regulations. CRR and CRD IV will be complemented by a set of technical standards developed by the European Banking Authority (EBA). These standards will be applicable, word for word, as national law in the EU member states. The new EU regulatory framework is broadly in line with the previously published Basel 3 regulations.

The watchwords for Basel 3 are more capital and better capital. In accordance with CRR and CRD IV, the new capital requirements will be phased in during the four-year period 2014-2017. However, the Swedish authorities have announced that they will implement Basel 3 capital requirements as soon as possible without any phasing-in period – to the extent that this is possible given the European legislation.

Late in 2011, the authorities also announced an ambition to impose higher capital levels for systemically important Swedish banks than what follows from the CRR and CRD IV, which means a CET1 capital ratio requirement (from 2015) of at least 12%, and that the total capital ratio should be at least 3.5 percentage points higher than the minimum CET1 capital ratio requirement. In autumn 2013, the Swedish government and the SFSA indicated that they intended to impose even harsher capital requirements than previously announced, but it is still unclear how these additional requirements will be implemented.

One of the potential future additional buffers is the countercyclical buffer, which allows national regulators to impose requirements on additional CET1 capital during periods of high credit growth, to prevent overheating of the economy. An aspect that requires clarification from the SFSA is how the proposed increase of the risk-weight floor for Swedish mortgages (described below) will relate to the potential countercyclical buffer. The SFSA has stated that there is justification for making it a near-term priority to raise the risk-weight floor, in exchange for a lower countercyclical buffer.

The formal implementation of the requirements for higher levels of capital is expected to take place during the second half of 2014 when the SFSA has assumed its new responsibilities for macro prudential supervision. From 1 January 2014, capital adequacy reporting for Swedish banks takes place under the CRR, while the implementation of capital buffers resulting from CRD IV will be introduced later in 2014.

The SFSA has the option within CRR of allowing banks exemptions from the current floor under Basel 1 transitional rules. It previously indicated that it intended to allow such exemptions. However, in December 2013, it announced that it no longer intended to remove the Basel 1 floor. The SFSA's position means that, in future, the Basel 1 floor will be applied in Sweden in the same way as before.

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Changes in risk weights for Swedish mortgage exposures In May 2013 the SFSA announced its decision to introduce a risk-weight floor of 15% for Swedish mortgage portfolios. The floor was introduced as a supervisory measure within Pillar 2. Consequently, the reported capital ratios will not be affected, since the calculations are made according to the rules for Pillar 1. The average risk weight in Swedbank’s Swedish mortgage portfolio is 4.3% as of 31 December 2013. Given the Swedish minimum CET1 capital ratio requirement of 12% (as of 2015), Swedbank, as per the SFSA’s decision to raise the floor, has to maintain additional CET1 capital of SEK 10bn for its Swedish mortgage portfolio. This corresponds to about 2.2 percentage points of additional CET1 capital ratio requirement according to Pillar 1.

In November 2013 the SFSA announced its intention to increase the risk-weight floor further, to 25%. Following the same calculation methodology as above, this increase could mean that an additional SEK 9.3bn of Swedbank’s CET1 capital would be required. All in all, a risk-weight floor of 25% would mean that Swedbank would need to maintain additional CET1 capital of SEK 19.3bn for Swedish mortgages, corresponding to 4.3 percentage points of additional CET1 capital ratio requirement according to Pillar 1. Swedbank already has sufficient CET1 capital to meet the proposed increase in the risk-weight floor.

Leverage ratio The leverage ratio is a new non-risk-adjusted solvency requirement introduced in Basel 3. It is described as a backstop to the risk-based capital measures. Its purpose is to limit the leverage effects in the balance sheet of volumes that are overly large in relation to the bank’s own capital and to provide an extra layer of protection against model risk and measurement error. Under CRR, banks will be required to calculate and report their leverage ratio to regulators from 1 January 2014 and to disclose it and its components publicly from 1 January 2015. The ambition is to introduce the leverage ratio as a complementary Pillar 1 requirement by 1 January 2018. Swedbank’s leverage ratio as of year-end 2013 was 4.6%, according to Swedbank’s current calculation based on the new regulations.

Liquidity requirements The Basel 3 liquidity standard comprises a Liquidity Coverage Ratio (LCR) and a Net Stable Funding Ratio (NSFR). The LCR will require banks to hold a reserve of liquid assets sufficient to withstand a 30-day period of liquidity stress. The NSFR rules set minimum requirements for matching the maturities of a bank’s funding to the maturity of its assets.

The CRR contains provisions regarding the components of LCR and NSFR, but so far the details required for the calculation have not been finalised. The European legislation regarding the final definition of the measures and the minimum required levels is expected to be decided upon in 2014 for LCR and in 2017 for NSFR.

In 2013, the SFSA introduced a LCR requirement for all Swedish credit institutions, including Swedbank, with a balance sheet exceeding SEK 100bn. This requirement is based on the original Basel 3 proposal from 2010 but with some modifications. The plan is to replace the Swedish regulations with the forthcoming LCR requirement in CRR when CRR is fully implemented. Accordingly, Swedbank expects the SFSA to continue to require Swedish credit institutions to meet a 100% LCR requirement. Swedbank’s LCR (Swedish requirement) as of 31 December 2013 was 142%.

Bank Recovery and Resolution A new Bank Recovery and Resolution Directive will enter into force in the EU in 2014 and must be implemented by member states by 1 January 2015. It will give financial authorities additional tools to deal with banks in distress. The competent authorities will then be able to request changes in the structure and operations of systemically important financial institutions if such changes are deemed necessary for making these institutions resolvable in case they become non-viable. The authorities will also be able to permanently write down an institution’s debt that is not secured by collateral, or convert it into equity, while maintaining the institution as a going concern. This procedure is called bail-in.

16


Going forward, the Directive is likely to impact how large capital buffers that banks will need –in addition to those given by CRR and CRD IV. In 2013, the EBA had already adopted a recommendation stating that financial institutions deemed systemically important should draw up recovery plans and submit them to regulatory authorities. Swedbank submitted its first recovery plan to the SFSA in December 2013.

Guidelines on internal governance (GL 44) The EBA requires that competent authorities implement EBA Guidelines on Internal Governance (GL 44) by incorporating them into their supervisory procedures. The SFSA has chosen to do this by renewing the previous Swedish guidelines related to governance and internal control into three new mandatory regulations: Internal governance and control; Operational risk management; and IT governance and information security.

The purpose of these regulations is to strengthen governance through clarification of roles and responsibilities, of requirements on risk management and risk control, and of risk reporting to the Board of Directors and Executive Management to promote sound and well-functioning financial institutions. The new regulations will impose stricter requirements on how banks organise and manage risks, and will enter into force during 2014.

17


3. Credit risks

Swedbank maintained a low credit risk level in its asset portfolios during 2013. The bank’s largest portfolio, consisting of private mortgages, showed continued high resilience where customers’ payment ability is strong and loan-to-values have improved.

Highlights 2013 Swedbank’s low risk in its credit portfolio is confirmed by low credit impairments as well as a low number of customers with payment problems, or identified future problems. Historical loss levels in Sweden are low, especially for the large share of private mortgage loans in the credit portfolio. Continued global uncertainty has not had any major impact on the bank’s balance sheet. The economic downturn has slowed down, but there are challenges remaining before a full recovery can be achieved.

Looking at the Swedish market, corporates appear to have prepared for the weaker economy, adapting their conditions and costs to the situation. This, in combination with a long period of earnings with good opportunities to build up buffers, has increased their resilience. In the Baltic countries, macroeconomic trends continued to improve and the quality of Swedbank’s credit portfolio in the Baltics was strengthened during 2013, with a low percentage of credit impairments and an improved risk profile among customers. However, many corporates were careful with their investments, due to global uncertainty. Thus, credit demand during 2013 remained low in all of Swedbank’s home markets.

The bank’s long-term mortgage lending market position in Sweden, through Swedbank Mortgage AB, continued to strengthen in 2013. Lending to private mortgage customers rose by SEK 17.1bn or 2.7%. In the Swedish mortgage market, Swedbank’s new lending did well during the year; the market position for new lending strengthened without the need to take higher risks. Swedbank has taken an active part in the public debate regarding increased household debts. In Sweden, insufficient supply of housing has created a structural challenge which has put upward pressure on household debt over an extended period. And while the average debt-to-income ratio of Swedish households may seem high in an international perspective, this ratio is overstated, as it fails to include factors such as differences in social security systems which allow Swedish households to use a higher share of their disposable income for living expenses. Thus, thanks to the combination of a low loan-to-value ratio in the portfolio and the customers’ strong repayment ability, the direct risk for the bank is low.

Swedbank carefully monitors changes in its credit portfolio. The ICAAP and other stress tests indicate that Swedbank would have high resilience in an economic downturn. This is confirmed by stress tests performed by the Swedish FSA and Riksbank. In the Riksbank’s stability report from November 2013, Swedbank was the only one of the four major Swedish banks that had a positive result throughout the scenario period. Moreover, its CET1 capital ratio was the least affected among the four banks. The results of Swedbank’s 2014 ICAAP are expected to show that resilience has been further reinforced in 2013 thanks to improved asset quality during the year.

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Credit risk exposures The total credit risk exposure for Swedbank as of 31 December 2013 was SEK 1 721bn. The total exposures increased during the year by SEK 37bn or 2.2%. The increase was primarily due to increased retail mortgage exposures in Swedish Banking and corporate exposures in LC&I. Risk is well diversified by having a wide customer base of private households and corporates in many different sectors. The low risk in the credit portfolio is the result of Swedbank’s strategy with a focus on the four home markets – Sweden, Estonia, Latvia and Lithuania – where the bank has good knowledge of its customers and their earnings premises.

The overall risk profile of Swedbank’s portfolio continued to improve during 2013. Average probability of default, including regulator-required margins and through-the-cycle adjustment, for all performing credit exposures decreased from 0.71% to 0.65%. This was mainly driven by reduced risk levels in Baltic Banking and Swedish retail exposures. Of the total IRB exposures with an assessed risk grade, 78% were in risk grades 13–21, or “investment grade”, where the probability of default is considered low. Further, 44% of the exposures were assigned a risk grade of 18 or higher, corresponding to an A rating or higher from the major rating agencies. For breakdowns of the portfolio data, including key ratios, see Appendix.

Share of total IRB exposures by risk grade

Most credit exposures towards low-risk markets and sectors The sectors that dominate Swedbank’s credit portfolio – Private mortgage, Property management, and Agriculture, forestry & fishing – comprise a total of 49% of the exposures and all have low risk. The low risk is shown in historical losses, in regulatory-calculated expected loss, as well as in stress-test losses. The outlook for these sectors is positive with customers with good repayment capability, and the level of collateralisation is high. The historical losses are on low levels, such as 0.01% in the Swedish mortgage portfolio, and are expected to remain low even in a severe situation such as in the ICAAP. For further information on these segments, see below in credit risk exposures by sector.

Sector exposures and five-year total losses in the severe negative ICAAP scenario

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The sectors considered to have higher risk – in terms of the highest loss ratios in the 2013 ICAAP – comprise less than 5% of Swedbank’s total portfolio. These are Retail, Hotels & restaurants, Transportation, and Shipping & offshore. The increased risk level is also confirmed by the historical loss ratios, which all are above the average corporate losses. On average, Swedbank’s customers in these sectors have a relatively low PD with a high share of investment-grade risk or better rating. For further information on these segments, see below. For further information on the ICAAP, see section 7 in this report.

Most credit exposures towards the Swedish market The vast majority of Swedbank’s exposures, 79%, is made up of exposures to Swedish customers. This ratio has increased since year-end 2012, mainly due to the growth of Swedish exposures in the retail mortgage and corporate exposure classes while placements in central banks were reduced. For further information on the geographical split, see below in credit risk exposures by business area and in the appendix.

Geographical distribution of credit exposures

Swedbank’s exposure to counterparties in Greece, Ireland, Italy, Portugal and Spain continued to decrease. These exposures totaled SEK 223m as of 31 December 2013 (SEK 280m at year-end 2012) in Swedbank Financial Companies Group, and SEK 342m in Swedbank Group. The difference between the two numbers is explained by exposures in the life insurance group which are not included in FCG.

Most Swedish credit exposures towards the mortgage market Exposures to Swedbank Mortgage AB totaled SEK 769bn, which represents 45% of Swedbank’s total exposures and 57% of its Swedish exposures. This portfolio has historically had very low credit impairments. Swedbank Mortgage’s average loan-to-value ratio remained at 62.2%, calculated at property level.

Swedbank has historically been one of Sweden’s largest mortgage lenders and has built up a high-quality back book in which customers have high repayment capability and low average loan-to-value level. The credit review process is well developed and takes into account household budgets’ ability to withstand substantially higher interest rates. The strong social security system in Sweden reduces the risk if, for example, a borrower becomes unemployed or is on long-term sick leave. Moreover, credit risk in Swedbank’s mortgage portfolio is kept on a low level by Swedish legislation which entails that household customers have extensive repayment responsibility. The element of speculation is very limited, as the Swedish market has few "buy to let" options. All of these factors make the risk low, as is demonstrated in the bank’s very low historical losses.

The average LTV ratio of Swedbank’s mortgages in Sweden was 62.2% (63.5%) as of 31 December 2013, based on property level. The corresponding figure for new mortgages in Sweden was 69.9%. In major Baltic cities, house prices have stabilised, with significant increases in Tallinn. The average LTV ratio in Baltic Banking was 84.9%, while the ratio for new lending was below 70%. Among household customers in Swedish Banking, nearly 81% were amortising on their first mortgages. For new lending in 2013, 93% of households with a

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LTV ratio over 75% were amortising. Among those not amortising on their payment dates, many had an agreed plan to begin amortisation within one to two years of the date when the mortgage was granted. For further information on Swedbank’s private mortgage portfolio, see below.

Reduced risk in the corporate portfolio Swedbank’s corporate exposures amount to SEK 434bn. Of this total, SEK 214bn is lending to large corporate companies in Sweden and the Nordic countries, many of them listed on the stock exchange. Another SEK 162bn are corporates in Swedish Banking, mainly SMEs, a portfolio that is well collateralised mainly by mortgage deeds, chattel mortgage and guarantees. The quality of the corporate portfolio in the Baltic countries, SEK 54bn, improved significantly during 2013. Also in the Baltic countries, the share of lending to real estate, which is more vulnerable, has been reduced and instead new lending to high-quality public-sector companies and manufacturing has been issued (see appendix tables 3-10 to 3-16).

Credit risk exposures, by customer type

Realised losses well below expected loss The levels of EL are above the realised losses, due to conservatism in models and rating, regulatory buffers and because Swedbank aims to use a through-the-cycle perspective when calculating the PD. This result was achieved even though economic conditions in Sweden, in some respects, were worse than in an average year.

In the Baltic countries, the realised losses are on very low levels compared to the expected loss levels – especially for the corporate customers, which are usually farther ahead than private customers are in the business cycle. One explanation is that the average PD is annually re-calibrated and mapped to historical observed default frequency. Another explanation is that the customers with highest risk defaulted during the crisis, resulting in a remaining portfolio with reduced risk.

Swedbank applies the prescribed estimated LGD values for the exposure classes of corporates and institutions; hence, the estimates are well above the outcome. See table 3-28 in appendix.

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21


Expected loss vs. Realised outcome

The above graph shows the calculated loss according to the capital requirement framework as EL= EAD * PD * LGD with FSA regulatory add-ons and downturn adjustments.

Reduced work-out portfolio Loans past due by more than 60 days continued to decrease within Baltic Banking during the year. Within Swedish Banking, the number of private mortgages and corporate loans past due by more than 60 days was stable on low levels. Overall, Swedbank’s corporate customers within Swedish Banking and LC&I demonstrated continued resilience; few customers had loans past due by more than 60 days, or other financial problems.

Impaired loans fell by SEK 6.4bn during 2013, to SEK 7.5bn. The sale of the Ukrainian operations and discontinuation of operations in Russia accounted for SEK 3bn of the decrease. In Baltic Banking, impaired loans fell by SEK 3.8bn. Impaired loans related to problem loans from the crisis years, which had peaked at SEK 27bn in Q2 2010, gradually declined to SEK 5bn as the loans were restructured, amortised, written off or from improved quality in the loan portfolio. Impaired loans within LC&I increased by SEK 0.7bn because of a few large commitments, while in Swedish Banking they were unchanged during the period. Impaired loans to private customers decreased during 2013. The share of Swedish mortgages past due by more than 60 days was stable at 0.9% of the portfolio (0.13). The share of impaired mortgages in Baltic Banking fell, with the largest decrease in Latvia. The share of mortgages past due by more than 60 days was 0.7% in Estonia (1.3), 7.4% in Latvia (10.7) and 4.4% in Lithuania (5.6).

Impaired loans Swedbank Group: changes in 2013

During the year, the value of repossessed assets in the Group fell by SEK 3m to SEK 2.1m. In 2013, properties with a book value of SEK 2.4m were sold. Ektornet, which was founded to acquire, manage and divest real estate taken over by Swedbank as a result of the financial crisis, will continue the reduction of its portfolio during 2014.

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Credit impairments for 2013 amounted to SEK 60m (recoveries of SEK 109m). Credit impairments in Swedish Banking and LC&I remained low and were related to a few corporate commitments. The recoveries in the Baltic countries continued and related primarily to work-out loans resolved during the year. For more on past due and impaired loans see appendix.

Credit impairment Swedbank Group breakdown 2013

Reduction in risk-weighted assets in 2013 In 2013, the bank’s average risk weight declined considerably, following concentrated efforts to decrease risks across the corporate segment. The improvement was also due to significant efforts by the bank to ensure proper calculations of risk in the portfolio and to make all processes efficient. RWA for credit risk was reduced by SEK 14bn during 2013, reaching SEK 375bn at year-end. The main changes were:

• Increased corporate exposures in Swedish Banking and LC&I caused the RWA to rise by SEK 9bn. The increased exposures in the private mortgage portfolio had only a minor effect, SEK 1bn, due to the low Pillar 1 risk weight for these exposures.

• Decreased exposures, mainly lower volumes of institutions exposures in the LC&I and Group Functions business areas, reduced RWA by SEK 5bn. The decreased exposures in Russia and Ukraine resulted in a RWA release of SEK 4bn.

• Positive rating migrations decreased RWA by a total of SEK 14.5bn. The largest effects were seen in the corporate exposure class and derived from improved risk assessment processes and methods, but also from improved financial statements for Baltic corporate customers.

• The change in Foundation IRB-prescribed LGD for corporate exposures increased RWA by SEK 2.5bn. The majority of the effect stemmed from collateral in residential properties, where the prescribed LGD increased from 30% to 35%. Increased collateral value offset this effect, reducing RWA by SEK 3.2bn.

• Changes in exchange rates, mainly attributable to the Baltic credit portfolio, increased RWA for credit risks by SEK 2.7bn due to depreciation of the Swedish krona vs. the euro.

Credit risk RWA attribution 2013

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In December 2012, Swedbank applied to the Swedish FSA for approval of Advanced IRB to calculate its own risk LGD estimates, for its corporate portfolios in the Swedish Banking and LC&I business areas, and is awaiting a reply. The effect on RWA is calculated to be similar for both business areas. Swedbank also plans to apply for Advanced IRB for its corporate portfolios in the Baltic countries.

In recent years, Swedbank has been actively developing its risk models and training personnel so that it can further improve capital efficiency and to put focus on risk-adjusted profitability. These activities have resulted in a decline in RWA. Except for Advanced IRB, most of these activities have now been completed, but minor adjustments can still be made. In the Baltic countries, further reductions in RWA can be expected for both corporate and retail customers, since the loss data from the recent extreme crisis negatively affects the IRB models, giving high levels of default and loss ratios which the portfolios on average shall equal in the risk calculations of PDs and LGDs.

24


Credit risk exposures - by business area

Swedish Banking business area Swedish Banking is Swedbank’s largest business area and has SEK 1 054bn in total exposure. Its main business is lending to private individuals (mainly mortgages), and lending to small and mid-sized corporates in Sweden. The sensitivity of the portfolio is mainly related to the Swedish economy in general.

Global unease during the year had no major impact on the bank’s balance sheet. This outcome was partly the result of selective lending. Swedbank follows its customers closely, and carefully monitors changes in its credit portfolio. If problems arise, actions are taken at an early stage, in cooperation with the customer, to mitigate risks and to reduce credit losses.

Swedish Banking business area, credit exposure by segment

Swedish Banking business area, credit exposure by risk grade

Large Corporates & Institutions (LC&I) and Group Functions Swedbank’s LC&I business area has SEK 289bn in total exposure. This amount includes lending, as well as dealing in financial instruments and products, to large Swedish, international corporate and institutional customers, such as international banks or asset managers, as well as Swedbank’s advisory operations.

The exposures within Group Functions mainly consist of Group Treasury. Its exposures are credit exposures similar to those of LC&I, meaning exposures to international banks and central banks. Total credit risk exposures amounted to SEK221bn. Group Treasury is responsible for the funding and management of Swedbank’s liquidity portfolio.

The sensitivity of the LC&I and Treasury portfolios is related to the Swedish economy, as well as the global economy in general and the European economy in particular. For LC&I, working closely with the bank’s risk organisation to avoid unwanted risks is a high priority and was in focus in 2013.

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Swedbank has an ongoing dialogue with customers operating in segments with increased risk levels, and uses covenants and other means to discover potential problems at an early stage.

LC&I and Group Functions, exposure by segment

LC&I and Group Functions, exposure by risk grade

Baltic Banking: Estonia The Estonian part of Baltic Banking had SEK 62bn in total exposure, or 41% of all Baltic Banking exposures. The exposure and sensitivity of this part of Swedbank’s portfolio is related to the Estonian economy in general. The Estonian portfolio performed well, showing a decreased share of problem loans and improved average ratings; thus, risks can be considered relatively low. Common for the Baltic economies is the robust growth in consumption. Decreasing unemployment, increasing wages and low inflation have strengthened purchasing power and stimulated household consumption. Consumer confidence increased during 2013 to its highest level since 2011, showing that Estonian households are slightly more optimistic than those in the two other Baltic countries. Households’ lending growth has accelerated in Estonia. The country’s mortgage loan stock has started to increase again.

Baltic Banking Estonia, exposure by segment

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Baltic Banking Estonia, exposure by risk grade

Baltic Banking: Latvia The Latvian part of Baltic Banking has SEK 46bn in total exposure, or 30% of total Baltic Banking, and is thus Swedbank's smallest market in the Baltic business area. The portfolio increased by SEK 5bn since year-end 2012, but increased placements at the central bank for the country’s euro entrance caused the exposures to rise by SEK 8bn.

Swedbank's exposure, as well as the sensitivity of the portfolio, is linked to the Latvian economy in general. In addition to the daily work of mitigating foreign currency lending, Swedbank has implemented risk tolerance limits in Latvia so that developments can be closely monitored and to secure a better balance in new lending.

In Latvia, consumer confidence and household expenditures remain robust since CPI growth is weak. Household investments are driven by credit, since low interest rates and improving expectations continue to support both demand and supply. New lending in Latvia is growing at a slow pace. The mortgage loan stock continues to decline because new lending remains insufficient to cover amortisation plus defaulted portfolio work-outs.

Baltic Banking Latvia, exposure by segment

Baltic Banking Latvia, exposure by risk grade

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Baltic Banking: Lithuania The Lithuanian part of Baltic Banking has a total exposure of SEK 44bn. Swedbank's exposure, as well as the sensitivity of its portfolio in the country, is related to the Lithuanian economy in general. In addition to the daily work of mitigating foreign currency lending, Swedbank has risk tolerance limits in Lithuania so that developments can be closely monitored and to secure a better balance in new lending. In Lithuania, consumer confidence and household expenditures remain robust since CPI growth is weak. Household investments are driven by credit, since low interest rates and improving expectations continue to support both demand and supply. Households’ lending growth has accelerated in Lithuania. The mortgage loan stock in Lithuania has started to increase again.

Baltic Banking Lithuania, exposure by segment

Baltic Banking Lithuania, exposure by risk grade

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Credit risk exposures - by sector This section provides additional information on Swedbank’s most important sectors measured by size and risk. Together these sectors comprise two thirds of Swedbank’s total exposure to private and corporate customers.

Exposure to the private mortgage sector Prices of single-family homes and apartments in Sweden continued to increase in 2013 although there were regional differences. The amount of new housing construction remained low, and housing shortages were noted mainly in urban areas.

Exposure to private mortgage, by country

Swedbank works to ensure that households carrying large debts amortise their mortgages; this is an important part of ensuring that they can service their debt even during stressed situations. In terms of new lending in 2013, among households that had a loan-to-value (LTV) ratio of over 75%, 93% were amortising, and many of the remaining households had an amortisation plan that will take effect within two years. For the portfolio as a whole, among households with a LTV ratio of over 75%, 81% were amortising.

Swedish households’ average debt-to-income ratio has increased in recent years and may seem high in an international perspective. However, it is lower than it may appear, if the country’s strong social security system and strong government finances are taken into account. Swedish households can use a larger share of their disposable income on their loan payments because expenses such as education, healthcare and pensions are financed by tax.

The bank’s loan portfolio periodically undergoes stress tests. The results in the Swedish portfolio indicate robust solvency among the bank’s mortgage customers and a LTV ratio that suggests a low risk of credit impairments. Furthermore, a close relationship to, and deep understanding of, the bank's customers gained via Swedbank's large retail network has helped Swedbank and its savings banks to maintain past-due loans at very low levels.

Historic losses were very low, especially in Sweden. Swedish private individual losses peaked during the Swedish real estate and financial crisis in the early 1990s, and have thereafter been very low. The Baltic countries had a similar experience in their crisis, which started in 2008; this explains the higher historical loan losses in Baltic Banking. The economy is now recovering, although it will take some time before losses come down to the long-term lower ratios. In Latvia LTVs remain high and loss ratios are relatively high.

Swedbank’s historical losses on private individuals

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The slightly positive trend noted in 2012 in market prices and transaction activity in the Baltic countries, mainly related to the capital cities, continued throughout 2013. Portfolio LTVs are improving due to regular amortisation, remaining work-out procedures, increased collateral values and also due to new good-quality lending. Although new lending volumes are still rather moderate, the risk level is significantly lower, and therefore it is slowly but constantly improving the overall quality of the private mortgage portfolio. The average LTV in Estonia is 60.7%, in Latvia 114.1% and in Lithuania 96.5%. Although the LTV ratios are generally high, they have decreased substantially since the crisis and are expected to continue to decline as the macroeconomic environment continues to improve.

Exposure to private mortgage, risk profile

Private mortgage, average past-due loans and LTV by country

Exposure to property management sector Swedbank’s exposures to property management companies amounts to SEK 189bn, of which SEK 158bn was to counterparties in Sweden. Property management companies are segmented at counterparty level into residential, commercial, industrial & warehouse, and other properties, based on the focus of the company.

Exposure to property management, by country

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Exposure to property management, by type and country

In Sweden, demand is currently high for rental apartments in major cities (including regional centers). Construction of new rental apartments is on a low level, causing prices of rental apartment properties to remain on a high level. The same trend applies for office properties, where demand is expected to increase as the Swedish economy becomes stronger and a low level of new construction keeps prices and rents up. The development trend for retail properties is expected to be weak in 2014, as households are likely to be cautious due to the upcoming interest rate increase. Several new projects are in the pipeline, which will increase the competition within this segment. Demand for industrial properties will be weak, especially within geographical markets without the relevant labour force.

In the long term, the stronger economy will be matched with a higher interest-rate level driven by higher growth and higher inflation. At the beginning of the forecast period, corresponding problems between a higher interest rate and a weak rental market are expected to continue. Generally, this may lead to increasing yields, and properties without rental potential risk having their market values decrease. Swedbank believes that, in the long term, regions with higher population concentrations have the best prospects for the rental market to generate a rent that provides a favourable ROE in a normalised interest-rate environment.

In the Baltic countries the situation is increasingly stable, but growth remains moderate. In Tallinn, vacancy rates for commercial property have stabilised at about 5%, after a quick recovery from 20% in the worst crisis years. For prime buildings, demand from foreign investors is increasing, but overall prices are expected to be stable. In Latvia and Lithuania, demand is increasing, but from very low levels. Most activity is in the retail and the residential segments, where development activity has already resumed. In Lithuania investments are expected to increase. New developments will mainly be in the residential segment.

In the long term, prices and rents should, in general, grow in line with inflation (or slightly above it, getting closer to EU averages). Additional foreign capital investments in the Baltic real estate markets can be expected, due to planned accession to the eurozone and rather stable economic growth. However, foreign investors are selective, looking for targets mostly in the prime segment with good-quality cash flows. Due to small market size and higher volatility, yields should still be above those of Western Europe by 150-250 bps.

Exposure to property management, risk profile

0

20

40

60

80

Residential properties Commercial properties Industrial properties Other propertymanagement

SEKbn

Sweden Estonia Latvia Lithuania Norway Finland

0

5

10

15

20

25

Def 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Sweden Estonia Latvia Lithuania Norway Finland Other countries

EAD, %

Swedbank risk grade

31


Exposure to the agriculture, forestry and fishing sector Swedbank’s exposures to customers in the agriculture, forestry and fishing sector amount to SEK 69bn, of which SEK 65bn is to counterparties in Sweden. A large share, 39%, of this industry sector consists of private investment customers who can be divided into private persons owning an agriculture property only for a living, residential properties and forestry investments. The corporate customers are segmented into growing of crops, dairy, and raising livestock. Swedbank’s portfolio consists of many small customers calculated in the retail exposure class with a high share of collateral. The average LTV in the total Swedish agriculture portfolio is 52.7%, and for the agriculture mortgage lending, it is 50.4%.

Exposure to agriculture, forestry and fishing, by country

Exposure to agriculture, forestry and fishing, by type and country

The number of family farmers is declining in our region. There is a significant structural trend towards fewer and specialised large farms with higher productivity and increasing investment credit needs. Generally, farmers who invested in modern production facilities and systems have been profitable during slower economic periods, if they are not overly leveraged.

The general outlook for Baltic agriculture remains positive. Agricultural subsidies will rise. One risk factor is the price dynamics of agricultural land; prices have increased extensively in the past two years. Prices per hectare are still low compared to Finnish or Swedish levels.

Swedish forestry contractors had a difficult season, with depressed prices, smaller harvests and flat costs. They face a tough future with fewer players and a continuing need to streamline and rationalise to reach acceptable profitability. Total demand for forest products, price levels and industry profitability will continue to depend heavily on the global economy.

In the long term, the value of forest land will increase by approximately 2-4% per year in Sweden. Baltic forest land will be of interest in the long term; the forestry risk profile for the Baltic countries depends highly on well-functioning infrastructure and on the growing interest of Scandinavian and West European institutional investors in forest land portfolios.

Exposure to agriculture, forestry and fishing, risk profile

0 10 20 30 40 50 60 70

Sweden

Estonia

Latvia

Lithuania

Other countries

SEKbn

0

5

10

Privateresidential

Privateinvestments

forestry

Growing Milk Raising Mixed Otheragriculture

Hunting Foretsry Fishing

SEKbn

Sweden Estonia Latvia Lithuania Other countries

0

5

10

15

20

Def 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21Sweden Estonia Latvia Lithuania Other countries

EAD, %

Swedbank risk grade

32


Exposure to the retail sector Exposures to retail companies amounted to SEK 46bn, of which SEK 31bn was in Sweden. The largest sub-segment in the Swedbank portfolio is non-durables (sometimes called consumables or groceries), which refers to goods that are consumed immediately or during a short period. This sub-segment includes a wide range of retailers, from gas-station chains, convenience stores and food retailers to pure e-commerce players. Historically, this sector has not been overly dependent on the economic cycle, with an especially positive performance in the discount segment.

Exposure to retail, by country

Exposure to retail industry by type and country

In Sweden, overall growth in retail sales remains weak despite relatively good economic conditions for consumers. Growth for the non-durable sector is favorable, while growth for durable goods was basically flat during the year. Home electronics, followed by clothing and sport retailers, remained the sectors with the weakest growth in terms of sales. Many companies in these sectors experienced severe problems with both profitability and liquidity. The frequency of bankruptcies continued to increase in 2013, albeit at a significantly slower pace than in 2012.

In the Baltic countries, retail sales are expected to grow in 2014. Growth is supported by increasing employment, rising income levels and improving purchasing power. Retail sector volumes are expected to grow, on average.

In general, profit margins are expected to be under pressure in both the short and the long term due to intense competition. We also expect gradual changes in consumer spending, whereby the consumer will tend to spend more on services such as travel, IT and restaurants – a change in spending patterns that will affect retail sales negatively.

Exposure to retail, risk profile

0 5 10 15 20 25 30 35

SwedenEstonia

LatviaLithuania

NorwayFinland

Other countries

SEK bn

0

5

10

15

Cardealerships

DIY Furniture Clothing Non-durables Homeelectronics

Sport &Leisure

Other retail

SEKbn


0

5

10

15

20

Def 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

EAD in %


Swedbank risk grade

33


Exposure to the hotel and restaurant sector Exposures to companies in the hotel and restaurants sector amounted to SEK 7bn, of which about SEK 5bn to counterparties in Sweden. This is the smallest of the industry sectors in Swedbank’s portfolio, comprising less than 0.5% of total exposures.

Exposure to hotels and restaurants, by country

Stockholm, an important market, is currently unbalanced with an oversupply of new hotel rooms. The occupancy rate is likely to decrease in 2014 even if the number of occupied rooms increases. In Sweden, two guest nights out of three are business-related. In the Baltic countries, particularly in Estonia, the opposite trend is common. The Baltic hotel sector is more oriented towards private and tourist guests. Estonia (Tallinn) is showing stable growth. The short-term outlook for the sector in Latvia and Lithuania is positive growth of a few per cent.

Exposure to hotels and restaurants, risk profile

The long positive trend for restaurants continued in 2013, and cafés and fast-food restaurants were the winners. The underlying positive trend for eating out has not been affected by the current economic uncertainty. That trend continued during the year with cafés as the winner.

For both hotels and restaurants, the long-term outlook is positive. One reason for this is that new groups of people, such as seniors, now tend to travel and eat out more. For hotels, some local markets may remain unbalanced during the next one or two years, but the growth trend indicates that the balance will be restored in time. Unbalanced markets will lead to reduced profitability even if more hotel nights are sold.

0 1 2 3 4 5

Sweden

Estonia

Latvia

Lithuania

Other countries

SEK bn

0

5

10

15

20

25

30


EAD, %

Swedbank risk grade

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Exposure to the transportation sector Exposure to transportation companies amounted to SEK 14bn, of which SEK 8bn to counterparties in Sweden. This equals less than 1% of the total exposures in Swedbank’s portfolio. The transportation sector comprises all kinds of transport, freight and associated business, except for shipping, which is reported separately.

Exposure to transportation, by country

The Swedish market appears to have performed better than the European market in general, but the combination of high fixed costs, weak demand and high levels of competition forced additional haulers into bankruptcy. In Sweden, demand for passenger transportation by bus and train is rising with population growth over time.

Although the logistics sector, including freight forwarders, is cyclical in nature, profitability can be defended in a variety of ways. Decent cost flexibility, growing e-commerce, the trend towards outsourcing, increasing product differentiation, market consolidation, and economics of scale are all factors that lift freight forwarders to a higher position in the value chain than that reached by haulers.

Demand for aviation is expected to continue to grow faster than world GDP in the long term, but with the emergence of low-cost carriers (LCC), industry dynamics have changed dramatically. Because LCC focus mainly on profitable point-to-point destinations, network carriers have seen increased competition on their most profitable routes.

In the Baltic countries, road freight volume has been recovering to close to pre-crisis levels, but 2012 was a slow year due to the economic situation in Europe and Russia. Demand is expected to remain stable in 2013-2014. In general, the Baltic transportation industry is dependent on economic sentiment and consumption in Europe, Russia and other CIS countries, in a long-term (five-to-ten-year) perspective. However, the industry is characterised by both opportunities and risks that are specific to the region, given that the Baltic countries are in a good location at the crossroads of Europe and Russia and that Russian political decisions can be unpredictable.

Exposure to transportation, risk profile

0 1 2 3 4 5 6 7 8 9

Sweden

Estonia

Latvia

Lithuania

Other countries

SEK bn

0

2

4

6

8

10

12

14

16


EAD, %

Swedbank risk grade

35


Exposure to the shipping and offshore sector Swedbank's total exposure to shipping and offshore amounted to SEK 34bn. Looking at the Swedbank shipping and offshore portfolio in more detail, drilling and exploration accounted for 29%, while the offshore service industry (oil service, supply, accommodation and floating production) accounted for 12%. The risk drivers for these two sub-segments differ in that drilling and exploration is more directly affected by the predicted price of oil and on decisions to explore new wells. The offshore service sector is more directly affected by existing production, so its dependence on the price of oil is lagged in time.

Exposures to shipping and offshore, by sub-segment

The near-term outlook remains uncertain for many shipping markets due to continued oversupply of ships. For many companies, especially those exposed to spot markets, 2013 was a tough year. However, we do not expect the situation to become substantially worse, and progress is already being seen in ship prices/asset values. Liquidity in the secondhand market is also increasing. The longer-term outlook is improving. The shipping industry’s main strengths are its global perspective and its importance for world trade. The extent to which the fleet is reduced will be an essential factor affecting the momentum of recovery.

We expect profitability in the oil service market to be stable on a high level in 2014. Oil prices have been relatively flat over the past few years and are still higher than USD 100/barrel. Prices are more likely to fall than rise, but no dramatic drop is expected. We expect the price of oil to remain high in the longer term as well, although it may continue to fall somewhat from the current level. Demand for oil will continue to grow, and supply is limited. Rapid growth in US onshore oil may put pressure on the price of oil, but compared to other resources, volumes are low. Older rigs with lower specifications are more vulnerable. Softening offshore spending will also result in lower supply rates, and to a great extent, the trend in fleet sizes will determine the profitability of this industry.

Exposures to shipping and offshore, risk profile

0 2 4 6 8 10

AccommodationChemical

ContainerCrude oil

CruiseDrilling exploration

Dry bulkFloating production

Gas (LNG/LPG)Oil service

ProductRORO

Supply

SEK bn

0

5

10

15

20

25

30

Def 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

EAD, %

Swedbank risk grade

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Management of credit risk

Working with credit exposures To maintain a well-diversified credit portfolio with a low risk profile, and to find a favourable balance between risk and returns, Swedbank works constantly to understand customers and their market conditions. We follow up on single credit exposures through continuous monitoring and periodic credit reviews of corporate customers, financial institutions and sovereigns at least once per year.

An essential tool in the steering of the bank is risk-adjusted profitability. The business has full responsibility for both the business and its risk. Profitability, in terms of economic profit and RAROC, is measured on all levels, down to individual customer. This is possible through the use of various models that measure the risk on all individual credit exposures and by allocating capital adequately and comprehensively, making it possible to put a correct price on credit agreements. The overall risk appetite is broken down into detailed risk tolerance limits and target levels for different industries, geographies and products. To safeguard that business performance remains within the risk appetite and that the Group maintains a well-diversified credit portfolio with a low risk profile, the CEO issues Tolerance limits and the CRO Escalation limits for the credit portfolio.

The credit organisation achieves enhanced duality with the business by participating in credit committees on upper levels – which are also chaired by the credit organisation – when dealing with credit risk decisions. The credit risk organisation also guides the business organisation by setting the framework for taking credit risk and for qualitative standards. In decisions relating to credit risk, the credit organisation achieves duality and acts as the second line of defence by participating in the credit committees.

Classification of risks in the credit portfolio

The bank’s risk classification system is central in how we monitor individual credit exposures; it regulates the monitoring process in various ways. The risk profile of the credit portfolio is continuously analysed. For portfolio segments and individual customers where the risk of default appears higher, customer reviews are carried out more often. If a customer’s risk profile has deteriorated, a number of corrective measures are considered and implemented. Using its risk classification system, the bank can calculate risk-adjusted profitability at the level of the customer, the portfolio or the business area.

At least once a year, Swedbank conducts a thorough and comprehensive stress test of the entire bank (see section on internal capital adequacy assessment process, ICAAP) which includes the entire credit portfolio. Specific stress tests, portfolio analysis or ad-hoc reviews are also conducted to further evaluate the bank’s credit risk. These tests provide further understanding and information on specific segments or exposure types which may be perceived as having a high risk or a high potential impact on the bank. By identifying increased risk levels at an early stage, the bank can take swift and appropriate actions on certain exposures. Credit portfolio trends and findings from stress tests form an important part of the monthly risk reports that go to the bank’s senior management and the Board of Directors.

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A sustainability analysis is carried out in all large and medium-sized corporate lending and covers (i) social responsibility (how the company works to ensure respect for human rights, for example in its supply chain, among its employees and in its local community), (ii) human rights, (iii) corruption and (iv) environment (to determine whether there is a structured environmental program). The sustainability analysis is an integral part of credit analysis and aims to assess how the risks related to these areas affect Swedbank’s and its customers’ profitability, repayment ability, collateral security value and reputation – if they should materialise.

Repayment capacity and collaterals When Swedbank considers a credit request, it carefully analyses the counterparty’s capacity to repay the new credit and all other credits, and how sustainable this capacity is. As a risk-reducing arrangement, the bank aims to secure adequate and satisfactory collateral for the credit. This applies for example to mortgage loans to private customers and property management companies, as well as to securities lending, factoring, lease agreements and all other types of financing.

Collateral for granted credits varies depending on the assessed risk and the choice of product. The valuation of collateral is based on a thorough review and analysis of the pledged assets. Since collateral is not generally seized and used until a borrower faces serious repayment difficulties (except within markets operations), the valuation of collateral needs to take into consideration the expected value in the case of insolvency.

Credit without collateral is mainly granted for small loans to private customers, or loans to large companies with very sound repayment capacity. For the latter, special loan covenants are commonly drawn up which entitle the bank to renegotiate or terminate the agreement if the borrower’s repayment capacity deteriorates, or if the conditions are otherwise breached.

In special circumstances the bank may buy credit derivatives or financial guarantees to hedge the credit risk in loan receivables, but this is not part of the bank’s normal lending operations (see Counterparty risk below).

Working with distressed credits Each business unit is responsible for monitoring signals and conditions that might suggest that the level of credit risk in individual exposures has increased, and in such situations a series of customised actions is taken immediately in order to minimise Swedbank’s risk or losses. One action, when certain criteria are met, is to contact the Financial Restructuring and Recovery (FR&R) unit.

FR&R is a special unit within the Swedbank Risk organisation which supports the business units when the risk associated with a certain exposure has increased. FR&R provides expertise in managing insolvency and restructuring cases. This organisation is built up with knowledge and expertise from previous crises. One of the group’s tasks is to educate the business in managing distressed credits and seeing early signals of crisis. There are also specialised subunits within FR&R: Ektornet and FR&R Invest. Ektornet provides expertise in managing repossessed real estate properties, trying to recover as much value as possible for Swedbank. FR&R Invest manages other types of repossessed assets (apart from real estate).

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Measurement of credit risk

Swedbank’s internal risk classification system Swedbank’s internal risk classification system is a central component in the credit process. It comprises working methods and decision-making processes for lending operations, credit monitoring and quantification of credit risk. The system aims to measure the risk that a customer or a contract will default and, in that case, what the losses would be for Swedbank.

Swedbank’s internal risk classification system is a proprietary system that is approved by the Swedish Financial Supervisory Authority. The system, and the results it produces, is based on Swedbank's experience and expertise in assessing and managing credit risks. Swedbank’s internal risk classification system serves as a basis for:

• risk assessments and credit decisions (in committees and automated)

• calculating risk-adjusted profitability (including RAROC)

• calculating portfolio provisions

• monitoring and managing credit risk (including migrations)

• reporting credit risks to the Board of Directors, the CEO and senior management

• developing credit strategy and subsequent risk management activities

• estimating capital requirements and capital allocation

Swedbank has been granted permission to use an internal rating-based approach, the IRB approach, as a basis for calculating capital requirements for credit risk. The IRB approach is applied for the absolute majority, 85%, of the bank’s credit exposures, with sovereign exposures (9% of the total exposure) being the main exception.

For the retail exposure class in Sweden and the Baltic countries, Swedbank has approval to use an advanced IRB approach for calculating capital requirements. For other IRB-approved exposure classes (corporate and institutions exposures) in the Nordic countries and in the Baltic countries, Swedbank calculates its own probabilities of default, but uses prescribed levels for other parameters in calculating capital requirements. For non IRB-approved parts of the bank’s credit portfolio, and also where an exception has been granted by the Swedish FSA, the bank uses the standardised approach in calculating its capital requirement for credit risks.

Capital adequacy approaches

Advanced IRB approach Foundation IRB approach Standardised approach

SEKm EAD RWA Portfolios EAD RWA Portfolios EAD RWA Portfolios Swedish Banking 832,145 53,600 Retail

exposure class

177,844 108,807 Corporate and institutions exposures

44,362 9,376 Entercard and government exposures

LC&I 303 155 Retail exposure class


32,645 5,835 Government exposures, parts of the Nordic branches

Baltic Banking 64,534 24,065 Retail exposure class


32,552 5,815

Group Functions 12 4 Retail exposure class


143,469 3,172 Government exposures, Russia

Swedbank FCG 896,994 77,823 570,904 272,690 253,028 24,198

Swedbank defines its risk classification system through governing documents. The overarching rules are established by the Board of Directors, with more detailed regulations issued by the CEO, CRO, or CCO, respectively. These regulations contain rules as to how models should be structured and validated for development and regular quality controls. To maintain efficiency and reliability, Swedbank performs yearly quantitative and qualitative validations of the system. The validation tests conducted to date have shown that the models are functional and are reliable.

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When calculating capital requirements and expected loss using the IRB approach, three concepts (PD, LGD and EAD) are central.

Swedbank uses a scale of 23 grades to classify the risk that a customer could default, where 21 represents the lowest risk of default and 0 represents the highest risk. In addition there is a default grade. Based on the PD estimate calculated with TtC, the bank assigns the customer or exposure a value on this risk scale. With the help of the risk scale, customers or exposures are ranked from those with the highest risk, to those with the lowest. The risk is also quantified.

Risk grade according to IRB methodology Internal PD, % Indicative rating Standard & Poor's Default 100 D

0 to 5 >5.7 C to B

6 to 8 2.0 - 5.7 B+

9 to 12 0.5-2.0 BB- to BB+

13 to 21 <0.5 BBB- to AAA

Swedbank’s risk rating systems When developing rating systems for various counterparties, the most relevant information for the assessment of PD must be taken into account. For this reason, Swedbank’s rating involves a number of methods ranging from individual expert assessments (rating) to quantitative methods and models based on statistical analysis of large numbers of customers and related customer information (scoring).

Probability of default (PD) Swedbank’s goal is to be as precise as possible in its risk calculations for each customer. It has developed a number of different models for rating counterparties, customers, or contracts in which each counterparty or contract is assigned a risk grade. For each risk grade, a risk value has been quantified and established. The probability of default (PD) indicates the risk that a counterparty or contract will default within a 12-month period.

3-1. Probability of default (PD) varies over the cycle

When calculating capital requirements, Swedbank tries to take a through-the-cycle (TtC) perspective, which aims at producing PD values that indicate the average 12-month default frequency across a full business cycle. PD values also include a safety margin to account for the statistical uncertainty in the estimates. Thus, TtC-adjusted PD figures should remain stable across a business cycle at the portfolio level, while reflecting underlying long-term trends in the risk profile of the portfolio.

In addition, the bank aims at producing Point-in-Time (PiT) PD estimates. These estimates express the risk that the borrower will default on payments to the bank over the next 12 months, and are used when estimating expected losses for the coming year.

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Rating A rating system derives a risk rating for a counterparty with the help of an expert-based system, in which values for selected criteria are weighted and converted into a risk grade. Rating systems are mainly used for large exposures where a thorough understanding of the risks is needed to ensure sound credit decisions. For this reason, Swedbank always conducts an extensive individual analysis before granting credits, and updates the ratings at least once a year.

Swedbank’s rating system:

• Sovereigns: The rating is based on an assessment of a number of parameters that, combined, describe the level of development, stability and financial strength of the sovereign (government) in question.

• Financial institutions: The rating is based on a total appraisal of the sovereign’s (government’s) rating and the level of risk in the banking system and the specific bank. The level of risk in the banking system is determined by weighing a number of parameters that reflect the development, stability and financial strength of the banking system. The level of risk of the specific bank is calculated by weighing up the financial strength, strategy and risk level of its operations.

• Large corporates: The rating is based on a total appraisal of a quantitative component that assesses the company’s financial strength, and a qualitative component that assesses the position of the industry, as well as the company’s market position and strategy.

Scoring In a scoring system, the risk grade of the counterparty (or contract) is based on the statistical relation between a number of selected variables and defaults. Scoring systems are mainly used in portfolios with large numbers of smaller exposures where statistical relationships between different variables and default help to identify potential high-risk customers. When granting loans in this type of portfolio with many small exposures, a credit process with a highly automated risk evaluation process is needed.

Swedbank’s scoring system for:

• Medium-sized corporates: represents a combination of a number of different scoring models and an expert system. In the statistical component, the risk assessment is based on information regarding the borrower’s financial status and behaviour. Market conditions and the borrower’s strategy are assessed in the model’s expert component.

• Retail exposures (private individuals and small corporates): comprises a number of different statistical scoring models where each model is designed to provide an effective instrument in its particular area. The risk assessment is based on information regarding the borrower’s financial status and behaviour.

Loss given default (LGD) Loss given default (LGD) measures what proportion of the exposure amount would be lost in the event of default.

For institutions and corporate exposures, LGD is prescribed by the Swedish Financial Supervisory Authority. For retail exposures (residential mortgages and others), the LGD is based on Swedbank’s own estimates, which in turn are based on internal historical data regarding the extent of loss. The extent of loss depends on factors including the counterparty’s financial status, the value of the collateral, and assumptions of amounts recovered through the sale of any collateral based on historical outcomes and other factors. Swedbank is awaiting S-FSA approval for the use of Advanced IRB for the corporate exposure class in Sweden. Our Swedish corporate lending has favourable collateral, which will lead to a

41


reduction in RWA after the S-FSA approves our application to use A-IRB and internal LGD models.

Capital requirements are based on LGD estimates which are representative for a severe economic downturn; this means that they correspond to a degree of loss incurred under economic stress and cannot be directly compared to the current affirmed loss levels. The LGD values also include a safety margin that takes into account the statistical uncertainty in the estimates. Swedbank’s LGD system is divided between real estate credit and other retail credit.

3-2. Loss given default (LGD) over economic cycles

The risk rating system is applied to the entire Financial Companies Group, with the exception of a few small portfolios. The tests conducted to date have shown that the LGD models are reliable and that downturn adjustments in general have been sufficient for current downturn conditions.

Exposure at default (EAD) Exposure at default (EAD) measures the utilised exposure at default. For on-balance sheet exposures, EAD is the gross value of the exposure without taking provisions into account. For off-balance sheet exposures, EAD is calculated using a credit conversion factor (CCF) which estimates the future utilisation level of unutilised amounts. Consequently, CCF is a gauge of future credit utilisation and estimates off-balance-sheet credit exposures. EAD is thus the sum of the current undertaking and the expected utilisation of the remaining limit.

For off-balance-sheet retail exposures, CCF is based on Swedbank’s own estimates. CCF is prescribed by the Swedish Financial Supervisory Authority for institutions and corporate exposures. Since the estimates in each risk dimension are adjusted to the business cycle and include safety margins, PD, LGD and EL estimates will normally be more conservative than the actual outcome. This calculation method aims at creating more stable capital requirements over fluctuating business cycles.

E A D = d r a w n a m o u n t + C C F x u n d r a w n a m o u n t

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Counterparty risk

Management of counterparty risk Most of Swedbank’s counterparty risk belongs to the trading operations in Sweden and emanates primarily from two units: Group Treasury and LC&I. Counterparty risk arises as a result of hedging of own market risk and from customer-related trading activities. As for products, most counterparty risk derives from interest rate swaps, basis swaps and currency forwards. In nominal terms, forward rate agreements comprise a large share of the derivatives trading. However, since these contracts to some extent are centrally cleared and since they have short maturities, the counterparty risk inherent in these derivatives is low.

Measurement of counterparty risk Measuring the risk arising from on-balance instruments is straightforward because the exposure at any point in the future is known. Derivatives and security financing transactions on the other hand require a more advanced approach, because the future exposure is unknown and therefore needs to be estimated. Swedbank generates estimates based on several thousand different scenarios for price movements in the underlying factors. Positive derivative values generate counterparty risk for Swedbank since the claim towards the counterparty increases. Based on a conservative estimate, the bank sets an add-on factor which is added to the market value of the derivative to reflect future potential market-value changes.

Risk measurement and evaluation is an ongoing process, and Swedbank makes regular assessments, for example through specifying detailed internal add-ons for a number of instruments and their maturities. The internal risk add-on factors are reviewed at least annually and more often if deemed necessary. The add-on factors are based on entities such as simulations of asset price volatility. These assessments facilitate the monitoring of risk and ensure relevance of various limits to the counterparties. The follow-up and measurement of counterparty risk exposure against approved limits is performed in a system specific to the task. Legal agreements as well as collateral held are also taken into consideration within the system.

Swedbank maintains an independent Group-level control unit that has the responsibility to identify, quantify, follow up, analyse and report the counterparty risk inherent in the business. This unit also proposes preventative actions, writes and implements policies, reviews new products and processes before they are put into production in the “new product approval process”, works with early warning indicators and highlights mitigating actions.

In addition to the daily, weekly, monthly and quarterly follow-up and reporting of counterparty risk as measured by internal models, Swedbank conducts stress tests to estimate the effects of tail events. The portfolio of stress tests being carried out includes a monthly stress test of extreme exchange rate movements, a stress test of rating downgrades on deals covered by agreements with rating triggers, and various ad-hoc stress tests pertaining to immediate political or market events. Effects on counterparty exposures, credit losses, RWA, collateral flows and even market risk are considered.

For capital adequacy purposes, Swedbank uses the “Mark-to-Market Method” to calculate the exposure for counterparty risk.

For foreign exchange (FX) settlement risk, the amount at risk is equal to the FX settlement amount. All competent decision-making bodies within Swedbank that decide on counterparty limits for instruments which imply FX settlement risk, in addition to the counterparty risk, also consider the FX settlement risk. FX settlement limits are established for each counterparty trading in instruments that entail such risk.

Mitigating counterparty risks As a principle, when Swedbank enters a transaction that entails counterparty risk, it does so

43


primarily with carefully selected and “systemically important” banks. Swedbank restricts the size of its counterparty risk exposures by setting counterparty limits and FX settlement limits in the regular credit process. Decisions are also made regarding the duration of counterparties’ underlying transactions. The bank uses a variety of methods to mitigate counterparty risk; the most important is netting and collateral management, as outlined below. Other actions include reviewing options to steer exposure and risks to clearing houses to reduce counterparty risk.

Swedbank also works to reduce the bilateral credit risk exposure between institutions by reviewing MTAs, as well as via thresholds and by closing out risk through various portfolio compression activities. In addition, a small part of the counterparty risk exposure is reduced by credit derivatives.

Swedbank conducts credit derivative transactions primarily in connection with counterparty risk, and mainly trades with counterparties where a CSA agreement has been established. Rather than using credit derivatives to mitigate counterparty risk in its trading operations, Swedbank prefers to make use of collateral arrangements.

Counterparty risks – Credit derivatives 31 December 2013 31 December 2012 Own credit portfolio Trading operations Own credit portfolio Trading operations Protection Protection Protection Protection

SEKm Bought Sold Bought Sold Bought Sold Bought Sold

Single name CDS 679 709 1,178 860

Index CDS 5,890 5,045 4,165 3,179

Total 6,569 5,754 5,343 4,039

Swedbank strives to minimise different types of settlement risk through Delivery-vs-Payment (DVP) or Payment-vs-Payment (PVP) arrangements when possible. One such settlement vehicle is the global FX clearing system Continuous Linked Settlement (CLS), which eliminates settlement risk in FX transactions with counterparties that are eligible for CLS clearing. Swedbank has been a member of CLS since November 2012, after being a third-party participant for several years.

Netting and collateral management Swedbank actively minimises its counterparty risk by establishing netting agreements with counterparties. Swedbank strives to have ISDA Master Agreements with CSA agreements in place with all relevant counterparties to ensure a well-functioning netting and collateral management process. As part of the credit review process, the credit committee will pre-define what collateral is accepted. Financial collateral is subject to daily independent valuation.

Swedbank has 39 netting and collateral agreements with rating triggers. In the event of a credit rating downgrade, the rating triggers require additional collateral posting, procurement of a third counterparty to step in between Swedbank and the original counterparty, or early termination of derivatives at market value. Rating triggers may apply to the ratings of one or both parties in the agreement.

The effects of a potential rating downgrade do not pose a threat to Swedbank’s balance sheet, due to the relatively small impact of these effects. A one-notch downgrade by Standard & Poor’s of Swedbank AB’s long-term credit rating to ‘A’ would lead to SEK 298m in collateral being posted. Collateral calls resulting from a similar downgrade by Moody’s or Fitch would be smaller. A two-notch downgrade by Moody’s of Swedbank AB’s long-term credit rating to ‘A3’ would cause the posting of SEK 746m in collateral. Collateral calls resulting from a similar downgrade by Standard & Poor’s or Fitch would be smaller. Novations would first start occurring at the ‘Baa1’ level, three notches below Swedbank’s current rating, and even then the upper boundary of the potential cost is only SEK 17m. Terminations would start occurring only if Swedbank were rated sub-investment grade.

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Counterparty risks – Derivatives SEKm 2013 2012

Positive market value of derivative contracts 64,352 104,789

Exposure reduction from netting agreements 45,370 76,749

Exposure after considering netting agreements 18,982 28,040

Exposure covered by collateral 10,853 15,905

Exposure after considering netting agreements and collateral 8,129 12,136 Potential future exposure from internal risk add-ons, thresholds and minimum transfer amounts 53,021 53,882 Net credit exposures for derivatives including potential future exposure according to internal model 61,149 66,018

Netting and collateral effects for derivatives

Maturity profile for derivative exposures

Note: Add-on + net credit exposure is the exposure according to the internal model. Net credit exposure is the largest of market values after netting and collateral and threshold plus minimum transfer amount for transfer of collateral.

0

10

20

30

40

50

60

70

Exposure before netting and collateral(Sum of positive market values)

Exposure after considering nettingagreements

Exposure after considering nettingagreements and collateral

Exposure, SEKbn

0

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40

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80

Add-on 2013 Net credit exposure 2013 Add-on + Net credit exposure 2012

Exposure, SEK bn

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4. Market risks

Market risk exposures were kept stable and low without large fluctuations; and with lower market volatilities during much of 2013. VaR on average decreased compared to 2012.

Highlights 2013 Both LC&I’s trading book and Group Treasury’s banking book kept their respective market risk exposures stable and low, without large fluctuations during 2013. In addition, most asset classes exhibited low volatilities during the year, which also contributed to lower VaR figures for the Group, averaging SEK 74m (SEK 96m). Trading book VaR, calculated for capital requirement charges, averaged SEK 14m (SEK 16m). Despite deepening debt crises, both in Europe and in the USA, the level of trading activity from client-driven operations, as well as revenue generation, was stable and solid.

With the development of the Market Risk Framework over the past few years, and the enhancements made during 2013, the Group fully benefited from a full spectrum of risk measurement tools including statistical measures, sensitivity analyses, stress tests and additional risk factors.

During 2013, Swedbank closed its operations in Ukraine and started to phase out its operations in Russia, which contributed to a reduction in both interest rate and currency risks. In addition, Ektornet, which is Swedbank’s company for acquiring, managing and developing real estate, successfully reduced a large portion of its assets. Finally, the Group prepared for Latvia joining the euro in January 2014, a change that eliminated Swedbank’s lat risk.

Management of market risks The majority of Swedbank’s market risks is structural or strategic in nature and emerges within Group Treasury, but market risk also occurs in the daily market-making and client-facilitation activities of the trading book within LC&I.

Structural interest rate risks are a natural part of any banking business that manages lending and funding. Interest rate risk arises from mismatches in interest-fixing periods between the assets and liabilities. Group Treasury manages these risks by, to the greatest extent possible, matching the assets and liabilities directly, or by, for example, using derivatives such as interest-rate swaps.

Strategic currency risks arise mainly through risks related to strategic holdings of foreign operations and when deposits and lending take place in different currencies. Group Treasury is mandated to manage these risks and may use derivatives such as cross-currency interest-rate swaps and forward rate agreements.

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Measurement of market risk Swedbank uses a variety of risk measures, both statistical and non-statistical, that guide its day-to-day operations as well as address important regulatory requirements. Statistical measures such as VaR and SVaR have become mainstays of the risk measurement process and are used for calculating regulatory capital. Non-statistical measures such as sensitivity analyses and stress tests are important complementary measures that provide a better understanding of specific market risk factors or possible tail scenarios.

VaR and Stressed VaR Swedbank’s VaR model (using Monte Carlo simulations and a 99% confidence level over a one-day time horizon) is a useful tool for comparing risk levels across different asset classes such as interest rate, credit spread, foreign exchange or equity; and thus gives insight into each asset class as well as into their relative risk levels. However, since VaR is premised on model assumptions, Swedbank conducts daily back-testing to assess the accuracy and relevance of the model. Since 2012, Swedbank has also been using its SVaR model, together with VaR, to calculate regulatory capital requirements for market risks occurring in the trading book. The SVaR model uses market data from the one-year period covering early 2008 to 2009, a period deemed to be of significant stress. In addition to these Monte Carlo-based VaR and SVaR models, Swedbank also runs Historical VaR; and other variants such as Exponential VaR and Expected Shortfall for further complementary monitoring and analysis.

Sensitivity analysis Swedbank uses various sensitivity measures which show a portfolio’s sensitivity to changes in one or more market risk factors. For example, measures used for interest rate sensitivities may include the one basis point shift along 19 nodes of the curve to capture basis risk or the 100 basis point parallel shift which attempts to capture convexity effects. In another example, FX matrix risk reports show each foreign currency’s sensitivity to changes in both price and volatility. Together these sensitivity measures provide important information to risk analysts who monitor changes, trends and anomalies. These measures also form the building blocks of important risk limits that guide the bank’s trading activities and banking operations.

Stress tests The various statistical and sensitivity measures above have known shortfalls and limitations. For example, the VaR model inputs are based on market data from the past year and therefore, in periods of low volatility and stable correlations, VaR figures may not capture hypothetical extreme market movements. Additionally, sensitivity measures only show general sensitivity to small and large movements but provide no historical context to the figures. To address these limitations, Swedbank has a comprehensive set of stress tests which are broadly categorised into scenarios: (i) historical, (ii) forward-looking, and (iii) method and model. The stress tests (and the scenarios underlying them) are meant to cover significant movements in market risk factors and to highlight mismatches in open positions that might cause large-scale losses.

Historical stress tests attempt to capture various effects on the current portfolio using past market data from periods of particular stress. In effect, these tests present the possible losses to the current portfolio if history were to repeat itself. The set of historical scenarios and relevant market data goes as far back as 25 years. It covers financial events (such as the 1992 Swedish banking crisis or the 2008 subprime mortgage meltdown) and non-financial events (such as the September 2001 terror attacks or the 2011 Japan earthquake).

Forward-looking stress tests attempt to quantify the change in portfolio value that would result from hypothetical and extreme shifts in risk factors. These tests include standardised single or cross-asset tests with large but probable shifts that are historically informed. Other forward-looking tests may include more customised tests which may be run on an ad-hoc basis, such as a recent test on the adverse effect from a US debt-ceiling crisis. Some customised tests may be more routinely established, such as the yearly ICAAP or the bi-annual Reverse Stress Test.

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Method and model stress tests measure how statistical measures (such as VaR, Expected Shortfall, or Historical Worst Loss) respond to changes in assumptions, parameters and market conditions. The purpose is partly to capture the uncertainty in reported risk figures due to assumptions and parameter estimations, and partly to capture how dependent the reported risk figures are on current market conditions (such as interest rate levels and risk factor covariance).

Market risk exposures Swedbank analyses market risk exposures using risk factors such as interest rates, exchange rates or share prices. Broadly speaking, market risk exposures fall under either the trading book (managed within the LC&I organisation) or the banking book (managed by Group Treasury).

Value-at-Risk

During 2013, the total VaR figure across the banking and trading books averaged SEK 74m, compared to SEK 96m for 2012. The VaR measure does not include strategic currency risk, since a VaR measure on a one-day time horizon for positions which are meant to be held strategically for longer periods of time is not relevant. It does, however, include positions that are not marked to market and have no direct impact on Swedbank’s net gains and losses on financial items at fair value. For risks captured in the VaR model, interest rate risk is by far the largest exposure.

VaR allocated by business type, 2013

VaR allocated by risk category Jan - Dec 2013 (2012) SEKm Max Min Average 31 Dec 2013 31 Dec 2012 Interest rate risk 99 (141) 49 (69) 75 (102) 66 71 Currency rate risk 17 (14) 2 (3) 8 (6) 10 5 Share price risk 9 (14) 1 (3) 3 (7) 3 4 Diversification -12 (-19) -13 -14 Total 101 (131) 58 (66) 74 (96) 66 66

Interest rate risk Most of the interest rate risk at Swedbank is structural and arises in the banking book, where interest-fixing periods and maturities on assets and liabilities, including derivatives, may not coincide. The interest rate risk from fixed-rate assets, primarily customer loans, is for the most part hedged either through fixed-rate funding or through interest-rate swap contracts. The trading book also generates interest rate risk from customer-related activities.

An increase in all market interest rates (including real interest rates) of one percentage point as of 31 December 2013 would have increased the value of Swedbank’s interest-bearing

-120

-100

-80

-60

-40

-20

0

J F M A M J J A S O N D

SEKm

Swedbank Group Banking Book Trading Book

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assets and liabilities, including derivatives, by SEK 75m (SEK -117m). The value of positions in SEK would have increased by SEK 250m (SEK -267m), while positions in foreign currency would have decreased in value by SEK 175m (SEK 150m). (See appendix table 4-1.)

Net interest income sensitivity In addition to interest rate sensitivities, other measures such as NII sensitivity are calculated and monitored regularly. NII sensitivity is dependent on the structural risks in the bank’s deposit business, where different products are affected differently by changes in current market rates as well as by the current interest-rate level (no products have negative nominal rates). An interest rate increase as of 31 December 2013 by one percentage point would increase Swedbank’s net interest income by approximately SEK 2 370m (SEK 2 186m) in the upcoming year. Conversely, an interest rate cut of one percentage point would imply a decrease in Swedbank’s net interest rate income by approximately SEK 2 601m (SEK 2 206m).

Currency risk Currency risk arises mainly through risks related to strategic holdings of foreign operations and when deposits and lending take place in different currencies; for example, from Swedbank’s operations in Lithuania and Latvia. A large part of Swedbank’s Lithuanian and Latvian lending is denominated in euro, while portions of the deposits are denominated in the local currency.

A considerable share of the currency risk pertains to Swedbank’s holdings in foreign subsidiaries, which do not affect the bank’s net income. Swedbank’s exposure to the litas as of 31 December 2013 was a short position of over SEK 10bn. This short litas exposure was a result of both a structural risk from the funding in litas versus lending in euros; and a strategic management decision to eliminate the negative financial impact in the event of devaluation, despite the litas’ current peg to the euro, in anticipation of eurozone entry in 2015. The Latvian lat exposure will be netted with EUR in 2014 as the country joined common currency at the beginning of the year.

Currency position, as of 31 December

Due to non-linear positions from the trading book, a general shift in exchange rates of foreign currencies against the Swedish krona of both positive and negative 5% would entail positive effects on Swedbank’s net gains and losses on financial items at fair value of SEK 6m (SEK 126m) and SEK 117m (SEK 33m).

Credit spread risk Credit spread risk within Swedbank arises when issuer-specific spreads change on interest-bearing assets and credit derivatives. Credit spread risk is present in client-related and mandated activities of the trading book and in the banking book through Group Treasury’s liquidity portfolio consisting of interest-bearing assets. An increase of all issuer-specific spreads as of 31 December 2013 by one basis point would have reduced the value of Swedbank’s interest-bearing assets, including derivatives, by SEK 18m.

-15,000

-10,000

-5,000

,0

5,000

10,000

15,000

20,000

EUR LTL LVL UAH JPY Net

SEKm

31-Dec-12 31-Dec-13

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Share price risk Share price risk occurs only in the trading book and comes from exposure to equities and equity-related derivatives. Swedbank’s equity trading book is primarily customer-driven and exists for the purpose of providing liquidity to the bank’s customer base. Thus, share price risks are kept at low levels. Swedbank measures and limits share price risk through a risk matrix that maps the outcome of 80 different scenarios where share prices are changed by a maximum of +/– 20% and volatilities by a maximum of +/– 30%. There is a limit in place for the worst-case outcome from this matrix. At the end of the year, the worst-case outcome would have entailed a decline in the value of the trading operation’s positions by SEK 64m (SEK -52m).

Commodity risk Exposure to commodity prices arises only as a part of client-related business, and only in exceptional cases. As a rule, Swedbank hedges any positions with commodity exposure with a third party. As of year-end, Swedbank had no open commodity exposure.

Value-at-Risk (Trading Book) In December 2013, Swedbank received approval from the Swedish FSA to incorporate a new VaR model for calculating capital requirement, which now includes several new risk factors (inflation risk, cross-currency basis risk, and new equity volatility surface).

Trading book, VaR and SVaR Jan - Dec 2013 (2012) SEKm Max Min Average 31 Dec 2013 31 Dec 2012 Value-at-Risk 24 (30) 8 (9) 14 (16) 17 17

Stressed Value-at-Risk 61 (69) 20 (14) 35 (32) 47 44

Note: VaR and SVaR for 2013 use the newly approved model with new risk factors, while 2012 figures are from the previous version of the model. Swedbank conducts both actual backtesting (using actual daily results) and hypothetical backtesting (using close-of-business positions and revaluing the portfolio with the latest market data) to ensure the validity of the VaR model. There were two instances during 2013 when hypothetical losses exceeded the VaR level.

Trading book, hypothetical profit/loss and VaR, 2013

In addition to the VaR model for capital requirement calculations, Swedbank also uses a model for internal risk management purposes. An additional risk factor, which captures credit spread risk, was incorporated into the model in 2013. The total trading book VaR in 2013 using this model averaged SEK 19m, compared to SEK 15m in 2012, when credit spreads were not captured. In general, risk measured in VaR was well balanced between the asset classes and, in total, exhibited favourable diversification.

-30

-20

-10

0

10

20

30

J F M A M J J A S O N D

SEKm

Hypothetical PnL VaR

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Trading book, VaR by risk category

Jan - Dec 2013 (2012)

SEKm Max Min Average 31 Dec 2013 31 Dec 2012

Credit spread 18 (n/a) 1 (n/a) 10 (n/a) 10 n/a

Equity 9 (14) 1 (3) 4 (7) 3 4

FX 16 (15) 4 (2) 9 (6) 10 7

Interest rate 25 (29) 8 (9) 14 (17) 18 18

Diversification -17 (-14) -17 -13

Total 31 (29) 10 (9) 19 (15) 25 17

Note: VaR figures above are generated from the VaR model used for internal risk-management purposes and are different from the figures generated from the VaR model used for capital requirement calculations. The figures in this table for 2013 incorporate the new credit-spread risk factor which was not available in 2012.

Capital requirements for market risks According to current regulations, capital requirements for market risk may be based either on a standardised model or on an internal VaR model, where the latter requires approval from the Swedish FSA. In December 2013, Swedbank received approval to implement the latest version of the VaR model, which includes new risk factors: inflation risk, cross-currency basis risk, and a new equity volatility surface. Capital requirement for market risk was SEK 1 688m as of year-end 2013 (SEK 1 724m).

While the trading book saw a slight increase in capital requirement from both the internal VaR model and the standard approach calculations; the banking book had a reduction in capital requirement, largely driven by FX risk reduction from the unwinding of the Ukrainian business. See appendix tables 4-2 and 4-3 for capital requirements for market risks.

Going forward, the proposed “Fundamental review of the trading book” from the Basel Committee may have an impact on market risk capital requirements. In October 2013, the Committee released its second consultative document. One of the major changes in the current proposal is a new approach to setting the boundary between the trading book and the banking book to better align risks against risk management practices and to reduce regulatory arbitrage. Other changes include an increased focus on the standardised approach and substantial revisions to both the standardised approach and to the internal model-based approach.

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5. Liquidity risks

Swedbank’s liquidity position remained strong, supported by continued pro-active funding activities and solid investor demand.

Highlights 2013 Swedbank continues to have lower long-term debt refinancing needs than in recent years. In 2013 the Group issued SEK 103bn of long-term debt to meet term-debt maturities with a nominal value of SEK 86bn. The estimated issuance volume of long-term debt during 2014 will be around SEK 120bn to meet maturities of nominal SEK 103bn. During 2013, Swedbank’s efforts relating to funding and liquidity received positive recognition once again from the Riksbank in its semi-annual Financial Stability Report, where Swedbank’s strong relative position was highlighted.

Long-term issuance and refinancing need

Note: Distribution of quarterly long-term issuance (Q1 2010-Q4 2013) and funding plan (Q1 2014-Q2 2015)

Funding and liquidity strategy

Strategy Swedbank’s funding strategy is based on its asset composition. More than half of the lending consists of Swedish mortgages, which are primarily financed through covered bonds. Swedbank is the market leader in its home markets in terms of savings solutions. Deposit volumes, together with covered bonds and shareholder equity, nearly cover Swedbank’s total funding requirements. This means that Swedbank has limited structural need for senior unsecured funding. The funding strategy is also closely linked to the credit quality of the assets in the balance sheet. One of Swedbank’s focus areas for managing liquidity risk is to ensure that it retains very good quality in all lending activities. Swedbank strives to match fund unsecured funding against assets of an equivalent amount and maturity.

0

20

40

60

80

100

120

Q11

0

Q21

0

Q31

0

Q41

0

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1

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1

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1

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1

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3

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5

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5

Covered bonds Senior unsecured

Nominal, SEK bn

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The share of unsecured funding is mainly determined by the bank’s liquidity needs and the buffer it wants to maintain in its cover pool in the form of over-collateralisation in order to withstand fluctuations in housing prices.

Funding Swedbank uses a number of different funding programs for its short- and long-term funding, including programs for commercial paper, certificates of deposit, covered bonds and senior unsecured debt (see appendix tables 5-1 to 5-3).

Swedbank had lower refinancing needs in 2013 than in 2012. This, in combination with unchanged high debt-investor demand, decreased the bank’s funding costs both in absolute and in relative terms. Continued intense debt-investor marketing activities helped to broaden Swedbank’s investor base and also to deepen existing relationships.

During 2013 Swedbank issued a total of SEK 103bn in long-term debt to meet its refinancing needs and maintain its conservative liquidity position. This was primarily done using Swedbank’s main funding source, covered bonds, as well as through senior unsecured funding, using public and private transactions executed in various markets, currencies and maturities. In 2013, a nominal SEK 86bn of long-term debt matured. Swedbank’s average wholesale funding maturity profile (both long-term and short-term funding programs) was reduced from 33 months in December 2012 to 29 months in December 2013 – mainly due to a significantly lower refinancing need leading to a relatively lower issuance level than in recent years.

During 2014 Swedbank plans to issue approximately SEK 120bn in long-term funding to meet total maturing long-term debt of nominal SEK 103bn.

The bank’s short-term funding is used mainly as a cash management tool, not to finance the bank’s lending to the public. During 2013 Swedbank extended the average maturity of its short-term financing. The outstanding volume decreased during the year to SEK 100bn.

Liquidity reserve The reason that Swedbank has established and is maintaining a liquidity reserve is to manage its liquidity risk. When future refinancing needs are high, the liquidity reserve needs to be adjusted to meet these maturities in different types of stressed scenarios in the markets, for example when the markets are partly or fully closed for new issuance. This also means that when funding maturities are lower, the liquidity reserve can be smaller as liquidity risk decreases.

At end-2013 Swedbank’s liquidity reserve was SEK 184bn according to the template defined by the Swedish Bankers’ Association (see appendix table 5-6). Swedbank held additional liquid assets outside of Group Treasury that totaled SEK 53bn (see appendix table 5-7).

In addition, the Board has set a minimum size limit for Group Treasury’s liquidity portfolio (unlike the liquidity reserve, this does not include liquidity placed with central banks or in the overnight market). The liquidity portfolio needs to exceed a certain volume, and has to be invested in liquid and pledgeable assets.

Rating Swedbank’s aim is to have a credit rating on the same level as the highest rated banks in the Nordic region. The bank’s funding costs are affected by the level of its credit rating. It is, therefore, a key priority for Swedbank to continue improving its relative rating (see table below).

As a result of this priority, Moody’s upgraded Swedbank’s credit rating to A1 in June 2013. The agency stated that the upgrade was due to Swedbank’s improved credit profile resulting from 1) a sustainable reduction of the risk profile and strengthening of corporate governance; 2) the continued reduction of problem loans and stabilisation of revenues; and 3) enhanced capital levels and improved funding profile.

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In July 2013, S&P revised Swedbank’s outlook from negative to stable. In S&P’s view, Swedbank increased its ability to manage higher financial risks in Sweden given its strong capitalisation and earnings. S&P expects Swedbank’s capital situation and profitability to continue to improve over the next two years. Swedbank was the only Swedish bank to retain a stable outlook from S&P, which affirmed the A+ long-term and A-1 short-term credit ratings of Swedbank and Swedbank Mortgage. Fitch maintained and confirmed the bank’s A+ rating during the year.

Swedbank’s ratings, 31 December 2013 Swedbank AB Swedbank Mortgage AB Covered bonds Rating Outlook Rating Outlook Rating Outlook Standard Short-term A-1

A-1

& Poor’s Long-term A+ S A+ S AAA S

Moody’s Short-term P-1

P-1 Long-term A1 S A1 S Aaa -*

Fitch Short-term F1 Long-term A+ S

* Based on Moody's rating methodology for covered bonds, no outlook is assigned

Asset encumbrance Swedbank believes that transparency and enhanced disclosure will be decisive for how market participants assess the level of asset encumbrance for a given bank. Detailed disclosures on asset quality, funding and liquidity, pledged assets and assets available for pledging will be required. This information, together with the specific structural characteristics of each jurisdiction, as well as the business model and balance sheet of each bank, will allow market participants to determine the level of encumbrance for a specific bank and require adequate compensation for the assessed risk level.

Furthermore, Swedbank’s opinion is that both LGD and PD aspects should be considered; taking mitigating actions to minimise the PD is as important as assessing the actual LGD. Regulators in Sweden have, for example, started to introduce harsher capital and liquidity requirements with the intention of minimising the PD in the banking sector. Safeguarding the asset quality on the balance sheet is another key risk mitigating factor which reduces the PD.

In addition, the type of assets and funding instruments that are being utilised to encumber the balance sheet of a bank impact the “quality” of the asset encumbrance. For example, secured funding in the form of covered bonds, which have a direct link to the underlying business line of mortgage lending is, in Swedbank’s view, of higher “quality” than secured funding in the form of repos, where all different types of assets are used.

Also, we argue that the specific structure of the Swedish covered bond market significantly reduces the PD for banks that utilise this funding instrument. In particular, the high liquidity and stability demonstrated by the covered bond market during turbulent market conditions make this instrument a solid funding source. On the other hand, a bank with overly high reliance on senior unsecured funding – which has proven more volatile during market distress – will increase its PD, while it might decrease the LGD for senior bondholders.

Thus, in our view, the decisive factor concerning the level of asset encumbrance will be the extent of disclosure that banks provide to market participants, so they can make their own assessments. (Appendix table 5-8, illustrating Swedbank's current and potential level of asset encumbrance, should be seen in this context).

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Management of liquidity risk Managing liquidity risk is an integral part of Swedbank’s business operation. Thus, liquidity risk is forecasted and analysed continuously, using different time horizons, to ensure that the Group has adequate cash or cash equivalents to meet its obligations in a timely manner.

Swedbank’s funding strategy and liquidity buffer are key components in liquidity management. In analysing the liquidity position, the Group’s balance sheet structure is crucial, since this is where key ratios and other essential information are derived. Maturity structure and maturity mismatches, in SEK and foreign currencies, are also taken into account. The analysis of the Group’s expected future cash flows provides important information for managing liquidity risk and for planning the Group’s funding.

Intra-day liquidity Swedbank attaches the utmost importance to meeting its intra-day payment and settlement obligations in a timely manner and hence uses methodologies and systems which ensure that obligations are fulfilled under normal and under stressed conditions during the day. The management of intra-day liquidity comprises the following elements:

• Measurement of daily liquidity inflows and outflows

• Monitoring of intra-day liquidity positions

• Funding of intra-day liquidity needs

• Management of timing of liquidity outflows

• Capacity to deal with unexpected disruptions in intra-day liquidity flows

Transferability The ability to transfer liquidity between entities and countries is also of utmost importance in management of liquidity risk. Swedbank manages liquidity risk centrally, which means that individual subsidiaries or legal entities have very limited mandates to take on liquidity risks. When it is deemed necessary to regulate loan-facility conditions between a parent company and an entity, legally binding agreements are entered into to establish a clear responsibility for the parent company to provide liquidity in times of crisis.

Funds Transfer Pricing Swedbank’s methodologies for pricing products and services where liquidity, currency and interest rate risk are incorporated were further improved during 2013 with the launch of a new FTP model. The purpose of the refined FTP methodology is to assign each business transaction a price that reflects the relevant liquidity cost, ensure the correct allocation to the business areas and to incentivise prudent management of liquidity risks.

Business continuity plans and Early Warning Indicators Swedbank has special continuity plans to manage any serious disruption in the liquidity situation, and uses a number of forward-looking risk indicators to perceive and act on increased liquidity risks as early as possible. These indicators show different kinds of market information, such as volatility in market prices and price discrepancies between different financial instruments. The indicators can signal increased stress and risk aversion on the financial market and hence increased liquidity risks.

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Measurement of liquidity risk In Swedbank, Group Risk is responsible for defining the method of measuring Group-wide liquidity risks. All liquidity risks must be identified and measured. The calculation of Swedbank liquidity risks is based on future contractual cash flows which are netted and accumulated over time. The liquidity risk measurement platform which was implemented during 2011/2012 was further developed during 2013, enabling enhanced analysis of liquidity risk.

Survival horizon As part of the ERM Policy, a minimum survival horizon limit has been established. The survival horizon represents the number of days with positive cumulative net cash flows, taking the Group’s future contractual cash flows into consideration. Impacts from non-contractual cash flows are analysed through various simulations and stress tests. The model is conservative to the extent that it assumes no access to the wholesale funding markets or any other external support from central banks in the form of credit facilities and other type of intervention assumed in the calculation. At present the bank would survive more than 12 months with the capital markets completely shut down (see appendix figure 5-9).

Stress tests In addition to daily measurement of the Survival Horizon, Swedbank performs stress tests regularly to increase readiness for liquidity disturbances such as, for example, a severe bank run. The stress tests take both idiosyncratic and market-related problems into account, whereas analyses encompass the effect of a combination of the two.

In these tests, the bank constructs unlikely but still possible adverse scenarios, which trigger a range of risk drivers. The major risk drivers are:

• Client withdrawals of deposits

• Severe utilisation of customer credit lines

• Higher collateral requirements due to increased intraday requirements and margin calls

• General price fall of the assets in the liquidity portfolio

• Severe drop in real estate prices in the mortgage portfolio, which would have a negative impact on the covered bond pool as a funding vehicle

• No access to the capital markets, but the liquidity-generating capacity of the Group’s liquid assets is assumed to remain intact

Cover pool The volume of covered bonds that can be issued is determined by the size of Swedbank’s cover pool. A certain over-collateralisation (OC) must also be maintained; the rating agencies that rate Swedbank’s covered bond program require it so that the triple-AAA rating can be maintained. As stipulated in the ERM policy, a minimum OC level must be maintained at all times, regardless of the requirements of the rating agencies. This level is meant to ensure that sufficient collateral is available to protect covered bond investors – even in the event of large decreases in housing prices. At the end of 2013 the OC level was 44%.

A sensitivity analysis of house price decline on the cover pool is run regularly as part of the internal liquidity stress tests. The impact on the OC level is described in appendix table 5-10. The LTV structure of Swedbank’s cover pool demonstrates strong resilience to house price declines. Swedbank’s goal is to have an OC of rating requirement of + 20% to manage a 20% decline in housing prices.

Liquidity ratios Swedbank also monitors liquidity risks through additional measures including LCR and NSFR.

• The LCR aims to ensure that a bank maintains an adequate level of unencumbered, high-quality assets (a liquidity reserve) to meet its liquidity needs for the next 30-day time

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horizon under the assumption of a severe liquidity stress scenario. Thus the LCR metric focuses on a bank’s short-term liquidity. As of 1 January 2013, the Swedish FSA requires Swedish banks to uphold LCR to 100% on total exposure (all currencies combined) and in USD and EUR respectively. Therefore, the LCR has grown in importance as a metric for liquidity risk measurement, and Swedbank was reassuringly above 100% during the year. Per 31 December 2013 Swedbank had an LCR of 142% (see appendix table 5-11).

• The NSFR shows a bank’s ability to manage stressed liquidity situations over a one-year horizon. NSFR ensures that a bank’s long-term illiquid assets are funded with a minimum amount of stable long-term funding. An NSFR of above 100% means that the long-term illiquid assets are adequately funded with stable funding. Swedbank has an NSFR of 97%, according to the latest Basel definition (see appendix table 5-11).

Swedbank publishes the ratio of the size of its stock of liquid assets vs. the maturing market funding for various maturities. In this respect, the liquidity and funding ratios are complements to the regulatory standards. A ratio above 100% indicates that the stock of liquid assets exceeds the amount of maturing market funding during the predefined time period.

Capital requirement for liquidity risk There is no direct capital requirement for liquidity risk. However, liquidity constraints may arise as a result of an imbalance between risks and capital. The ICAAP process is designed to ensure that such imbalances do not arise. Consequently, a conservative view of liquidity risks is crucial to the capital process.

57


6. Operational risks

The operational risks in the Group have decreased as a consequence of management actions to increase stability in IT as well as due to discontinued operations outside Swedbank’s home markets.

Highlights 2013 The main risk drivers of operational risk continue to be IT and System risk related to life-cycle issues in legacy systems, and as a consequence of this, process risk from manual processing. Work to modernise, consolidate and improve efficiency in the bank’s IT infrastructure is continuing according to plan, and the operational risk level for the Group continued to decrease as a consequence of management actions to modernise IT infrastructure and increase stability in IT. External risk has also been reduced on the back of discontinued operations in Ukraine and the wind-down of operations in Russia.

Meanwhile, the high level of change in the Group – including the transfer of responsibility for a large portion of the Swedish customer base from Swedbank’s regional organisation to Electronic Channels, the efforts to reduce product complexity, and organisational changes across the Group – entail increased operational risks. Also, as customers are increasingly accessing the bank’s services via internet and other electronic channels, external threats are high on the agenda. Criminals are using all channels available to commit fraud, often as a combination of cybercrime and consumer frauds and scams. We are constantly improving our countermeasures to fight these crimes, and we inform our customers on best practice for IT security.

In 2013 the operational risk loss amount remained at a low level and the only larger loss was related to a fine from the Competition Board in Lithuania (the ruling has been appealed). 2013 accumulated losses were on par with 2011 and 2012 but below the expected annual loss.

Operational risk – total annual losses

2009 2010 2011 2012 2013

Personnel Process IT- and Systems External

58


Management of operational risk Operational risks are inherent in the Group’s business activities and are typical of any financial institution. It is not cost-efficient to attempt to eliminate all operational risks, nor is it possible to do so. Swedbank seeks to maintain the lowest possible level of operational risk, taking into account market sentiment and regulations, as well as our strategy, rating ambitions, and capacity to absorb operational risk losses.

Larger losses of material significance are rare and Swedbank seeks to reduce the likelihood of these through relevant operational risk control, continuity management, and compliance to maintain readiness for events that could cause losses or reputational damage.

Risk-based planning During 2013 we established a common risk-based planning process to ensure relevance of risk management and risk control activities and to enable resource allocation within the Group Risk function over time. We also worked to improve coordination and information-sharing between Group Risk, Group Compliance and Internal Audit.

Reporting Operational risk reporting takes place in the form of regular reporting and immediate escalation. Comprehensive reports are sent to the Board and the CEO on a quarterly basis (and on a deviation basis in the monthly CRO report).

Risk and control self-assessments Risk and control self-assessments (RCSAs) are performed by all Business Areas and Group Functions. The same methodology is used to evaluate operational risks across the Group, and to secure that adequate measures are taken. The RCSA process is designed to provide Business Areas and Group Functions with a forward-looking view of operational risks and an assessment of the effectiveness of controls, and a tracking mechanism for action plans to secure the proactive management of operational risks within accepted levels.

RCSAs are reviewed and updated on an annual basis. All appropriate means of mitigation and controls are considered. These include accepting the risk, mitigating it or transferring it in order to protect Swedbank from potential and actual loss.

New Product Approval (NPA) process The NPA process that was implemented across the Group in 2011 has settled in to varying extents across departments and product categories. The revised NPA process encompasses not only new products and services, but also operational and organisational changes. Process fine-tuning continues to secure product and processing quality, as well as to safeguard customer interests and ensure that the risks are within the risk tolerance limits.

The process has been further simplified and aligned with existing product and project management processes. It is designed to emphasise the responsibility of the Business areas for risk identification, analysis and mitigation. Group Risk contributes with an expert evaluation of the risk analysis process and the residual risks, and has the mandate to halt changes where the residual risks exceed the risk tolerance limits.

Security and Business Continuity Management Through technical, organisational and administrative measures, Swedbank works proactively with security management to protect all types of assets, including personnel, tangible assets, and intangible assets. Swedbank’s security management model is derived from the international standard ISO/IEC 27002:2013 Code of Practice for Information Security Controls.

Swedbank has coordinated processes to prevent and manage serious events such as IT disruptions, financial disturbances and pandemics.

Swedbank’s principles for security, business continuity management, incident and crisis

59


management are defined in a Group-level framework. A crisis management team is available on the Group level for high-level coordination and communication internally and externally. In addition, business continuity plans are in place for all business-critical operations, IT systems and services that are critical for society in the countries where Swedbank operates. The plans on strategic, tactic, and operational levels describe how Swedbank is to operate in the event of a serious business disruption or potential crisis situation.

Processes and Controls During 2013, Swedbank set up a centralised process for mapping the process universe and the key control activities within its entire organisation. The purpose of having a common process universe is to ensure that control activities are consistently implemented in the whole organisation. The process universe is designed to emphasise responsibility for the critical and core processes within the bank as well as responsibility for the control activities within the process and the assessment of the effectiveness of these controls.

Specific control frameworks exist for Internal Control over Financial Reporting (ICFR) established within Group Finance, and for Credit Process Control (CPC) established within the Credit Risk unit.

Incident management An incident is defined as “a deviation in business processes resulting in unexpected business outcome” caused by events such as crime, errors, disputes, service inability, delayed services, or loss of control of the business process”.

To ensure that operational risk losses are consistently reported and monitored at the group level, all Group companies are required to report individual losses when the net loss is expected to exceed SEK 25 000. Losses are entered into the operational risk loss database and reported to the Group Operational Risk function on a quarterly basis as part of regular reporting.

Annual loss- by Basel Event Type Annual loss - by Basel Business Line

Legal and compliance Legal and compliance risks are included under operational risk. The CEO has established Group Legal and Group Compliance for governing, controlling and supporting the proper handling of legal and compliance matters respectively.

The Group has lawyers in all major business areas with specialisation in all core areas of Swedbank. The Head of Group Legal has issued a directive which describes and establishes the basic and common view within the Group on escalation, information sharing and reporting of legal risks and lawsuits. In the Directive, it is stated that each Business Area Head of Legal must set up and implement appropriate overall processes and procedures for the effective handling of legal risks within their area of responsibility in order to mitigate potential threats, and must undertake reviews to identify and follow up actual and/or potential legal risks, while

Internal fraud

External fraud

Employment Practices &Workplace Safety

Clients, Products & BusinessPractices

Damage to Physical Assets

Business Disruption & SystemFailures

Execution, Delivery & ProcessMgmt

0% 10% 20% 30% 40% 50% 60%

Corporate Finance

Trading and Sales

Retail Banking

Commercial Banking

Payment and Settlement

Agency Services

Asset Management

Retail Brokerage

0% 20% 40% 60% 80%

2013 2012 2011

60


modifying practices to ensure compliance with local regulatory requirements.

The Group Compliance function is responsible for providing assurance to the CEO and the Board that the Group’s business is being conducted in accordance with regulatory requirements. The scope of the Compliance function is defined by the Board in the Compliance Policy and includes regulatory licenses, internal governance, customer protection, market conduct, ethics, conflicts of interest, anti money-laundering activities, counter-terrorist financing activities, and remuneration.

Insurance policies Swedbank has insurance protection for significant parts of its operations. The goal of continuous risk-reduction work is to maintain and reinforce the Group’s reputation by protecting, among other things, life, health, financial assets and data. Swedbank maintains several insurance programs to mitigate operational (and other types of) risks. These insurance programs consist of external insurance solutions, internal captive solutions, and externally reinsured captive solutions. The external programs include Crime, Professional Liability, Directors’ and Officers’ Liability, and Property insurance.

Capital requirements for operational risk

Pillar 1 capital Operational risk capital requirements are calculated under the standardised approach, as a percentage of the average of the last three financial years’ gross revenues. The standardised approach assigns different multipliers (beta factors) to different business lines depending on the inherent risk of the operation. These beta factors express the capital requirement for the industry in relation to gross income for each business line. The beta factors are determined by the capital adequacy rules.

Capital requirement for operational risk, by business line

Capital requirement

SEKm Beta (%) * 2013 2012 2011 Corporate finance 18 1 0 0 Trading and sales 18 720 239 69 Retail banking 12 2,764 2,867 2,943 Commercial banking 15 673 828 947 Payment and settlement 18 232 268 269 Agency services 15 19 19 19 Asset Management 12 75 102 112 Retail brokerage 12 3 3 0 Total 4,486 4,326 4,359

*The capital requirement for each business line is derived by multiplying the business line’s beta factor by its gross income. The total capital requirement for a legal entity or financial group of undertakings is obtained by adding the respective capital requirement of all eight business lines.

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7. Internal capital adequacy assessment process – ICAAP – Pillar 2

The 2013 ICAAP result shows that Swedbank has limited risks and is well capitalised when exposed to a negative scenario in all four home markets.

Highlights 2013 In the ICAAP for 2013 scenario simulation, calculations are based on the Swedbank FCG balance sheet as of 31 December 2012. The result displays Swedbank’s limited risks and strong capitalisation when subjected to a negative scenario which includes a major recession in Sweden and the Baltic countries that adversely affects the bank.

Swedbank and its Baltic subsidiaries demonstrate strong resilience throughout the scenario, even during the years with the highest stress level, and would meet the anticipated Pillar 1 regulatory requirements over the five-year scenario horizon.

Measurement Types of risk Swedbank calculates Pillar 2 capital for all relevant risk types identified. Strategic risk and reputational risk are handled indirectly within the capital adequacy assessment, as the capital buffer implicitly protects against such risks. These risks remain an important part of Swedbank’s potential exposure and are carefully monitored and managed. Liquidity constraints may arise as a result of an imbalance between risk and capital. The ICAAP is designed to ensure that imbalances like this do not arise, and consequently, a conservative view of liquidity risks is important to the process.

Risk types according to the ICAAP process (cont. next page)

Risk type Pillar 1 Pillar 2

Capital is allocated

Contributes to calculated capital need? Credit risk Yes Yes Concentration risk Yes1 Yes Market risk Yes Yes Market risk: Interest rate risk in banking book No Yes Operational risk Yes Yes Business risk: Earnings volatility risk No Yes Insurance risk Yes 2 Yes 3 Risks in post-employment benefits No Yes Strategic risk: Business plans No Yes Strategic risk: Projects and acquisitions No Yes, as a one-off sum added

62


Risk types according to the ICAAP process (cont. from above)

Risk type Pillar 1 Pillar 2

No specific capital is allocated

Identified and mitigated? Reputational risk No Yes Liquidity risk No Yes, stress test Strategic risk: Decision risk No Yes

1. The Basel formulae are calibrated to include sector- and geographical concentration risk, i.e. the Pillar 1 measure already includes a large amount of concentration risk. 2. Holdings in insurance business (equities, sub-debts, similar instruments) are deducted from capital. 3. Holdings in insurance business are deducted from capital, and an assessment is made to determine whether the invested capital amount is adequate considering the adverse scenario applied in the Group’s ICAAP. The assessment is made in accordance with the current as well as future solvency regulations.

The adverse ICAAP scenario The ICAAP macro scenario, being one of five scenarios evaluated, stipulates an outstretched growth contraction occurring in 2013 and holding its grip for a demanding three-year period before entering into positive GDP territory in 2016. The protracted recession scenario was selected because it was considered the most probable macro development given the European debt crisis. The scenario’s severity level is set on the conservative side; when comparing Swedish historic economic crises with similar macro developments, these appear less frequently than 1 in 25 years. (See also appendix table 7-1.)

I C A A P S C E N A R I O : “ P R O T R A C T E D R E C E S S I O N ”

Triggers

• Bankruptcy in large European bank

• Sudden stop in credit and capital flows

• Debt leveraging and fiscal consolidation

• Global negative sentiment

Outcome

• Negative GDP three consecutive years (2013-2015)

• Drop in housing prices in all home markets

• SEK appreciates against EUR, making Swedish export sector suffer

• The Baltic states experience falling external demand affecting investment, consumption and export

Sweden is particularly affected due to its major dependency on foreign trade, and the Swedish krona appreciates against the euro, meaning that Sweden is considered a safe haven during 2013-2015. GDP falls by about 9% over three years, and unemployment rises to almost 12% in 2015 before slowly decreasing.

The Baltic economies are also hit hard as falling external demand weakens both investment and consumption. Exports are severely affected as the global economy takes a dive. Latvia and Lithuania maintain their pegs to the euro but do not join the EMU. The GDP decline for Estonia is about 11%, for Latvia 12% and for Lithuania 9%. Unemployment rises to 15%, 19.5% and 18% for each country, respectively. House prices fall by 18% in Sweden and by 16-20% in the Baltic countries during the scenario period.

The impending regulatory changes will have a profound effect on larger banks of systemic importance, and Swedbank is no exception. The main result from our analysis of the scenario simulation states a regulatory effect of 194bps on the CET1 capital ratio – from 17.4% to 15.4%.

The regulatory* effects included in the analysis can be divided into these main streams:

• pure Basel 3/ CRD IV effects (both capital and RWA effects), and

• effects from abandoning the “corridor rule” on Swedbank’s pension commitment as a result of amendments to IAS 19.

* Note: When preparing the 2012 ICAAP, the foreseen 15% average risk weight for the Swedish mortgage portfolio was incorporated as a Pillar 1 measure. S-FSA has since announced this measure as a Pillar 2 add-on and consequently, in the 2013 ICAAP, the add-on was instead included as part of additional calculations. Further revision by S-FSA concerning an additional increase to 25% is ongoing, as is a discussion regarding whether this will be considered Pillar 1 or Pillar 2.

63


Impact on Swedbank – simulation results The result of the simulation shows the impact on Swedbank during a severe five-year scenario (see also income statement, appendix table 7-2), with no management interventions included.

If management interventions are incorporated, the effect would be a higher CET1 capital ratio with a cumulative effect of 0.6% in 2017.

CET1 capital ratio effects, %

Net interest income In Sweden, the full scope of the downturn is revealed in 2014 and consequently, credit demand falls. The lending volume contraction is emphasised by defaulted volumes as well as increased amortisations. Swedish deposit volumes are strained as increasing unemployment significantly reduces the flows to private persons’ transaction accounts and buffers are gradually consumed. Counteracting this reduction is an inflow from persons still in the workforce increasing their savings or diverting their funds from the stock market into savings accounts. In the Baltic countries, the years of economic turmoil and struggling recovery in their aftermath drive households and corporates to rapidly adjust their behaviour, causing credit demand to fall more or less instantaneously. Defaulted volumes are higher because customers have already depleted their deposited funds after years of hardship, so lending and deposit volumes fall throughout the scenario but at a diminishing pace, sensing a recovery at the end of the scenario.

The effects of the prolonged recession scenario have a severe impact on net interest income, which drops for three consecutive years for an overall decline of 15% – from SEK 22.8bn in 2012 to SEK 19.3bn in 2015.

Credit impairments During the scenario, credit losses accumulate to SEK 31.6bn, or 2.3% of the 2012 exposure level. The losses peak in 2014 and remain relatively high during 2015 before falling back down during the recovery years of 2016 and 2017 (see appendix table 7-3).

The single most severe scenario year is 2014; it carries SEK 12.5bn, which is 40% of the total loss amount. Throughout the scenario range, BA Swedish Banking accounts for 53% of the losses and LC & I for 23% (see appendix table 7-4). Baltic Banking losses constitute SEK 4.5bn or 14% of the losses, of which 42% occur during 2014 (see appendix table 7-5). The Baltic loss level is more moderate than that indicated in previous ICAAPs; a more stable Baltic scenario is detected as both Latvia and Lithuania maintain their EUR pegs. Additional credit losses stem from Russia, Ukraine and Ektornet.

15.4

16.0

16.8

18.3

20.0

20.9

15.4

16.1

17.0

18.6

20.5

21.5

15

17

19

21

23

2012 2013 2014 2015 2016 2017

CET 1 capital ratio, ICAAP scenario

CET 1 capital ratio, ICAAP scenario + management interventions

64


Expenses Expenses in Swedbank start at a lower level than in previous years, due to successful execution of the 2012 cost-cutting plan. No large cost cuts are incorporated in this year’s scenario, so a conservative stance is ensured. Throughout the scenario, Swedbank’s expenses have a stable annual level of approximately SEK 18.5bn.

These results are additionally analysed from a risk weight and capital perspective.

RWA and capital assessment results Given the Pillar 2 reforms that are underway both on an EU level and nationally, the capital assessment acts to incorporate known changes within the scenario horizon. The upcoming regulatory effects are discounted to the start year, 2012. The regulatory changes incorporated from the start are: a) the change related to IAS 19, meaning that the abolishment of the corridor rule will increase Swedbank’s pension commitment by SEK 3.1bn, and b) the Pillar 1 Basel 3/CRD IV effects. In the ICAAP, Swedbank’s CET1 capital ratio carries a regulatory effect of 194bp (Basel 3 and IAS 19).

RWA for 2013 rises slightly due to credit risk effects from migrations and increasing business volumes, but then falls back down as the crisis set out in the scenario gains a hold on the process. From 2013, RWA falls annually throughout the scenario (see appendix table 7-6). The total decline is 20% and is mainly due to defaulted volumes being taken out and to decreasing lending volumes in all segments in all of Swedbank’s home markets.

The strong capital situation is stated as the regulatory adjusted CET1 capital ratio of 15.4%, which is the starting value for the scenario, also constitutes the scenario’s low-point. This is a severe macro scenario in which Swedbank’s executive management takes a conservative stance and does not impose or enforce any management interventions. Further, the majority of the subordinated loans are redeemed during the first and last year in the scenario period (2013 and 2017). This results in a decrease of SEK 13bn in subordinated debts – from SEK 14.2bn to SEK 1.2bn – consequently causing the total capital ratio to decrease accordingly in 2013 and 2017.

Capital assessment in the adverse scenario The current capitalisation risk appetite set by the Board implies that, at all times, the Group should be capitalised to be able to withstand a stress scenario as described in the ICAAP. With a low point of 15.4% for the CET 1 capital ratio in the ICAAP adverse scenario, the bank is sufficiently capitalised even considering the assumed future regulatory requirements stated at the time when the ICAAP was prepared. The adverse scenario simulation further shows that Swedbank remains resilient and continues to build capital throughout the forecast period even under the stressed scenario. Hence, Swedbank can be considered one of the best-capitalised banks in Europe under Basel 3 and IAS 19.

Appendix 1


Appendix

All figures are in SEK million unless otherwise stated.

2. Capital base and capital requirement - Appendix

2-1. Capital adequacy Swedbank FCG, 31 December 2013 vs. 2012 2013 2012

Basel 2 Basel 3* Basel 2 Basel 3*

SEKm

including transition

rules

excluding transition

rules

including transition

rules

excluding transition

rules

CET1 capital 84 606 84 606 80 826 77 545 77 545 75 242

Tier 1 capital 88 615 88 615 86 371 83 815 83 815 81 661

Capital base 90 772 90 772 91 026 88 003 88 003 89 917

Risk-weighted assets 785 634 451 931 440 620 769 117 464 339 487 105

Capital requirements 62 851 36 154 35 250 61 529 37 147

Surplus of capital 27 921 54 618 55 776 26 474 50 856

Capital quotient 1.44 2.51 2.58 1.43 2.37

CET1 capital ratio, % 10.8 18.7 18.3 10.1 16.7 15.4

Tier 1 capital ratio, % 11.3 19.6 19.6 10.9 18.1 16.8

Capital adequacy ratio, % 11.6 20.1 20.7 11.4 19.0 18.5

* According to Swedbank's current calculation based on the new regulations.

Note: On 31 December 2013 the Swedbank Financial Companies Group comprised the Swedbank Group with the following exceptions. In the consolidated accounts, the associated companies EnterCard (Group), Sparbanken Rekarne AB, Färs och Frosta Sparbank AB, Swedbank Sjuhärad AB, Vimmerby Sparbank AB, Bankernas Depå AB and Bankernas automatbolag AB are consolidated according to the equity method. In the Financial Companies Group, these companies are fully consolidated according to the purchase method, apart from EnterCard, which is consolidated according to the proportional consolidation method. The insurance companies included in the consolidated accounts, Swedbank Försäkrings AB, Sparia Insurance AB, Sparia Group Insurance Company Ltd., Swedbank Life Insurance SE and Swedbank P&C Insurance AS, are not included in the Financial Companies Group and are instead subject to solvency rules rather than capital adequacy rules. A list of the companies included in the Swedbank Financial Companies Group is provided at the end of this appendix.

Appendix 2


2-2. Capital base, Swedbank Financial Companies Group, as of 31 December Note

SEKm 2013 2012

1 Shareholders’ equity according to the Group balance sheet 109 540 103 032

– of which preference shares 8 251

2 Non-controlling interests 165 154

3 Anticipated dividends -11 100 -10 880

4 Deconsolidation of insurance companies -1 982 -2 444

5 Associated companies consolidated according to purchase method 2 251 1 864

6 Unrealised value changes in financial liabilities due to changes in own creditworthiness 92 92

7 Cash flow hedges 139 42

8 Goodwill -11 198 -10 894

9 Deferred tax assets - 399 - 567

10 Intangible assets -1 943 -1 880

11 Net provisions for reported IRB credit exposures - 959 - 938

12 Shares deducted from CET1 capital - 36

13 Total CET1 capital 84 606 77 545

14 Tier 1 capital contributions 5 536 6 270

14 a – of which Tier 1 instruments that must be converted during emergency situations

14 b – of which Undated Tier 1 instruments without incentives to redeem 528

14 c – of which Fixed-term Tier 1 instruments or perpetual Tier 1 instruments with incentives to redeem 5 536 5 742

15 Shares deducted from Tier 1 capital -1 527

16 Total Tier 1 capital 88 615 83 815

17 Perpetual subordinated loans 25 28

18 Fixed-term subordinated loans 4 618 8 028

19 Deduction remaining maturity

20 Net provisions for reported IRB credit exposures - 959 - 938

21 Shares deducted from Tier 2 capital -1 527 - 36

22 Total Tier 2 capital 2 157 7 082

23 Less shares in insurance companies -2 894

24 Total capital base 90 772 88 003

1 Shareholders’ equity according to the Group balance sheet This item includes capital contributed by the shareholders, which is reported as share capital and statutory reserves. Swedbank’s share capital consists of ordinary shares and preference shares. This item also includes earnings in previous years and in the current year reported via the comprehensive income statement, including the capital part of untaxed reserves. Profit generated during the year is included in CET1 capital as soon as it has been verified by the company’s auditor. 2 Non-controlling interests The equity interests of minority equity holders in companies that are fully consolidated in the Financial Companies Group. 3 Anticipated dividends Deduction for estimated dividends. 4 Deconsolidation of insurance companies Deduction of equity capital emanating from the insurance companies in Swedbank Group. The insurance companies are consolidated in the Group but not in Financial Companies Group under the capital adequacy rules. 5 Associated companies consolidated according to purchase method The equity interests of majority equity holders in associated companies that are fully consolidated in the Financial Companies Group. 6 Unrealised value changes in financial liabilities due to changes in own creditworthiness Recognised changes in the value of equity arising from financial liabilities (not held for trade or not subject of an effective and documented fair value hedge but reported at fair value) due to changes in own creditworthiness are not eligible for inclusion in the capital base. 7 Adjustment for cash flow hedges Recognised changes in the value of equity arising from cash flow hedges are not eligible for inclusion in the capital base. 8 Goodwill Goodwill reported on the balance sheet is deducted from CET1 capital. Goodwill attributable to shareholdings in foreign subsidiaries can vary due to exchange rate fluctuations. 9 Deferred tax assets Deferred tax assets reported on the balance sheet are deducted from CET1 capital. 10 Intangible assets Intangible assets, other than goodwill, such as the value of acquired customer relationships are deducted from CET1 capital. 11 Net provisions for reported IRB credit exposures Deduction for the negative difference between expected losses calculated within the IRB approach and the reported provisions. 50% is deducted from CET1 capital and 50% is deducted from Tier 2 capital. The difference arises when losses calculated in accordance with the capital adequacy rules exceed Swedbank’s best assessment of loss levels and provision needs according to incurred loss model in financial reporting. Expected losses are calculated in accordance with the capital adequacy regulations and using data from Swedbank’s internal risk rating system, where risks are overestimated rather than underestimated. In addition, extra safety margins are applied, which have been built into the risk rating system due to the Swedish Financial Supervisory Authority’s interpretation of the regulations. 12 Shares deducted from CET1 capital Deduction for certain types of equity shares and contributions to institutions that are not part of the Financial Companies Group. 13 Total CET1 capital Common Equity Tier 1 (CET1) capital consists mainly of equity capital less proposed dividends and deduction for goodwill/intangible assets and deferred tax assets. The ratio of CET1 capital to risk-weighted assets is the CET1 capital ratio.

Appendix 3


14 Tier 1 capital contributions The Tier 1 capital contributions are made up of subordinated loans whose terms are such that the Swedish Financial Supervisory Authority has allowed Swedbank to include them in Tier 1 capital. They may be redeemed or repurchased on approval by the Swedish Financial Supervisory Authority. Normally, such approval cannot be given until five years after the loan was issued, although a step-up cannot occur until ten years have passed. The Tier 1 capital contribution is also called “hybrid capital” because the properties of these instruments contain elements of both debt and equity. Interest payments are determined according to the contract, but are allowed only if there are distributable funds. The priority rights of the contribution are subordinated to all other deposits and borrowings including subordinated loans that may not be included as Tier 1 capital contributions. The Tier 1 capital contributions are limited to a ceiling of 50% of Tier 1 capital. Any surplus may instead be included in Tier 2 capital in the same way as undated subordinated loans. Since some of the loans are issued in foreign currencies, the size of the Tier 1 capital contribution can vary due to exchange rate fluctuations. The principal amount of Tier 1 capital contributions can be appropriated to cover losses to the extent that may be required to avoid Swedbank AB being obliged to enter into liquidation. The appropriation is processed by writing down the principal amount fully or partially and converting such amount into a conditional capital contribution, given a resolution hereof is passed at General Meeting and the Swedish Financial Supervisory Authority has given its permission. The whole or part of accrued and unpaid interest can be appropriated if Swedbank AB lacks sufficient unappropriated earnings. The Tier 1 capital contributions are included in the capital base in accordance with FFFS 2010:10 transitional rules. For specification of outstanding Tier 1 capital contribution, please see note G43 in the Annual Report. 14 a Tier 1 instruments that must be converted during emergency situations Specification of Tier 1 instruments that must be converted during emergency situations, included in total Tier 1 capital contributions. Such Tier 1 capital contributions are limited to a ceiling of 50% of Tier 1 capital. 14 b Undated Tier 1 instruments without incentives to redeem Specification of undated Tier 1 instruments without incentives to redeem, included in total Tier 1 capital contributions. Such Tier 1 capital contributions are limited to a ceiling of 35% of Tier 1 capital. 14 c Fixed-term Tier 1 instruments or undated Tier 1 instruments with incentives to redeem Specification of fixed-term Tier 1 instruments or undated Tier 1 instruments with incentives to redeem, included in total Tier 1 capital contributions. Such Tier 1 capital contributions are limited to a ceiling of 15% of Tier 1 capital. 15 Shares deducted from Tier 1 capital Deductions for certain types of equity shares and contributions to institutions that are not part of the Financial Companies Group. An earlier rule such that insurance holdings were deducted from the total capital base expired on 1 January 2013. Thus, from the first quarter of 2013, half of the deduction was made from Tier 1 capital and half from Tier 2 capital. 16 Tier 1 capital Tier 1 capital must make up at least half the capital base and consists mainly of equity capital less proposed dividends and deduction for intangible assets. Upon approval from the supervisory authority, Tier 1 capital contributions may be included in Tier 1 capital. The ratio of Tier 1 capital to risk-weighted assets is the Tier 1 capital ratio. 17 Perpetual subordinated loans Subordinated loans may be included in the capital base because they constitute a subordinated debt, which means that if the obligor is declared bankrupt, the holder would be repaid after other creditors, but before shareholders. In principle, an undated subordinated loan applies over an unlimited period, although it may be repaid or repurchased on approval by the Swedish Financial Supervisory Authority. Normally, such approval cannot be given until five years after the loan was issued. Undated subordinated loans convey preferential rights before Tier 1 capital contributions raised by Swedbank but after fixed-term subordinated loans and Swedbank’s other obligations. Undated subordinated loans are eligible for inclusion in the capital base up to a maximum amount equivalent to Tier 1 capital. 18 Fixed-term subordinated loans Fixed-term subordinated loans carry priority rights before undated subordinated loans raised by Swedbank but after the bank’s other obligations. Fixed-term subordinated loans are eligible for inclusion in Tier 2 capital up to a maximum amount equal to 50% of Tier 1 capital. 19 Deduction remaining maturity Fixed-term subordinated loans with time to maturity of less than five years are subject to a term reduction by which 20% of the nominal value may be included for every whole year remaining before maturity. Accordingly, a fixed-term subordinated loan with less than one year remaining to maturity may not be included in the capital base. Aimed at avoiding this, the loans are usually structured so that they can, if approved by the Swedish Financial Supervisory Authority, be redeemed before the term reduction begins. 20 Net provisions for reported IRB credit exposures Deduction for the negative difference between expected losses calculated within the IRB approach and the reported provisions. 50% is deducted from CET1 capital and 50% is deducted from Tier 2 capital. The difference arises when losses calculated in accordance with the capital adequacy rules exceed Swedbank’s best assessment of loss levels and provision needs according to incurred loss model in financial reporting. Expected losses are calculated in accordance with the capital adequacy regulations and using data from Swedbank’s internal risk rating system, where risks are overestimated rather than underestimated. In addition, extra safety margins, which have been built into the risk rating system due to the Swedish Financial Supervisory Authority’s interpretation of the regulations, are applied. 21 Shares deducted from Tier 2 capital Deductions for certain types of equity shares and contributions to institutions that are not part of the Financial Companies Group. An earlier rule such that insurance holdings were deducted from the total capital base expired on 1 January 2013. Thus, from the first quarter of 2013, half of the deduction was made from Tier 1 capital and half from Tier 2 capital. 22 Tier 2 capital Tier 2 capital includes fixed-term subordinated loans, in some cases less term reductions if the remaining maturity is less than five years, undated subordinated loans and other capital contributions and provisions permitted for inclusion in Tier 2 capital, as well as deductions to be made in accordance with Ch. 3 of the Capital Adequacy Act. Subordinated loans may be included in the capital base because they constitute a subordinated debt, which means that if the obligor is declared bankrupt, the holder would be repaid after other creditors, but before shareholders. In addition, subordinated loans may be used to cover any losses from ongoing operations to prevent liquidation. In total, Tier 2 capital is eligible for inclusion in the capital base up to an amount equal to Tier 1 capital. Since parts of the subordinated loans have been issued in foreign currency, the size of Tier 2 capital can vary due to exchange rate fluctuations. 23 Less shares in insurance companies According to Swedish regulations deductions were, until 31 December 2012, made from the total capital base for equity shares and contributions in insurance companies. As from the first quarter of 2013, half of the deduction was instead made from Tier 1 capital and half from Tier 2 capital. 24 Total capital base The capital base is intended to act as a buffer against the risks to which Swedbank Financial Companies Group is exposed and comprises the sum of Tier 1 capital and Tier 2 capital less the value of equity and contributions in insurance companies (which have separate capital requirements). Concisely put, the capital base consists of equity capital after various adjustments plus subordinated debt. Subordinated loans may be included in the capital base because they constitute a subordinated debt, which means that if the obligor is declared bankrupt, the holder would be repaid after other creditors, but before shareholders. Subordinated loans can be both dated and undated term and the amount of each type that may be included in the capital base is restricted by the capital adequacy rules. The ratio of the capital base to risk-weighted assets is the capital adequacy ratio. The ratio of the capital base to the capital requirement is the capital quotient.

Appendix 4


2-3. Outstanding subordinated debt, Swedbank AB, 31 December 2013

Coupon Nom. amt.

Carrying amt, Rating

ISIN Value

date Maturity

date Coupon Call

date after step-up Curr local

curr, m SEKm Fitch Moody's S&P Lower Tier 2

SE0000122111 26-Apr-89

26-Apr-19 11.00% n.a. Non-innovative SEK 111 137

XS0861583887 5-Dec-12 5-Dec-22 3.00%

5-Dec-17 Non-innovative EUR 500 4 297

A

BBB+

Total Lower Tier 2 4 434

Hybrid Tier 1 XS018877902

8 ######

# Perpetual 5.75% 17-Mar-

16 3mGBPLibor +

1.92% GBP 200 2 159

Ba2 BBB- XS0321184706

17-Sep-07 Perpetual 6.67%

17-Sep-17 6mStibor + 300bp SEK 2 000 2 192

XS0363160127

12-May-08 Perpetual 8.28%

17-Sep-18 6mStibor + 450bp SEK 873 1 025

Total Hybrid Tier 1 5 743 Total 10 177

2-4. Capital requirement SEKm 2013 2012 Capital requirement for credit risk 29 977 31 095 Credit risks, IRB approach 28 041 28 819

of which institutional exposures 1 294 1 757 of which corporate exposures 19 752 19 540 of which retail exposures 6 226 mortgage 3 916 4 221 other 2 310 2 371 of which securitisation exposures 8 10 of which other non credit-obligation assets 761 920

Credit risk, standardised approach 1 936 2 276

of which exposures to governments and central banks 45 47 of which exposures to local governments and comparable associations and authorities 39 36 of which exposures to administrative bodies, non-commercial undertakings and religious communities 129 117 of which multilateral development banks 0 of which exposures to institutions 22 41 of which exposures to corporates 312 441 of which retail exposures 825 760 of which exposures secured on real estate property 90 253 of which past due items 24 61 of which exposures to CIUs 0 of which other items 450 520

Capital requirement for market risk 1 688 1 723

of which risks in trading book where VaR models are applied 530 502 of which risks in trading book outside VaR 565 526 of which currency rate risk outside VaR 593 695

Capital requirement for settlement risk 3 3 Capital requirement for operational risk 4 486 4 326 Capital requirement excl supplement during transitional period 36 154 37 147 Supplement during transitional period 26 697 24 382 Total capital requirement 62 851 61 529

Appendix 5


2-5. Capital requirement by business area/country, 31 December 2013

FCG

Capital requirement split by business area

Swedish Banking

LC&I Baltic Banking Russia Other

SEKm Estonia Latvia Lithuania Investment

Capital requirement for credit risk 29 977 13 743 8 934 2 618 1 980 1 701 8

123 869

Credit risks, IRB approach 28 041 12 992 8 468 2 363 1 869 1 603 8 26 712

of which institutional exposures 1 294 191 695 10 10 2 387

of which corporate exposures 19 752 8 135 7 659 1 674 1 119 1 080 86

of which retail exposures 6 226 4 288 12 664 740 521 0

mortgage 3 916 2 633 1 391 527 364

other 2 310 1 655 11 273 213 157 0

of which securitisation exposures 8 5 3 of which other non credit-obligation assets 761 379 97 16 0 0 8 26 235

Credit risk, standardised approach 1 936 750 467 256 111 98 97 157

of which exposures to governments and central banks 45 24 0 10 10 of which exposures to local governments and comparable associations and authorities 39 2 29 6 0 1

of which exposures to administrative bodies, non-commercial undertakings and religious communitites 129 0 122 2 5

of which multilateral development banks

of which exposures to institutions 22 4 0 1 0 16

of which exposures to corporates 312 6 234 6 17 28 19 1

of which retail exposures 825 629 170 1 23 2 0 of which exposures secured on real estate property 90 35 11 45

of which past due items 24 17 4 0 1 0 3

of which exposures to CIUs of which other items 450 59 33 96 51 63 4 144 Capital requirement for market risk 1 688 2 1 100 6 581

of which risks in trading book where VaR models are applied 530 530 of which risks in trading book outside VaR 566 566 of which currency rate risk outside VaR 593 2 4

6 581

Capital requirement for settlement risk 3 3

Capital requirement for operational risk 4 486 2 390 902 240 211 241 0 36 466

Capital reqt excl supplement during transitional period 36 154 16 135 10 939 2 859 2 192 1 942 8 165 1 915

Supplement during transitional period 26 697 Total capital requirement 62 851

Appendix 6


2-5. (cont) Capital requirement by business area/country, 31 December 2012

FCG

Capital requirement split by business area Swedish

Banking LC&I Baltic Banking Russia & Ukraine Other

SEKm Estonia Latvia Lithuania Investment Russia Ukraine

Capital requirement for credit risk 31 095 14 311 8 382 2 840 2 178 1 809 14 280 156 1 125

Credit risks, IRB approach 28 819 13 447 8 104 2 500 2 010 1 703 14 18 1 023

of which institutional exposures 1 757 228 1 023 8 4 2 492

of which corporate exposures 19 540 8 245 6 943 1 862 1 220 1 233 37

of which retail exposures 6 592 4 712 13 614 785 468

mortgage 4 221 2 954 380 560 327

other 2 371 1 758 13 234 225 141

of which securitisation exposures 10 6 4 of which other non credit-obligation assets 920 262 119 16 1 0 14 18 490

Credit risk, standardised approach 2 276 864 278 340 168 106 262 156 102 of which exposures to governments and central banks 47 15 23 9 of which exposures to local governments and comparable associations and authorities 36 0 2 28 6 0 of which exposures to administrative bodies, non-commercial undertakings and religious communities 117 109 2 6 of which multilateral development banks

of which exposures to institutions 41 1 0 1 3 0 34 2

of which exposures to corporates 441 21 217 60 58 19 61 5

of which retail exposures 760 734 1 1 22 2 0 0 of which exposures secured on real estate property 253 25 16 125 87

of which past due items 61 17 0 5 0 13 26

of which exposures to CIUs

of which other items 520 66 43 141 56 79

6 27 102 Capital requirement for market risk 1 723 8 945 14 27 564 9 102 54 of which risks in trading book where VaR models are applied 502 487 1 12 2 of which risks in trading book outside VaR 526 446 13 4 63 of which currency rate risk outside VaR 695 8 12 11 499 9 102 54

Capital requirement for settlement risk 3 3 Capital requirement for operational risk 4 326 2 326 766 222 246 260 69 79 358 Capital reqt excl supplement during transitional period 37 147 16 645 10 096 3 076 2 451 2 633 14 358 337 1 537

Supplement during transitional period 24 382

Total capital requirement 61 529

Appendix 7


2-6. Capital adequacy* in significant companies as of 31 December

2013 2012

SEKm Swedbank AB Swedbank

Mortgage AB Swedbank AB Swedbank

Mortgage AB CET1 capital 56 147 35 599 55 945 33 994

Tier 1 capital 60 188 35 599 62 215 33 994

Capital base 62 748 35 599 67 020 33 994

Risk-weighted assets 322 882 374 557 329 837 357 996

Capital requirements 25 831 29 965 26 387 28 640

Surplus of capital 36 917 5 634 40 633 5 354

Capital quotient 2.43 1.19 2.54 1.19

CET1 capital ratio, % 17.4 9.5 17.0 9.5

Tier 1 capital ratio, % 18.6 9.5 18.9 9.5

Capital adequacy ratio, % 19.4 9.5 20.3 9.5

2013 2012

SEKm Swedbank AS

(Estonia) Swedbank AS

(Latvia) Swedbank AB

(Lithuania) Swedbank AS

(Estonia) Swedbank AS

(Latvia) Swedbank AB

(Lithuania)

CET1 capital 12 912 7 896 7 150 12 035 6 906 5 431

Tier 1 capital 12 912 7 896 7 150 12 035 6 906 5 431

Capital base 12 912 7 896 7 150 12 035 6 906 5 431

Risk-weighted assets 47 178 28 141 32 036 47 058 31 835 32 568

Capital requirements 4 718 2 251 2 563 4 706 2 547 2 605

Surplus of capital 8 194 5 645 4 587 7 329 4 360 2 826

Capital quotient 2.74 3.51 2.79 2.56 2.71 2.08

CET1 capital ratio, % 27.4 28.1 22.3 25.6 21.7 16.7

Tier 1 capital ratio, % 27.4 28.1 22.3 25.6 21.7 16.7

Capital adequacy ratio, % 27.4 28.1 22.3 25.6 21.7 16.7 * Basel 2 according to national implementation, and when relevant, transition rules

2-7. Leverage ratio

Leverage ratio 2013 2012 Tier 1 capital, SEKm 86 371 81 661 Total exposure, SEKm 1 867 070 1 875 606 Leverage ratio, % 4.63 4.35

CET1 capital, SEKm 80 826 75 242 CET1 leverage ratio, % 4.33 4.01

Note: According to Swedbank's current calculation based on the new regulations

Appendix 8


3. Credit risk - Appendix

Credit Risk exposures - overview 3-1. Key parameters, by risk category as of 31 December

PD >5.7% PD 2.0 -

5.7% PD 0.5 -

2.0% PD < 0.5%

Non-rated exposures

Default High risk Increased

risk Average

risk Low risk Total 2013

Total 2012

Retail - mortgages Exposure, in SEKm 3,854 12,904 22,605 73,750 712,530 825,644 794,944

Exposure weighted average PD, in % 100.00 15.77 3.31 1.01 0.09 0.97 0.54 Exposure weighted average LGD, in % 21.34 13.73 13.54 14.25 9.45 10.11 10.42 Average RW, in % 51.39 69.22 36.25 18.19 2.31 5.93 6.64 Expected loss, in SEKm 994 299 101 104 72 1,570 2,168

Retail - other Exposure, in SEKm 1,109 5,433 11,457 23,723 29,628 71,350 73,363 Exposure weighted average PD, in % 100.00 14.74 3.35 1.07 0.20 3.65 2.15 Exposure weighted average LGD, in % 45.80 44.12 41.81 40.11 43.70 42.27 42.49 Average RW, in % 160.24 88.04 62.06 43.08 16.82 40.47 40.42 Expected loss, in SEKm 527 358 161 102 25 1,173 1,348

Corporate Exposure, in SEKm 3,293 6,523 34,914 113,227 276,193 434,151 418,677

Exposure weighted average PD, in % 100.00 14.23 3.31 0.90 0.20 1.60 0.99 Exposure weighted average LGD, in % 44.47 43.33 42.38 42.65 41.44 41.88 42.13 Average RW, in % 169.83 110.74 77.06 38.88 56.29 57.62 Expected loss, in SEKm 1,464 404 482 434 233 3,018 4,158

Corporate - specialised lending Exposure, in SEKm 2,225 2,225 3,105 Average RW, in % 113.35 113.35 96.75 Expected loss, in SEKm 423 423 792

Institutions Exposure, in SEKm 70 62 394 1,653 119,517 121,698 147,467 Exposure weighted average PD, in % 100.00 10.70 3.40 1.20 0.05 0.14 0.12 Exposure weighted average LGD, in % 45.00 40.92 44.98 42.78 24.55 24.88 26.27 Average RW, in % 184.42 140.93 99.08 11.60 13.29 14.89 Expected loss, in SEKm 32 3 6 8 17 66 98

Other IRB exposure classes Exposure in SEKm 12,830 12,830 15,115 Average RW in % 74.97 74.97 76.91

Total IRB approach Exposure, in SEKm 8,327 24,923 69,370 212,353 1,137,869 15,055 1,467,898 1,452,671

Exposure weighted average PD, in % 100.00 15.13 3.32 0.96 0.11 0.00 1.22 0.71 Exposure weighted average LGD, in % 33.95 28.17 32.92 32.50 19.70 0.00 22.45 22.96 Average RW, in % 45.13 99.95 78.60 52.99 12.54 80.65 23.88 24.80 Expected loss, in SEKm 3,018 1,064 750 648 347 423 6,250 8,564

Standardised approach Exposure in SEKm 253,028 253,028 231,739

Average RW in % 9.56 9.56 12.28 Total exposures

Exposure in SEKm 8,327 24,923 69,370 212,353 1,137,869 268,083 1,720,926 1,684,409 Average RW in % 45.13 99.95 78.60 52.99 12.54 13.56 21.77 23.08

Note: Exposures according to the capital adequacy framework, IRB approach exposures defined as EAD.

Appendix 9


3-2. Key parameters by business area, as of 31 December

Swedish Banking LC&I

Baltic Banking

- of which

Estonia

- of which Latvia

- of which

Lithuania

- of which Investment

and Other Group

Functions Total 2013

Total 2012

Retail - mortgages Exposure 773,772 44 51,827 23,945 13,408 14,473 825,644 794,944

Capital requirement 2,633 1 1,282 391 527 364 3,916 4,220 Exposure weighted average PD (incl

defaults), % 0.52 1.24 7.62 4.56 13.87 6.90 0.97 1.20 Exposure weighted average PD (excl

defaults), % 0.36 1.24 2.76 2.38 4.20 2.13 0.50

0.54 Exposure weighted average LGD, % 9.5 16.3 18.5 12.9 25.3 21.5 10.1 10.4 Average risk weight, % 4.3 28.0 30.9 20.4 49.1 31.4 5.9 6.6 Expected loss in SEKm 402 0 1,168 154 758 256 1,570 2,168 Expected loss on non-defaults in SEKm 295 281 76 134 71 576 1,543

Retail - other Exposure 58,373 259 12,707 5,714 3,418 3,575 12 71,350 73,363

Capital requirement 1,655 11 644 273 213 157 0 2,310 2,372 Exposure weighted average PD (incl

defaults), % 2.80 5.06 7.52 5.40 10.99 7.58 5.08 3.65 4.01 Exposure weighted average PD (excl

defaults), % 1.54 3.88 4.84 4.06 6.71 4.34 5.08 2.13 2.15 Exposure weighted average LGD, % 41.7 38.2 45.1 43.1 51.8 41.9 19.5 42.3 42.5 Average risk weight, % 35.4 55.2 63.3 59.7 78.0 55.0 31.8 40.5 40.4 Expected loss in SEKm 727 6 440 121 205 113 0 1,173 1,348 Expected loss on non-defaults in SEKm 358 4 284 100 119 65 0 646 683

Corporates Exposure 161,645 214,079 51,772 22,764 14,011 14,997 6,654 434,151 418,677

Capital requirement 8,135 7,659 3,671 1,581 1,030 1,060

86 19,550 19,299 Exposure weighted average PD (incl

defaults), % 1.65 0.73 5.09 4.11 6.15 5.60 1.06 1.60

2.26 Exposure weighted average PD (excl

defaults), % 1.08 0.30 2.38 1.99 2.88 2.52 1.06 0.85 0.99 Exposure weighted average LGD, % 41.4 42.7 43.5 44.4 43.1 44.5 14.9 41.9 42.1 Average risk weight, % 62.9 44.7 88.6 86.8 91.9 88.3 16.1 56.3 57.6 Expected loss in SEKm 1,142 694 1,172 416 380 375 9 3,018 4,158 Expected loss on non-defaults in SEKm 734 279 531 195 172 164 9 1,553 2,394

Corporate - specialised lending Exposure 2,225 1,001 780 444 0 2,225 3,105

Capital requirement 0 0 202 91 90 21 0 202 240

Average risk weight, % 113.3 113.9 144.0 58.2 97.0 113.3 96.8 Expected loss in SEKm 70 30 33 6 70 792 Expected loss on non-defaults in SEKm 423 170 114 139 423 705

Institutions Exposure 10,275 39,144 1,089 583 380 125 71,189 121,698 147,467

Capital requirement 191 695 21 10 9 2

387 1,294 1,757 Exposure weighted average PD (incl

defaults), % 0.09 0.34 0.18 0.08 0.37 0.06 0.04 0.14

0.17 Exposure weighted average PD (excl

defaults), % 0.09 0.16 0.18 0.08 0.37 0.06 0.04 0.08 0.12 Exposure weighted average LGD, % 39.7 34.0 45.0 44.9 45.0 45.0 17.4 24.9 26.3 Average risk weight, % 23.2 22.2 24.6 22.4 29.0 21.3 6.8 13.3 14.9 Expected loss in SEKm 4 56 1 0 1 0 5 66 98 Expected loss on non-defaults in SEKm 4 25 1 0 1 0 5 34 33

Other IRB exposure classes Exposure 5,924 2,463 815 681 32 1 102 3,628 12,830 15,115

Capital requirement 379 102 24 15 0 0 8 265 770 930

Average risk weight, % 80.0 51.6 36.8 28.4 14.5 15.8 100.0 91.3 75.0 76.9 Total IRB approach

Exposure 1,009,989 255,989 120,436 54,690 32,029 33,615 102 81,484 1,467,898 1,452,671 Capital requirement 12,992 8,467 5,843 2,363 1,869 1,603 8 738 28,041 28,800 Exposure weighted average PD (incl

defaults), % 0.83 0.68 6.43 4.46 10.04 6.38 0.13 1.22 1.55 Exposure weighted average PD (excl

defaults), % 0.54 0.28 2.79 2.37 3.82 2.54 0.13 0.65 0.71 Exposure weighted average LGD, % 16.8 41.4 32.7 30.1 36.4 34.2 17.2 22.4 23.0 Average risk weight, % 16.1 41.3 60.6 54.0 72.9 59.6 100.0 11.3 23.9 24.8 Expected loss in SEKm 2,274 757 2,851 722 1,377 751 14 5,897 8,564 Expected loss on non-defaults in SEKm 1,390 308 1,520 541 540 439 14 3,232 5,359

Standardised approach Exposure 44,362 32,645 32,552 7,532 14,315 10,706 143,469 253,028 231,739

Capital requirement 750 467 465 256 111 98

254 1,936 2,276

Average risk weight, % 21.1 17.9 17.9 42.5 9.7 11.4 2.2 9.6 12.3 Total exposures

Exposure 1,054,351 288,634 152,988 62,221 46,344 44,321 102 224,953 1,720,926 1,684,410 Capital requirement 13,743 8,934 6,308 2,618 1,980 1,701 8 992 29,977 31,076 Average risk weight, % 16.3 38.7 51.5 52.6 53.4 48.0 100.0 5.5 21.8 23.1

Note: Exposures according to the capital adequacy framework, IRB approach exposures defined as EAD.

Appendix 10


Credit risk exposures - retail exposure class Retail exposures refer to exposures to private individuals, exposures to small or medium-sized legal entities and tenant owner associations where the total exposure to such legal entities is less than SEK 6m. However, exposures secured by residential property eligible to reduce LGD are excluded at hurdle.

3-3. Retail exposure class, outstanding exposures by risk grade 31 December 2013 31 December 2012

Risk grade PD

Exposure Retail

mortgage

Risk weight,

% Retail mortgage

Exposure Retail -

other

Risk weight, %

Retail - other

Exposure

Retail mortgage

Risk weight, %

Retail mortgage

Exposure Retail -

other

Risk weight, %

Retail - other

Def 100.000% 3,854 51.39 1,109 160.24 5,300 34.13 1,389 142.79 0 38.400% 1,438 103.23 593 135.86 1,280 107.37 629 134.32 1 27.153% 1,163 98.94 410 113.07 1,270 102.86 516 112.44 2 19.200% 1,963 72.39 542 97.27 2,142 80.19 618 96.06 3 13.576% 1,952 76.63 903 86.35 2,168 76.97 939 84.91 4 9.600% 3,270 53.63 1,156 76.64 3,307 56.38 1,226 73.02 5 6.788% 3,118 52.17 1,829 72.21 3,368 56.19 1,725 70.33 6 4.800% 5,145 46.29 3,079 66.22 5,740 48.75 3,037 65.69 7 3.394% 8,251 35.78 3,495 62.38 8,246 36.67 3,413 62.94 8 2.400% 9,209 31.07 4,882 59.23 9,360 31.60 4,091 58.32 9 1.697% 11,316 25.94 5,347 52.66 11,538 27.92 5,776 52.97 10 1.200% 19,748 18.82 6,449 48.56 20,472 18.57 6,427 48.82

11 0.849% 23,110 16.23 5,263 40.94 21,992 17.61 5,787 41.32

12 0.600% 19,576 15.40 6,664 31.78 19,598 15.96 6,862 31.99

13 0.424% 22,098 12.36 5,197 28.84 19,675 12.57 4,676 28.57 14 0.300% 30,145 6.98 4,031 23.98 57,972 10.06 5,795 24.84 15 0.212% 18,612 6.72 4,787 20.00 19,476 6.16 5,526 20.16 16 0.150% 29,057 5.27 3,400 15.58 24,714 4.87 3,352 15.81 17 0.106% 130,870 2.59 4,000 10.97 124,649 2.44 4,071 11.32 18 0.075% 108,002 2.05 2,596 10.13 91,946 1.84 2,472 10.22 19 0.053% 51,798 1.63 2,050 6.48 46,451 1.59 1,753 6.51 20 0.038% 36,341 1.28 1,193 5.47 33,013 1.30 1,088 5.64

21 0.030% 285,609 0.66 2,374 5.49 261,266 0.66 2,193 5.58 Total Swedbank 825,644 5.93 71,350 40.47 794,944 6.64 73,363 40.42

3-4. Retail exposure class, risk profile 3-5. Retail exposure class, 12-month migration

3-6. Retail exposure class, average LGD by risk grade

0

5

10

15

20

25

30

35

Def 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

2012 2013 Swedbank risk grade

Share of total EAD

0

100

200

300

400

500

600

todefault

≥4 grades

2-3grades

+/- 1grade

2-3grades

≥4 grades

fromdefault

Downgrades UpgradesSwedish Banking LC&I Baltic Banking

EAD, SEKbn

0

5

10

15

20

25

30

Def 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Average LGD, %

Swedbank risk grade

Appendix 11


3-7. Retail exposure class, exposure weighted 31 December 2013 Swedish

Banking LC&I Baltic

Banking - of which

Estonia - of which

Latvia - of which Lithuania Total

Private mortgage 537,228 1 51,227 23,591 13,242 14,393 588,456 Private other 109,443 4 9,523 4,155 2,430 2,938 118,969 Tenant owner associations 81,401 1 0 0 0 Agriculture, forestry, fishing 58,641 1 373 133 205 34 59,015 Manufacturing 3,269 7 490 235 151 104 3,765 Public sector and utilities 1,479 6 2 0 0 1 1,486 Construction 6,246 4 355 253 47 55 6,606 Retail 6,450 13 818 403 230 185 7,281 Transportation 2,488 4 450 217 127 106 2,942 Shipping and offshore 69 0 2 0 2 0 70 Hotels and restaurants 1,679 5 95 58 21 16 1,780 Information and communication 932 10 82 47 19 16 1,024 Finance and insurance 372 6 27 22 2 3 406 Property management 11 0 292 179 81 32 304

Residential properties 6,881 64 39 26 6 7 6,985 Commercial properties 1,912 11 57 37 13 7 1,979 Industrial and warehouse properties 1,297 13 58 54 3 2 1,367 Other property management 1,274 14 137 62 59 17 1,426

Professional services 5,355 19 278 133 34 111 5,651 Other corporate lending 5,598 121 457 185 232 40 6,176 Total Swedbank 832,012 303 64,470 29,612 16,821 18,037 815,383

Note: This table shows only corporate exposures in the retail exposure class. There are also exposures to corporate customers in the corporate exposure class, but they are not included in table 3-7 above. For these exposures, see tables 3-14 to 3-16. 3-8. Retail exposure class, exposure-weighted average risk weights, %

31 December 2013 Swedish Banking LC&I

Baltic Banking

- of which Estonia

- of which Latvia

- of which Lithuania Total

Private mortgage 2.85 5.27 30.56 20.08 48.95 30.81 5.26 Private other 7.32 68.66 59.35 55.76 77.89 49.08 11.48 Tenant owner associations 9.14 70.12 Agriculture, forestry, fishing 8.15 50.72 74.64 68.52 75.43 93.68 8.57 Manufacturing 46.02 24.49 75.44 67.39 77.38 90.81 49.81 Public sector and utilities 35.56 56.97 45.18 56.25 42.80 35.66 Construction 36.74 26.94 73.43 69.18 73.40 92.98 38.71 Retail 50.49 21.71 74.97 64.69 80.85 90.01 53.19 Transportation 35.26 28.32 69.13 64.74 74.22 72.03 40.43 Shipping and offshore 45.67 64.04 52.11 52.11 45.83 Hotels and restaurants 53.82 53.49 85.16 75.00 81.94 126.28 55.50 Information and communication 35.96 14.55 67.87 58.97 71.08 89.47 38.31 Finance and insurance 47.22 50.39 56.61 59.73 66.67 29.73 47.89 Property management 35.63 49.27 72.27 60.06 78.51 124.03 70.89

Residential properties 30.47 47.57 78.96 70.80 92.81 96.86 30.90 Commercial properties 39.28 70.13 67.71 54.07 66.99 143.06 40.26 Industrial and warehouse properties 49.03 70.13 65.41 62.34 82.04 121.95 49.92 Other property management 44.41 23.33 75.14 57.16 79.37 127.94 47.16

Professional services 36.97 36.60 70.58 56.05 66.63 89.19 38.62 Other corporate lending 36.87 63.82 70.57 67.51 72.82 71.67 39.89 Total Swedbank 6.44 51.22 37.29 27.98 54.99 36.08 8.68

3-9. Retail exposure class, exposure-weighted average PD, %


Baltic Banking

- of which Estonia

- of which Latvia


Private mortgage 0.26 0.00 2.72 2.31 4.15 2.07 0.47 Private other 0.59 0.05 4.37 3.37 6.65 3.88 0.89 Tenant owner associations 0.25 0.05 0.25 Agriculture, forestry, fishing 1.15 0.04 7.04 7.87 6.45 7.33 1.19 Manufacturing 2.14 0.03 6.83 6.15 7.07 8.04 2.76 Public sector and utilities 1.63 0.06 3.38 2.44 3.58 1.65 Construction 2.03 0.02 6.10 5.86 6.71 6.68 2.25 Retail 2.29 0.02 6.32 5.91 6.94 6.44 2.74 Transportation 1.90 0.05 6.49 5.83 7.47 6.69 2.61 Shipping and offshore 2.38 0.02 1.32 1.32 2.36 Hotels and restaurants 2.48 0.01 10.08 10.27 9.70 9.87 2.89 Information and communication 1.77 0.02 5.02 4.37 4.13 7.89 2.03 Finance and insurance 2.03 0.07 5.66 6.11 2.77 4.08 2.35 Property management 1.29 0.03 7.55 6.11 9.25 11.23 1.46 Residential properties 1.12 0.03 11.14 6.34 6.49 33.28 1.19 Commercial properties 1.29 0.05 6.59 4.45 8.67 14.20 1.46 Industrial and warehouse properties 1.42 0.05 7.63 7.15 20.65 3.70 1.72 Other property management 2.11 0.02 7.66 6.24 8.88 8.63 2.64 Professional services 1.65 0.02 6.33 5.18 5.41 7.99 1.88 Other corporate lending 1.40 0.04 6.78 6.47 7.20 5.76 1.85 Total Swedbank 0.44 3.49 3.17 2.71 4.73 2.57 0.63

Appendix 12


Credit risk exposures – corporate exposure class Exposures not assigned to any of the other exposure classes are assigned to the corporate exposure class. This category includes mainly exposures to large and to medium-sized legal entities where the total exposure to such legal entities is more than SEK 6m, after reduction of collateral in residential property eligible to reduce LGD. Within corporate exposures, specialised lending is a sub-class referring to exposures with a high degree of correlation between the exposure and the collateral or asset financed, e.g. SPVs.

3-10. Corporate exposure class - outstanding exposures, by risk grade 31 December 2013 31 December 2012 Risk grade PD Exposure, SEKm Risk weight, % Exposure, SEKm Risk weight, % Def 100.000% 3,293 5,369 0.00

0 38.400% 514 212.05 769 219.90

1 27.153% 292 212.47 320 207.80

2 19.200% 1,251 207.52 1,663 218.44

3 13.576% 937 178.49 831 173.36

4 9.600% 1,586 154.93 2,958 158.69

5 6.788% 1,943 135.97 2,718 135.41

6 4.800% 9,151 116.28 8,678 126.20

7 3.394% 9,831 115.26 12,730 113.54

8 2.400% 15,932 104.78 18,694 103.67

9 1.697% 10,892 92.43 14,600 91.81

10 1.200% 16,716 84.16 17,709 84.42

11 0.849% 46,866 78.32 48,737 79.44

12 0.600% 38,754 68.14 30,212 64.89

13 0.424% 33,696 57.99 24,746 55.49

14 0.300% 47,366 50.32 34,270 48.29

15 0.212% 50,749 42.13 45,339 42.26

16 0.150% 56,010 35.56 64,297 35.62

17 0.106% 51,627 29.28 45,609 28.44

18 0.075% 23,655 24.64 28,013 24.28

19 0.053% 5,521 19.58 4,252 19.28

20 0.038% 2,586 17.47 4,408 17.64

21 0.030% 4,983 4.78 1,754 14.94 Total Swedbank 434,151 56.29 418,676 57.62

3-11. Corporate exposure class, risk profile 3-12. Corporate exposure class, 12-mo migration

3-13. Corporate exposure class, average LGD by risk grade

0

5

10

15

20

Def 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

2012 2013

Share of total EAD

Swedbank risk grade

0

50

100

150

200

250

300

todefault

≥4 grades

2-3grades

+/- 1grade

2-3grades

≥4 grades

fromdefault

Downgrades UpgradesSwedish Banking LC&I Baltic Banking

EAD, SEKbn

0

5

10

15

20

25

30

35

40

45

50

Def 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Average LGD, %

Swedbank risk grade

Appendix 13


3-14. Corporate exposure class, exposures 31 December 2013 Swedish

Banking LC&I Baltic

Banking - of which

Estonia - of which

Latvia - of which Lithuania Total

Agriculture, forestry, fishing 5,774 812 2,833 1,356 1,016 461 9,419 Manufacturing 14,294 33,111 13,356 4,742 3,535 5,079 60,761 Public sector and utilities 5,547 9,291 13 0 0 13 14,850 Construction 6,389 11,343 1,839 1,048 447 343 19,570 Retail 12,670 15,018 8,013 2,784 2,390 2,840 35,701 Transportation 4,014 1,844 4,590 1,780 1,653 1,156 10,448 Shipping and offshore 36 32,368 925 904 21 0 33,330 Hotels and restaurants 2,756 27 2,373 980 660 733 5,156 Information and communication 874 7,110 735 447 52 236 8,719 Finance and insurance 2,160 13,577 5,806 3,635 506 1,665 21,542 Property management 79,176 73,812 13,236 6,499 3,378 3,359 166,224 Residential properties 31,892 5,831 0 0 0 0 37,724 Commercial properties 24,138 51,161 9,267 3,924 2,263 3,080 84,567 Industrial and warehouse properties 14,364 15,376 2,779 2,081 530 168 32,518 Other property management 8,782 1,444 1,059 495 454 111 11,285 Professional services 7,280 5,129 1,102 593 45 464 13,512 Other corporate lending 11,793 4,980 2,860 1,480 429 952 19,633 Total Swedbank 152,763 208,422 57,550 26,248 14,002 17,300 418,736

Note: This table shows only corporate exposures in the corporate exposure class. There are also exposures to corporate customers in the retail exposure class, but they are not included in table 3-14 above. For example, the majority of the customers in the Agriculture, forestry and fishing industry are included in the Retail mortgage exposure class, see table 3-22. Swedbank uses the foundation methodology and the prescribed values to calculate LGD for the corporate exposure class which affects the risk weight. For these exposures, see tables 3-15 and 3-16. 3-15. Corporate exposure class, exposure weighted average risk weights, %


Baltic Banking

- of which Estonia

- of which Latvia


Agriculture, forestry, fishing 75.86 26.79 98.58 88.85 113.69 93.89 78.46 Manufacturing 70.79 53.65 83.27 81.46 72.47 92.47 64.19 Public sector and utilities 67.73 41.12 45.16 11.11 45.38 51.06 Construction 71.98 43.20 94.43 95.44 92.32 94.09 57.41 Retail 70.92 49.20 93.06 98.89 95.59 85.22 66.75 Transportation 70.52 51.59 91.84 82.87 99.51 94.67 76.54 Shipping and offshore 92.59 50.96 86.93 86.79 92.68 52.00 Hotels and restaurants 82.91 49.13 88.90 82.59 95.17 91.70 85.49 Information and communication 81.24 38.05 103.15 94.09 101.02 120.83 47.87 Finance and insurance 72.75 33.27 22.54 24.31 36.99 14.30 34.34 Property management 52.86 39.36 85.77 85.78 97.05 74.42 49.49 Residential properties 45.75 37.33 114.64 114.64 44.69 Commercial properties 58.99 38.73 82.07 81.00 95.72 73.41 49.26 Industrial and warehouse properties 61.94 40.99 93.84 93.00 103.10 75.04 54.76 Other property management 47.01 52.46 93.44 93.32 91.53 101.76 52.06 Professional services 73.82 63.00 79.86 57.72 94.03 106.78 70.20 Other corporate lending 77.26 38.71 57.83 75.56 89.74 15.90 64.65 Total Swedbank 62.91 44.72 89.65 87.98 94.62 87.45 56.58

3-16. Corporate exposure class, exposure weighted average PD, %


Baltic Banking

- of which Estonia

- of which Latvia


Agriculture, forestry, fishing 1.72 0.08 3.38 2.44 5.34 1.83 2.08 Manufacturing 1.44 0.37 1.87 1.65 1.49 2.35 0.95 Public sector and utilities 1.23 0.25 0.47 0.03 0.48 0.61 Construction 1.61 0.20 2.73 2.75 2.71 2.69 0.90 Retail 1.17 0.28 2.33 2.36 2.87 1.84 1.06 Transportation 1.28 0.99 2.59 1.27 3.03 4.00 1.80 Shipping and offshore 2.67 0.30 0.92 0.89 2.40 0.32 Hotels and restaurants 2.04 0.28 2.63 1.61 3.37 3.31 2.30 Information and communication 1.85 0.17 2.55 1.91 2.69 3.73 0.54 Finance and insurance 1.11 0.13 1.30 1.52 0.38 1.12 0.54 Property management 0.80 0.29 2.43 2.06 3.24 2.32 0.70 Residential properties 0.64 0.24 3.18 3.18 0.59 Commercial properties 0.85 0.29 2.17 1.71 2.85 2.24 0.66 Industrial and warehouse properties 1.09 0.26 2.64 2.37 3.37 3.62 0.83 Other property management 0.75 0.60 4.43 3.60 5.46 3.92 1.08 Professional services 1.24 0.73 3.42 2.49 3.63 4.59 1.22 Other corporate lending 1.54 0.57 1.63 1.62 4.62 0.28 1.31 Total Swedbank 1.08 0.30 2.38 1.99 2.88 2.52 0.85

Appendix 14


Credit risk exposures - institutions exposure class The institutions exposure class includes exposures to credit institutions, banks and investment firms, as well as exposures to local authorities in the Baltic countries. Operations with customers in the institutions exposure class are concentrated to Sweden, and in particular to the LC&I and Group Functions (Group Treasury) business areas, which have the most expertise in analysing these types of customers, business segments and countries. Swedbank’s exposures are mainly to large and established credit institutions with whom it has long-standing business relations, and most are from the Nordic countries. The risk for these types of customers is considered low. Exposures to banks in the GIIPS countries make up less than 0.3% of total institution exposures (see table 3-21).

3-17. Institutions exposure class, outstanding exposures by risk grade 31 December 2013 31 December 2012 Risk grade PD Exposure Risk weight, % Exposure Risk weight, % Def 100.000% 70 73

0 38.400%

1 27.153%

2 19.200% 7 51.23 12 127.07

3 13.576%

4 9.600% 55 201.58 507 201.59

5 6.788%

6 4.800% 1 145.03 31 155.29

7 3.394% 393 140.92 868 126.71

8 2.400%

9 1.697%

10 1.200% 1,653 99.08 1,540 104.23

11 0.849%

12 0.600%

13 0.424% 921 59.65 990 57.16

14 0.300%

15 0.212%

16 0.150% 9,518 33.35 13,151 31.64

17 0.106% 50 32.52 945 32.52

18 0.075%

19 0.053% 50,640 11.02 52,675 11.37

20 0.038% 152 16.77 856 17.32

21 0.030% 58,236 7.76 75,818 9.22 Total Swedbank 121,698 147,467 14.89

3-18. Institutions exposure class, risk profile 3-19. Institutions exposure class, 12-mo migration

0

10

20

30

40

50

60

Def 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

2012 2013

Share of total EAD

Swedbank rating grade

0

20

40

60

80

100

120

todefault

≥4 grades

2-3grades

+/- 1grade

2-3grades

≥4 grades

fromdefault

Downgrades Upgrades

Swedish Banking LC&I Baltic Banking Group Treasury

EAD, SEKbn

Appendix 15


3-20. Outstanding exposures, by geographical areas* 31 Dec 2013 IRB approach Standardised approach

SEKm Retail -

mortgages Retail -

other Corporate Institutions Other

Govts and central

banks

Local govts and comparable

assns and authorities Other Total

Sweden 773,078 58,386 298,714 68,799 8,112 39,426 53,547 60,545 1,360,607 Estonia 23,739 5,679 23,796 2 951 11,185 751 8,022 74,125 Latvia 13,264 3,410 14,870 20 1,471 11,657 81 3,565 48,338 Lithuania 14,414 3,566 15,681 6 224 6,843 236 5,682 46,652 Russia 124 27 89 684 222 260 0 1,133 2,539 Norway 297 72 26,341 2,606 6 2,586 142 3,500 35,549 Denmark 188 23 2,175 1,871 3 1,149 0 1,327 6,736 Finland 22 13 16,788 5,469 16 10,591 0 188 33,085 USA 30 15 4,089 3,299 518 20,198 0 216 28,366 Other 487 160 33,835 38,941 1,307 3,578 0 6,622 84,929 Total Swedbank 825,644 71,350 436,376 121,698 12,830 107,472 54,756 90,800 1,720,926

31 Dec 2012 IRB approach Standardised approach

SEKm Retail -

mortgages Retail -


Govts and central

banks


assns and authorities Other Total

Sweden 743,338 60,847 302,123 76,474 8,234 12,967 46,297 12,118 1,262,398 Estonia 22,951 5,317 23,631 5 1,090 10,742 668 4,856 69,259 Latvia 13,955 3,521 16,168 150 2,008 4,379 80 3,346 43,606 Lithuania 13,659 3,328 16,359 84 410 5,261 305 4,130 43,536 Russia 119 30 221 613 0 577 0 3,414 4,974 Ukraine 2 1 0 69 408 111 0 1,815 2,406 Norway 232 77 24,212 6,679 5 5,899 113 7,106 44,323 Denmark 169 19 2,003 3,151 2 704 0 1,934 7,982 Finland 23 8 12,980 4,715 318 77,833 3 77 95,956 USA 35 10 3,846 10,800 1,481 21,598 0 257 38,027 Other 462 206 20,238 44,727 1,160 196 0 4,953 71,942 Total Swedbank 794,944 73,363 421,781 147,467 15,115 140,266 47,467 44,006 1,684,409

* Exposures to customers in the country. For institutions exposures, the country of origin where the customer’s head office is located is used for all exposures.

3-21. Exposures to Greece, Ireland, Italy, Portugal and Spain 31 December 2013 2012 SEKm Greece Ireland Italy Portugal Spain Total Total Bonds 1 86 27 48 162 115 of which sovereign 1 86 27 5 119 115 of which held to maturity* 1 86 27 5 119 115 Loans (money market and certificates) 4 0 4 Loans (committed credit facilities) Derivatives net** 3 6 70 79 186 Other***

89

9 98

95

Total Swedbank Group 1 3 185 27 126 342 396 Adjustments for life insurance operations -1

-86 -27 -5 -119

-116

Total Swedbank FCG 0 3 99 0 121 223 280

*The market value of the bonds is approximately SEK 6m lower than their book value. **Derivatives at market value, taking into account netting and collateral agreements. Considering the bank's internal risk add-ons for counterparty risk at potential future change in prices, the derivative exposures amount to: Ireland SEK 10m, Italy SEK 338m and Spain SEK 105m. Total SEK 453m. ***Includes mortgage loans and trade finance.

Appendix 16


3-22. Outstanding exposures by industry 31 December 2013 IRB approach Standardised approach

SEKm Retail -

mortgages Retail -


Govts and

central banks

Local govts and

comparable assns and

authorities Other Total Private mortgages 588,456 0 469 0 0 0 3 1,263 590,191 Private other 89,915 29,184 2,787 1 240 0 2 11,322 133,450 Tenant owner associations 78,623 2,779 8,714 0 0 0 1,073 0 91,189 Agriculture, forestry, fishing 52,300 6,715 9,420 98 131 0 38 155 68,857 Manufacturing 465 3,301 61,545 253 1,177 0 892 273 67,906 Public sector and utilities 481 1,005 15,110 14 171 11,484 16,641 4,005 48,912 Construction 1,482 5,122 19,716 157 750 0 37 121 27,386 Retail 1,178 6,109 36,549 94 1,078 26 110 966 46,111 Transportation 332 2,609 10,453 166 390 0 80 245 14,274 Shipping and offshore 11 61 33,374 178 57 0 0 0 33,681 Hotels and restaurants 439 1,342 5,157 10 48 0 241 3 7,239 Information and communication 316 708 8,719 7 365 1 22 31 10,169 Finance and insurance 115 292 21,512 3,648 131 396 385 4,611 31,088 Property management 6,773 4,984 168,733 25 151 492 6,650 1,529 189,336

Residential properties 5,097 1,888 38,852 0 23 0 3,775 8 49,641 Commercial properties 858 1,122 85,332 12 44 0 1,380 113 88,861 Industrial and warehouse property 291 1,077 32,531 2 27 0 694 0 34,622 Other property management 528 898 12,018 11 57 492 801 1,408 16,212

Professional services 1,778 3,872 13,593 51 970 0 430 97 20,792 Other corporate lending 2,957 3,217 20,267 44 389 5,573 982 7,082 40,511 Credit institutions 0 0 1 116,951 799 89,082 27,015 51,941 285,788 Other exposures 22 50 257 0 5,986 418 157 7,156 14,046

Total Swedbank 825,644 71,350 436,376 121,698 12,830 107,472 54,756 90,800 1,720,926

31 December 2012 IRB approach Standardised approach

SEKm Retail -

mortgages Retail -


Govts and

central banks

Local govts and


authorities Other Total Private mortgages 569,844 0 1,348 0 809 572,001 Private other 86,715 29,417 3,509 298 10,484 130,422 Tenant owner associations 73,864 3,050 3,689 0 0 80,604 Agriculture, forestry, fishing 48,369 6,752 11,769 17 1 26 232 67,167 Manufacturing 508 3,505 72,828 71 983 77,895 Public sector and utilities 532 1,136 15,827 1 11,086 26,873 1,808 57,262 Construction 1,504 5,189 24,028 65 109 30,894 Retail 1,170 6,562 33,773 132 0 1,006 42,643 Transportation 354 2,730 12,743 52 326 16,205 Shipping and offshore 8 66 19,795 0 139 20,008 Hotels and restaurants 409 1,379 5,183 6 47 45 7,068 Information and communication 293 714 6,940 17 1 28 7,992 Finance and insurance 113 303 18,553 549 4 16,944 1 3,762 40,230 Property management 6,402 5,213 163,461 20 492 63 2,529 178,179

Residential properties 4,950 2,081 35,841 0 1 42,873 Commercial properties 849 1,261 93,769 1 1,221 97,101 Industrial and warehouse property 391 1,365 30,155 0 21 31,932 Other property management 212 507 3,696 19 492 63 1,285 6,273

Professional services 1,830 3,935 12,126 38 0 21 95 18,047 Other corporate lending 3,006 3,355 12,911 5 82 916 184 7,277 27,736 Credit institutions 3 750 145,403 1,122 108,594 20,148 3,910 279,931 Other exposures 22 55 2,546 1,511 13,191 2,233 103 10,464 30,124

Total Swedbank 794,944 73,363 421,781 147,467 15,115 140,266 47,467 44,005 1,684,409

Appendix 17


3-23. Collateral reducing LGD, exposures (EAD) 31 December 2013 IRB approach Standardised approach

SEKm Retail -

mortgages Retail -


Govts and

central banks

Local govts and


authorities Other Total Exposures covered by physical collaterals* 768,452 41,479 103,910 33 0 0 0 3,559 917,434 Exposures covered by financial collaterals 26 96 3,821 11,362 0 0 0 416 15,721 Exposures covered by guarantees and credit derivatives** 337 2,795 23,982 616 0 0 0 842 28,573


SEKm Retail -

mortgages Retail -


Govts and

central banks

Local govts and


authorities Other Total Exposures covered by physical collaterals* 739,673 41,231 97,995 32 4,126 883,057 Exposures covered by financial collaterals 25 95 3,986 14,666 135 18,908 Exposures covered by guarantees and credit derivatives** 365 3,018 25,500 504 1,384 30,771

*Mainly collaterals in residential properties. **Municipalities and property management companies are the major guarantors. 3-24. Outstanding exposures by maturity*


SEKm Retail –

mortg** Retail -


Govts and

central banks

Local govts and


authorities Other Total Payable on demand 7,246 13,802 30,981 7,200 262 14,531 9,242 55,579 138,844 < 3 months 370,095 30,281 167,217 5,876 246 68,090 19,562 14,412 675,779 3-12 months 106,921 4,179 43,691 20,237 1,338 3,721 5,022 2,378 187,487 1-5 years 281,179 16,791 157,634 57,057 4,053 3,000 16,526 9,136 545,377 5-10 years 16,043 4,166 27,190 5,231 524 1,632 4,051 1,649 60,484 > 10 years 43,952 1,985 6,859 24,898 602 3,660 348 3,165 85,469 Without maturity 207 146 2,804 1,199 5,805 12,838 5 4,481 27,486 Total Swedbank 825,644 71,350 436,376 121,698 12,830 107,472 54,756 90,800 1,720,926


SEKm Retail –

mortg** Retail -


Govts

and central banks

Local govts and


authorities Other Total Payable on demand 7,911 14,586 33,431 21,073 20 47,738 9,353 8,002 142,114 < 3 months 346,702 31,490 159,669 9,116 420 76,257 19,025 14,986 657,665 3-12 months 98,582 3,703 49,410 20,732 1,204 606 3,635 5,602 183,475 1-5 years 282,872 16,210 134,937 57,324 4,022 998 9,451 6,276 512,090 5-10 years 15,281 4,460 32,617 7,246 640 1,272 5,460 2,315 69,290 > 10 years 43,289 2,039 7,815 29,097 654 1,165 458 2,948 87,465 Without maturity 307 874 3,902 2,879 8,156 12,231 85 3,877 32,311 Total Swedbank 794,944 73,363 421,781 147,467 15,115 140,266 47,467 44,005 1,684,409

* Maturity is the remaining contractual maturity as of 31 December 2012, except for contracts where the terms and conditions are set periodically, for example mortgages. In these cases, the time to the next change in terms and conditions is used as maturity, in accordance with the guidelines from the Swedish Financial Supervisory Authority. ** Looking at the exposure class of retail mortgage exposure, the majority of loans relate to private mortgages and have a contracted floating interest rate, i.e. a three-month fixed rate, after which the loans roll over to a new three-month fixed rate. Compared to the Baltic countries, mortgage loans in Sweden tend to have substantially shorter contracted interest rate fixing periods. The majority of mortgage loans that have a remaining maturity of over 10 years represent lending in the Baltic countries.

Appendix 18


3-25. Exposures* and average exposure SEKm IRB approach Standardised approach

31-Dec-13 Retail -

mortgages Retail -

other Corporate Institutions Other**

Govts and central

banks


associations and authorities Other Total

Total exposure 825,644 71,350 436,376 121,698 12,830 107,472 54,756 90,800 1,720,926 Average exposure 811,051 71,990 423,558 134,198 14,365 217,157 51,828 74,461 1,798,607

31 December 2012 Total exposure 794,944 73,363 421,781 147,467 15,115 140,266 47,467 44,006 1,684,409 Average exposure 788,982 76,194 423,491 148,515 17,816 167,051 51,427 39,934 1,713,410

* Exposures according to the capital adequacy framework, IRB approach exposures defined as EAD. ** Swedbank’s holdings in interest-bearing debt securities, SEK 941m as of 31 December 2013, were exposures classified according to capital adequacy rules as the securitisation exposure class (included in ‘other’ above). These holdings consist of residential mortgage-backed securities (RMBS) with an AAA rating. These assets are not growing; they are a legacy from previous operations which have now ceased. Also included in Other IRB is the ‘non-credit obligation exposure’ class consisting of assets which do not require deliveries from a counterparty, e.g. the residual value in leasing agreements where Swedbank carries the financial risk.

3-26. Unutilised advance commitments SEKm IRB approach Standardised approach

31-Dec-13 Retail -

mortgages Retail -


Govts and central

banks


associations and authorities Other Total

Unutilised advance commitments 34,695 14,752 126,879 9,085 0 2,433 21,669 26,907 236,420 Associated exposures to unutilised advanced commitments 10,449 13,095 89,415 6,523 0 755 11,068 1,736 133,042

31 December 2012 Unutilised advance commitments 28,764 14,813 115,813 10,685 0 2,148 23,141 5,575 200,940 Associated exposures to unutilised advanced commitments 9,522 13,294 84,825 8,103 0 597 10,618 1,921 128,879

3-27. IRB exposures by exposure type 31 December 2013 On-Balance Off-Balance Derivatives Repos

SEKm EAD RWA EAD RWA EAD RWA EAD RWA

Swedish Banking 959,774 140,444 47,938 20,748 2,250 1,202 27 12

LC&I 155,574 72,544 63,274 25,906 35,844 7,311 1,297 80

Baltic Banking 112,426 67,428 7,684 5,438 326 174

- of which Estonia 51,107 27,052 3,375 2,361 207 119

- of which Latvia 29,812 21,556 2,183 1,787 34 20

- of which Lithuania 31,404 18,717 2,126 1,290 85 35

Group Functions & Other 75,830 8,395 5,648 832 7 0

Total Swedbank 1,303,603 288,810 118,897 52,091 44,067 9,520 1,331 92

31 December 2013

On-Balance Off-Balance Derivatives Repos

SEKm EAD RWA EAD RWA EAD RWA EAD RWA

Retail mortgage 815,195 48,236 10,449 714

Retail other 57,908 23,575 13,007 5,001 418 287 17 10

Corporate 334,956 195,461 88,918 44,198 10,226 4,708 51 5

Corporate specialised lending 2,063 2,307 162 215 0 0

Institutions 80,651 9,612 6,361 1,963 33,423 4,525 1,263 76

Other non-credit obligations 11,890 9,517

Securitisation 941 103

Total Swedbank 1,303,603 288,810 118,897 52,091 44,067 9,520 1,331 92

Appendix 19


3-28. Estimated loan losses and realised outcome* 2013 PD in % LGD in % EL in %

Estimated Realised*** Estimated on

total portfolio Estimated on

the defaults Realised**** Estimated Realised Swedbank

Retail - mortgages 0.54 0.25 10.34 13.36 6.46 0.08 0.08 Retail - other 2.14 0.79 42.77 40.37 11.51 0.91 0.18 Corporate** 1.00 0.67 42.85 43.37 15.21 0.44 0.06 Institutions** 0.11 27.69 0.04 Swedish Banking

Retail - mortgages 0.39 0.25 9.81 10.15 0.72 0.05 0.00 Retail - other 1.59 0.79 42.25 38.71 6.39 0.64 0.10 Corporate** 1.16 1.05 40.43 42.09 9.71 0.48 0.06 Institutions** 0.10 0.00 43.94 0.04 0.00 LC&I

Retail - mortgages 0.28 0.00 6.01 0.01 0.00 Retail - other 4.28 1.72 44.48 20.50 0.00 1.84 0.00 Corporate** 0.33 0.25 44.62 45.00 17.19 0.18 0.04 Institutions** 0.18 0.00 34.08 0.07 0.00 Baltic Banking

Retail - mortgages 2.84 1.32 18.65 24.13 25.74 0.53 0.34 Retail - other 4.96 1.58 45.42 48.99 37.80 2.25 0.60 Corporate** 3.06 0.43 43.86 42.52 32.24 1.34 0.14 Institutions** 0.33 0.00 44.47 0.15 0.00 Group Functions

Retail - mortgages Retail - other 2.45 0.00 31.14 0.89 0.00

Corporate** 0.29 0.00 44.64 0.12 0.00 Institutions** 0.05 0.00 18.78 0.01 0.00

2012 PD in % LGD in % EL in %




Retail - mortgages 0.56 0.40 10.74 11.29 2.82 0.06 0.03 Retail - other 2.21 1.66 42.93 41.70 13.84 0.95 0.29 Corporate** 1.36 0.69 Institutions** 0.08 0.00 Swedish Banking

Retail - mortgages 0.40 0.32 10.00 10.26 1.25 0.04 0.00 Retail - other 1.61 1.36 42.15 40.89 8.28 0.68 0.11 Corporate** 1.62 0.59 Institutions** 0.17 0.00 LC&I

Retail - mortgages 1.90 3.50 11.84 10.30 0.42 0.23 0.01 Retail - other 4.19 0.06 34.15 15.90 0.00 1.43 0.00 Corporate** 0.43 0.81 Institutions** 0.11 0.00 Baltic Banking

Retail - mortgages 3.00 1.52 20.45 26.55 26.30 0.61 0.45 Retail - other 5.19 3.11 46.73 45.88 40.28 2.42 1.15 Corporate** 4.32 0.56 Institutions** 0.19 0.00 Group Functions

Retail - mortgages Retail - other 1.40 0.00 45.05 n.a. n.a. 0.63 0.00

Corporate** 0.95 0.00 Institutions** 0.04 0.00

* The results are exposure-weighted. ** Swedbank applies prescribed LGD values for exposures to corporates and institutions. *** At Swedbank, a credit exposure is regarded to be in default if any of the following criteria are fulfilled: a. There has been an assessment indicating that the counterparty is unlikely to pay its credit obligations as agreed or b. The counterparty is past due more than 90 days on any material credit obligation to Swedbank, and Swedbank will have to claim collateral or

take other similar action. **** LGD is defined as the portion of exposure amount that would be lost in the event of default. Realised LGD is based on all available data as of 31

December for defaulted counterparties/accounts. For defaults that still have an ongoing work-out process, provisioning amount is used instead of established loss. The outcome for these will be adjusted when additional information becomes available.

Appendix 20


3-28. Estimated loan losses and realised outcome* (Cont) 2011 PD in % LGD in % EL in %




Retail - mortgages 0.48 0.50 10.71 17.06 12.12 0.05 0.06 Retail - other 2.26 1.94 42.95 38.83 29.92 0.97 0.58 Corporate** 1.81 0.92 Institutions** 0.07 0.01 Swedish Banking

Retail - mortgages 0.36 0.32 9.84 10.16 3.14 0.04 0.01 Retail - other 1.56 1.28 42.67 42.74 22.91 0.66 0.29 Corporate** 1.77 0.83 Institutions** 0.09 0.00 LC&I

Retail - mortgages 1.34 3.57 11.74 16.22 3.96 0.16 0.14 Retail - other 4.85 0.58 41.26 19.39 6.45 2.00 0.04 Corporate** 0.61 0.07 Institutions** 0.07 0.01 Baltic Banking

Retail - mortgages 2.03 3.02 22.81 27.19 25.39 0.46 0.82 Retail - other 5.43 4.81 44.16 34.41 37.91 2.40 1.83 Corporate** 5.71 3.90 Institutions** 0.38 0.00

(For footnotes, see previous page)

Past-due loans and impairments Past-due loans refer to overdrafts or loans where amounts due for payment have not been paid in accordance with the terms of the loan. Loan agreements become classified as “impaired loans” when the bank considers it unlikely that payments will be made in accordance with contract terms. However, if there is collateral that covers the full amount of the loan and any late fees by a safe margin, the loan is not considered “impaired”.

Credit impairments comprise actual loan losses and probable losses on credits granted, minus recoveries. Established loan losses may refer to all or part of a credit and are recognised when there is, using a conservative assessment, no realistic chance of recovery. Recoveries consist of payments on actual losses that were written off in previous years, or reversals of previous provisions for probable loan losses.

3-29. Change in provisions SEKm 2013 2012

Opening balance 8,824 15,452

New provisions -71 1,186

Utilisation of previous provisions -430 -5,410

Recoveries of previous provisions -1,718 -1,479

Portfolio provisions for loans that are not impaired -282 -366

Group adjustments -2,283 -559

Change in exchange rates 218 Closing balance 4,258 8,824

3-30. Value adjustments recorded directly to the income statement SEKm 2013 2012 Established losses 2,989 7,197

Utilisation of previous provisions -1,745 -5,410

Credit impairment for contingent liabilities and other credit risk exposures -150 -33 Value adjustments recorded directly to the income statement 1,094 1,754

3-31. Recoveries recorded directly to the income statement SEKm

2013 2012 Recoveries, loans that individually are assessed as impaired -385 391

Recoveries, that individually are not assessed as impaired 0 1,457

Recoveries recorded directly to the income statement 381 -1,848

Appendix 21


3-32. Impaired* and past due** loans, by geographical area 31-Dec-13

Principal past due loans

SEKm

Impaired loans gross

5-30 days, that are not

impaired


impaired

> 60 days, that are not

impaired

Total impaired and past due

loans

Provisions for anticipated loan

losses*** Sweden 2,687 800 482 629 4,599 1,037 Estonia 1,338 756 130 42 2,266 432 Latvia 2,145 583 290 86 3,104 1,032 Lithuania 1,563 781 203 162 2,709 489 Russia Norway 9 130 2 40 181 9 Denmark 5 0 0 0 5 3 Finland USA Other Total Swedbank 7,747 3,050 1,108 959 12,864 3,002

31-Dec-12


SEKm

Impaired loans gross


impaired


impaired


impaired

Total impaired and past due

loans

Provisions for anticipated loan

losses*** Sweden 2,232 1,431 691 806 5,159 1,819 Estonia 2,181 825 242 55 3,303 987 Latvia 4,449 610 284 10 5,353 2,479 Lithuania 2,241 1,330 193 106 3,871 1,112 Russia 411 0 0 412 262 Ukraine 2,661 2 0 30 2,693 2,085 Norway 30 1 32 63 52 Denmark 7 3 Finland USA 2

Other 22 Total Swedbank 14,212 4,198 1,411 1,039 20,860 8,823

* Loans where payments are unlikely to be made in accordance with contract terms. Such loans are not considered impaired if there is collateral that covers the full amount of the loan and any late fees by a safe margin.

** Past-due loans refer to overdrafts or loans where, according to the terms of the loan, amounts due for payment have not been paid. *** Impaired loans are measured, individually and collectively, to determine whether provisioning is needed. When provisioning is needed, a calculation is

made between the loan’s carrying amount and the present value of estimated future cash flows discounted by the loan’s effective interest rate. 3-33. Impaired* and past due** loans, by industry

31 December 2013


SEKm Impaired

loans gross


impaired


impaired


impaired

Total impaired and past

due loans

Provisions for

anticipated loan

losses*** Private mortgages 2,942 1,679 518 490 5,628 1,041 Tenant owner associations 10 4 6 0 20 7 Private other 443 238 82 25 788 261 Agriculture, forestry, fishing 233 73 45 67 418 66 Manufacturing 629 188 48 47 912 283 Public sector and utilities 13 94 17 21 145 6 Construction 189 53 36 7 284 80 Retail 286 135 33 10 463 127 Transportation 69 126 66 119 379 23 Shipping and offshore 946 0 0 0 946 211 Hotels and restaurants 65 19 4 17 106 25 Information and communication 6 14 2 0 22 2 Finance and insurance 3 4 1 0 8 2 Property management 1,061 242 174 83 1,560 391

Residential properties 397 28 7 52 484 132 Commercial properties 157 166 21 18 363 68 Industrial and warehouse properties 107 7 16 4 135 44 Other property management 399 40 130 9 578 147

Professional services 483 61 31 2 578 215 Other corporate lending 293 121 44 71 531 200 Credit institutions 75 75 63 Total Swedbank 7,747 3,050 1,108 959 12,864 3,002

Appendix 22


3-33. Impaired* and past due** loans, by industry (cont.) 31 December 2012 Principal past due loans

SEKm 342


impaired


impaired


impaired

Total impaired and past

due loans 136 Private mortgages 4,397 2,034 799 608 5,804 2,694 Tenant owner associations 53 11 14 20 87 28 Private other 1,048 364 109 42 1,199 331 Agriculture, forestry, fishing 533 219 72 84 689 313 Manufacturing 1,495 191 16 14 1,525 583 Public sector and utilities 41 281 7 14 62 25 Construction 753 95 30 17 801 217 Retail 1,116 195 27 34 1,178 366 Transportation 300 183 42 15 357 138 Shipping and offshore 342 0 0 0 342 136 Hotels and restaurants 176 26 10 6 192 103 Information and communication 40 46 7 0 47 19 Finance and insurance 83 2 0 0 83 21 Property management 2,336 217 136 135 2,824 1,282

Residential properties 755 40 23 67 845 454 Commercial properties 704 106 15 67 786 401 Industrial and warehouse properties 415 43 84 0 499 183 Other property management 462 28 13 1 476 244

Professional services 602 106 53 7 662 344 Other corporate lending 819 220 86 40 945 296 Credit institutions 75 0 0 0 75 0 Total Swedbank 14,210 4,189 1,409 1,038 16,656 6,896

* Loans where payments are unlikely to be made in accordance with contract terms. Such loans are not considered impaired if there is collateral that covers the full amount of the loan and any late fees by a safe margin. ** Past-due loans refer to overdrafts or loans where, according to the terms of the loan, amounts due for payment have not been paid. *** Impaired loans are measured, individually and collectively, to determine whether provisioning is needed. When provisioning is needed, a calculation is

made between the loan’s carrying amount and the present value of estimated future cash flows discounted by the loan’s effective interest rate.

Exposures according to Pillar 3 and loans in the balance sheet Credit risk can be measured and monitored using different perspectives. In Swedbank’s annual report, the loan portfolio is valued at a net amount, i.e. after provisions for anticipated loan losses, in accordance with accounting standards and the IFRS framework. In this Pillar 3 report, exposures are calculated as exposure at default (EAD) in accordance with the Capital Requirement Directive and the Basel 2 framework. The main differences in numbers are that EAD also includes off-balance items (such as guarantees and unutilised amounts of credit facilities), securities financing (reversed re-purchase agreements, net) and derivative contracts. Also, this Pillar 3 report refers to exposures of the FCG, whereas the annual report refers to exposures of the Group.

In this Pillar 3 report, exposures are expressed as EAD for IRB exposure, and as exposure value for exposure calculated by the standardised approach, if nothing else is stated.

3-34. Balance sheet amount, link to original exposure 31 December 2013 IRB approach

Standar-dised

approach expo-sures

Total exposures

for on-balance,

derivatives and repos

Difference regarding

repos, derivatives and market

risk

Other differ-

rences*

Deductions in Capital

base

Balance Sheet

FCG

Conso-lidation

differ-ences

Balance Sheet Group On-balance sheet items

rated expo-sures

non-rated exposures

Cash and balances with central banks 97,832 97,832 -31,206 66,626 -7,244 59,382 T- bills and other bills eligible for refinancing with central banks and bonds and other interest-bearing securities, etc. 71,117 941 24,750 96,808 87,636 184,444 -2,045 182,399 Loans to credit institutions and Loans to the public 1,227,347 7,866 44,628 1,279,841 36,270 59,347 1,375,458 -28,207 1,347,251 Derivatives 44,065 2 3,471 47,538 16,850 64,388 -36 64,352 Current and deferred tax assets 472 472 423 399 1,294 18 1,312 Other assets, prepaid expenses and accrued income 4,228 6,086 56,064 66,378 11,975 -46,690 16,118 47,781 118,330 166,111 Total 1,346,757 14,895 227,217 1,588,869 65,095 69,510 16,517 1,739,991 80,816 1,820,807

The table shows the credit risk exposures for total assets. Contingent liabilities and commitments are excluded. *Some items are treated differently in the capital adequacy report vs. the balance sheet, e.g. security settlement claims are not included in the capital adequacy report. Another difference is that the capital adequacy report does not include the supplement in the balance sheet of market value on the post that is in fair value option within Swedbank Mortgage AB and Swedbank AB.

Appendix 23


4. Market Risks – Appendix 4-1. Change in value of assets and liabilities incl. derivatives, if market interest rate rises 1 pp

Swedbank Group, (SEKm) 31 Dec 2013

< 3 mths.

3-6 mths.

6-12 mths.

1-2 yrs.

2-3 yrs.

3-4 yrs.

4-5 yrs.

5-10 yrs.

> 10 yrs. Total

SEK -36 -172 -323 -464 1,524 -39 -247 -6 12 250

Foreign currency -59 -85 70 -12 -27 -16 -14 -18 -14 -175

Total -96 -256 -253 -476 1,497 -54 -261 -23 -3 75 Of which financial instruments measured at fair value

SEK -171 -127 -33 -115 -38 -62 -126 45 -2 -630

Foreign currency 5 -34 46 27 -10 15 -11 -13 -1 22

Total -167 -161 13 -88 -49 -47 -138 32 -3 -608

31 Dec 2012

< 3 mths.

3-6 mths.

6-12 mths.

1-2 yrs.

2-3 yrs.

3-4 yrs.

4-5 yrs.

5-10 yrs.

> 10 yrs. Total

SEK -32 58 -645 -904 1,431 -256 -61 28 114 -267

Foreign currency -61 34 1 82 52 -10 10 63 -21 150

Total -93 92 -644 -822 1,483 -266 -51 91 93 -117 Of which financial instruments measured at fair value SEK -304 80 -28 -160 262 -240 -83 73 114 -286

Foreign currency -34 62 -54 90 66 12 25 73 -6 234 Total -338 142 -82 -70 328 -228 -58 146 108 -52

4-2. Capital requirement for market risks as of 31 December – Swedbank FCG

Financial Companies Group (SEKm)

Capital requirement 2013 Capital requirement 2012

standard method

internal method* Total

standard method


Risks in trading book Interest rate risk 526 530 1056 501 502 1003 of which specific risk 526 526 501 501

of which general risk 530 530 502 502 Equity risk 6 73 79 5 139 144 of which specific risk 1 1 1 1

of which general risk 1 73 74 1 139 140

of which positions in CIUs 4 4 3 3 of which options where the capital requirement is equal to the option's market value 0 0 0 0 Currency risk in trading book 317 317 170 170 Commodity risk 33 33 20 20 Total capital requirement for risks in trading book 565 530 1095

526 503 1029

of which stressed VaR** 391 391 350 350 Currency risk outside trading book 593 593 695 695 Total capital requirement for market risks 1688 1724

Notes for tables 4-2 and 4-3:* The Parent Company’s capital requirement for general interest-rate risk, share price risk and currency risk in the trading book as well as Swedbank Estonia AS’, Swedbank Latvia AS’ and Swedbank Lithuania AB’s capital requirement for general interest-rate risk and currency risk in the trading book are calculated in accordance with the VaR model. ** Stressed VaR is a requirement in CRDIII from end of December 2011. 4-3. Capital requirement for market risks as of 31 December – Swedbank AB

Swedbank AB (SEKm) Capital requirement 2013 Capital requirement 2012

standard method


standard method


Risks in trading book Interest rate risk 514 521 1035 446 505 951 of which specific risk 514 514 446 446

of which general risk 521 521 505 505 Equity risk 1 73 74 1 136 137

of which specific risk 1 1 1 1

of which general risk 73 73 136 136

of which positions in CIUs of which options where the capital requirement is equal to the option's market value Currency risk in trading book 316 316 171 171 Commodity risk 1 1 1 1 Total capital requirement for risks in trading book 516 521 1037 446 505 951 of which stressed VaR** 382 382 352 352 Currency risk outside trading book 35 35 151 151 Total capital requirement for market risks 1072 1102

Appendix 24


5. Liquidity risks - Appendix

5-1. Outstanding long-term funding volumes SEKm 2013 2012 Domestic covered bonds 283,946 298,406 Euro covered bonds 139,161 132,910 USD 144a covered bonds 35,571 30,000 Senior unsecured bonds 80,291 82,054 USD 144a senior unsecured bonds 12,607 6,457 Government guaranteed bonds 8,578 30,393 Structured retail bonds 13,669 14,942 Total 573,823 595,162

5-2. Outstanding short-term funding volumes Swedbank AB (nominal, SEKm) 2013 2012 Domestic CP 3,300 9,050 European CP/CD 13,668 18,318 USCP 52,539 43,148 Yankee CD 28,981 38,926 French CD 2,161 559 Finnish CD 713 0 Total 101,362 110,001

Swedbank Mortgage AB Domestic CP 40 5,905 Total 40 5,905 Total, Group 101,402 115,906

5-3. Issued long-term debt SEKm 2013 2012 Domestic covered bonds 54,170 58,607 EUR covered bonds 11,457 6,873 USD 144a covered bonds 6,524 10,190 CHF covered bonds 0 0 Other 1,160 1,359 Senior unsecured bonds 19,481 51,966 USD 144a senior unsecured bonds 6,276 6,457 Structured retail bonds 4,017 5,155 Total 103,085 140,607

5-4. Long-term funding by maturity

5-5. Long-term funding by currency

0

50

100

150

200

2014 2015 2016 2017 2018 2019-

Nominal, SEKbn

0

10

20

30

40

50

60

70

SEK EUR USD CHF Other

%

Appendix 25


5-6. Liquidity Reserve, Group* SEKm Total Currency distribution SEK EUR USD Other Cash and holdings in central banks 59,382

292 20,131 20,198 17,174

Deposits in other banks available overnight 397

4 18 353 22 Securities issued or guaranteed by sovereigns, central banks or multilateral

development banks 68,054

34,388 24,415 9,251 Securities issued or guaranteed by municipalities or public-sector entities

Covered bonds 54,002

51,009 2,862 131 - Issued by other institutions 54,002

51,009 2,862 131

- Own issued Securities issued by non-financial corporates Securities issued by financial corporates (excl. covered bonds) 2,096

705 1,391 Other

Total 183,931 85,693 48,131 31,324 17,196

* According to the template defined by the Swedish Bankers’ Association.

5-7. Additional Liquidity Reserve, Group* SEKm Total Currency distribution SEK EUR USD Other Cash and holdings in central banks

Deposits in other banks available overnight Securities issued or guaranteed by sovereigns, central banks or multilateral development banks 6,253

3,422 173

2,658

Securities issued or guaranteed by municipalities or public-sector entities 265

193 13

59 Covered bonds 38,717

30,417 1,672 6,628

- Issued by other institutions 33,659

25,729 1,621

6,309 - Own issued 5,058

4,688 51

319

Securities issued by non-financial corporates 1,513

58 1,415

40 Securities issued by financial corporates (excl. covered bonds) 5,762

1,893 3,577 292

Other

Total 52,510 34,090 5,166 3,577 9,677

*82% of the additional assets fulfill the Liquidity Reserve definition by the Swedish Bankers’ Association except that they are held outside Treasury. 80% of the additional assets are rated AAA. Note: 90% of the securities in the liquidity reserve are rated AAA. Definition of Liquidity Reserve Assets included in the liquidity reserve should comply with the following: - assets shall be included and held by the Treasury function in a bank - assets cannot be encumbered - market values are used for the assets - only unencumbered securities receiving 0-20% risk weight under the standardised approach to credit risk of the Basel 2 framework can be included - securities received in reverse repo transactions are included in the liquidity reserve, and securities used as collateral for repo transactions are excluded

5-8. Asset encumbrance, by type of liability (row) and asset (column)

SEKm

Govt debt instr

Central banks and

supranational debt instr

Covered bonds

Debt instr

issued by credit

instns

Securities issued by corporate and other

issuers ABS Mortg.

loans Cash Total

of which received

collateral (off-

balance)

Central bank funding Intra-day settlement 1,912

9,243

11,155 5,397

Repurchase agreements 1) 19,272

7,475

26,747 7,314 Derivatives 2) 968

1,266

7,178 9,412 2

Covered bonds 3)

514,186

514,186 Other 4) 860 510 1,370

Total 22,152 17,984 860 514,186 7,688 562,870 12,713 Financial assets pledged for insurance policy holders

118,627

Unencumbered assets - additional assets available for secured funding

Securities 5, 6) 39,699 32,925 80,358 14,248 9,157 705

177,092 23761 Cover pool (overcollateralisation) 7)

226,029

226,029

Cover pool eligible assets 8) Total 39,699 32,925 80,358 14,248 9,157 705 226,029 0 403,121 23,761

Appendix 26


1) Repoed securities on balance sheet. 2) Collateral posted under CSA agreements, gross (3-year, SEKm, High: 21 572, Low: 10 086, Average: 14 223). 3) Of which accrued interest of encumbered assets in the cover pool, SEK 2 091m as of Q4 2013 4) Collateral pledged in securities lending activities and with exchanges 5) Reversed repos are included. 6) All types of securities, including securities non-pledgeable at central banks, of which 78% are rated AAA, 2% are rated below A-and 7% are not rated. 7) Of which accrued interest of assets in the cover pool overcollateralisation, SEK 932m as of Q4 2013 8) Securities received as collateral in, e.g., reversed repo transactions that: either have (encumbered) or have not (unencumbered) been used as collateral by Swedbank.

5-9. Survival Horizon, as of 31 December 2013

In this calculation, these main principles have been used: Cash flows are assumed to occur according to contractual agreements. Highly liquid securities (i.e. interest-bearing securities that are pledgeable at central banks) are assumed to generate liquidity from day 1, and it is assumed that the liquidity-generating capacity of the highly liquid securities is intact. The corresponding cash equivalent of the highly liquid securities is market value reduced for hair-cuts set by central banks. Highly liquid securities are available from the day they are registered on an account with a Swedbank clearer. Non-pledgeable securities are assumed to generate cash flow at coupon payment days and at maturity. Holdings of securities issued by entities within Swedbank Group are not part of highly liquid assets, but are considered non-pledgeable in the model. Exceptions and clarifications - contractual cash flows: Revolving loans which give the counterparty an embedded option to extend the loans and to switch currency at maturity, are excluded since they are assumed to be rolled over. Cash outflows from retail (private individuals and SMEs as defined by Swedish LCR regulation FFFS 2011:37) term deposits are excluded since these deposits are assumed to be rolled over. Securities issued by Swedbank Mortgage AB and over-collateralisation in Swedbank Mortgage AB’s cover pool may be used as intra-day collateral in Riksbank and Norges Bank. Exceptions and clarifications - repurchase transactions: The liquidity effect of repo/reversed repo transactions, with highly liquid securities as collateral, is assumed to be zero. The liquidity effect of repo/reversed repo transactions with non-pledgeable securities occurs on the start day and end day of the repo transaction. The cash flows from the securities in a reversed repo transaction are modeled to generate contractual cash flows at coupon payment days and at maturity day from the day they are registered on an account with a Swedbank clearer. The liquidity effect of repo/reversed repo transactions with securities issued by Swedbank Group is confined to the corresponding cash flows, since such securities are not part of highly liquid securities. Additional limits define the maximum cumulative negative cash flows tolerated during predefined time periods for individual currencies as well as for currencies combined.

5-10. Cover pool sensitivity analysis, house price decline, 31 December 2013

House price decline, SEKbn Current -5% -10% -15% -20% -25% -30% -35% -40% -45% -50%

Total assets in the cover pool 737.2 730.5 718.7 701.7 681.0 657.2 630.7 601.5 569.8 535.6 499.0

Total outstanding covered bonds 512.1 512.1 512.1 512.1 512.1 512.1 512.1 512.1 512.1 512.1 512.1

Overcollateralisation level 44.0% 42.6% 40.3% 37.0% 33.0% 28.3% 23.2% 17.5% 11.3% 4.6% -2.6%

0

50

100

150

200

0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360

SEK bn

Days forward

Appendix 27


5-11. Liquidity coverage ratios and other liquidity and funding ratios Liquidity coverage ratios (new Swedish regulation FFFS 2012:6) 1) 31 Dec 2013 31 Dec 2012

Liquidity coverage ratio (LCR), Total, % 142 139 Liquid assets, SEKbn 206 240 Liquid assets level 1, SEKbn 132 157 Liquid assets level 2, SEKbn 74 83 Cash outflows, SEKbn 227 253 Customer deposits, SEKbn 87 76 Market borrowing, SEKbn 110 140 Other cash outflows, SEKbn 30 37 Cash inflows, SEKbn 82 80 Inflow from maturing lending to non-financial customers, SEKbn 9 12 Other cash inflow, SEKbn 73 68 Liquidity coverage ratio (LCR), EUR, % 662 269 Liquidity coverage ratio (LCR), USD, % 618 293 Liquidity coverage ratio (LCR), SEK, % 2) 45 Liquidity coverage ratio (Basel Committee recommendation) 3) 31 Dec 2013 31 Dec 2012 Liquidity coverage ratio (LCR), Total, % 168 171

Liquidity and funding ratios 31 Dec 2013 31 Dec 2012

Net stable funding ratio (NSFR), % 4) 89 91 Available stable funding (ASF), SEKbn 1,051

Required stable funding (RSF), SEKbn 1,178 Net stable funding ratio (NSFR) as per new recommendation, % 5) 97

Liquid assets in relation to maturing funding during next 3, 6 and 12 months 6) liquidity reserve 3 months 135 142 liquidity reserve 6 months 88 102 liquidity reserve 12 months 74 89 liquidity reserve + additional liquid assets 3 months 174 180 liquidity reserve + additional liquid assets 6 months 133 130 liquidity reserve + additional liquid assets 12 months 95 113

1) LCR - calculated in accordance with the new Swedish regulation 2012:6. LCR = Liquidity reserve/(cash outflows - cash inflows). 2) LCR in SEK is lower in comparison to EUR and USD LCRs due to capped liquid assets and capped cash inflows denominated in SEK and cash flows in general as main operations are conducted in SEK. It is also due to foreign currency funding and the corresponding swap agreements used to hedge FX risks. In contrast to EUR and USD, it is also more restrictive to invest in SEK-denominated liquid assets due to the low availability/restrictions of these assets. 3) LCR - calculated in accordance with Swedbank's interpretation of the Basel Committee recommendation 6 Jan 2013 (BCBS238). 4) NSFR - calculated in accordance with Swedbank's interpretation of the current Basel proposal. 5) NSFR according to Swedbank’s best understanding of BCBS’s new consultative document on the new NSFR recommendation (BSBS271). 6) Amounts stated in SEK bn. Liquidity ratios: liquid assets in relation to maturing wholesale funding during next 3, 6 and 12 months: - Liquidity reserve according to the definition of the Swedish Bankers' Association - Additional liquid assets: Assets, pledgeable in central banks, held by the Group outside of Group Treasury - Maturing funding during 3, 6 and 12 months: All wholesale funding maturing within 3, 6 and 12 months, including short-term CP/CDs, and net of lending and "borrowing to/from credit institutions (net Interbank)"

Appendix 28


7. ICAAP – Appendix Note: ICAAP is based on the Swedbank Financial Companies Group (SFCG), which differs from Swedbank Group. For example, insurance is not included and associated companies are treated differently.

7-1. Stress test ICAAP scenario

2012 2013 2014 2015 2016 2017

Sweden GDP growth, % 0.9 -3.8 -3.6 -1.4 2.5 2.7

Unemployment, % 7.7 8.2 11.1 11.9 10.9 10.5 Inflation index 100 99 98 98 99 101 Real estate price index 100 90 82 82 84 86 Estonia

GDP growth, % 3.0 -5.0 -4.5 -2.1 3.0 5.0 Unemployment, % 10.3 13.0 14.5 15.2 15.0 14.0 Inflation index 100 99 98 98 101 105 Real estate price index 100 91 84 80 81 86 Latvia

GDP growth, % 5.4 -5.5 -5.0 -2.0 4.0 6.0 Unemployment, % 15.0 17.5 19.0 19.5 18.5 16.5 Inflation index 100 99 98 98 100 104 Real estate price index 100 93 85 81 83 87 Lithuania

GDP growth, % 3,3 -4,5 -3,5 -1,0 2,0 5,0 Unemployment, % 13,2 14,5 16,5 18,0 17,0 15,0 Inflation index 100 99 98 99 102 106 Real estate price index 100 95 89 86 89 93 Interest rates

Stibor 3 m, % 0,95 0,20 0,15 0,15 0,65 1,40 Eurobor 3m, % -0,05 -0,05

0,20 0,80 1,50

FX USD/SEK 6.50 6.86 7.00 7.11 7.04 6.89

EUR/SEK 8.60 8.09 7.93 7.81 7.89 8.05 GBP/SEK 10.50 10.55 10.55 10.55 10.55 10.55

7-2. Income statement under ICAAP scenario

SEKbn 2012 2013 2014 2015 2016 2017 Total

2013 - 2017 Total net interest income 22.8 21.3 20.4 19.3 19.6 21.4 102.0 Total income 37.2 34.9 32.9 31.9 32.8 35.1 167.6 Total expenses 18.4 18.6 18.4 18.5 18.6 18.7 92.8 Profit before credit impairments 18.8 16.3 14.5 13.4 14.2 16.4 74.8 Credit impairments 0.9 5.0 12.5 8.3 4.3 1.5 31.6 Operating profit 17.9 11.3 2.0 5.1 9.9 15.0 43.3 Tax expense 4.0 2.5 0.4 1.1 2.2 3.3 9.5 Profit for the period 14.0 8.8 1.6 4.0 7.7 11.7 33.8 Profit for the period attributable to:

Shareholders of Swedbank AB 13.7 8.6 1.5 3.9 7.6 11.4 33.0 Non-controlling interests 0.3 0.2 0.0 0.1 0.2 0.3 0.8

7-3. Credit impairments by business area - ICAAP

EAD, SEKbn Credit impairment ratio, %

2012 2013 2014 2015 2016 20167 Accumulated 2013 - 17

Swedish Banking 979.2 0.3 0.7 0.5 0.2 0.1 1.7 LC&I 255.0 0.4 1.0 0.8 0.5 0.1 2.9 Estonia 51.8 0.5 1.4 0.8 0.3 0.2 3.2 Latvia 29.3 0.8 2.2 1.4 0.7 0.3 5.4 Lithuania 31.5 0.6 1.8 1.0 0.4 0.2 4.0 Russia & Ukraine 10.6 5.3 11.1 8.1 3.1 1.3 28.9 Total 1 357.3 0.4 0.9 0.6 0.3 0.1 2.3

Appendix 29


7-4. Credit impairments for Swedish Banking and LC&I (by sector) - ICAAP


2012 2013 2014 2015 2016 2017 Accumulated 2013 - 17

Agriculture. forestry and fishing 64.0 0.1 0.5 0.2 0.1 0.0 0.9 Manufacturing 53.8 1.0 1.7 1.5 1.2 0.4 5.8 Public sector and utilities 15.2 0.5 1.7 0.8 0.3 0.2 3.5 Construction 28.2 0.4 0.8 0.8 0.2 0.1 2.3 Swedish Banking 32.6 1.1 2.6 2.0 0.8 0.4 6.9 Transportation 10.3 1.0 4.5 1.4 0.7 0.3 8.0 Shipping 29.0 0.1 2.8 2.9 1.3 0.0 7.1 Hotels and restaurants 4.5 1.4 2.5 3.6 0.9 0.5 9.0 Information and communication 7.2 0.3 0.8 0.3 0.2 0.1 1.7 Finance and insurance 16.7 0.1 0.5 0.2 0.1 0.0 0.9 Property management 157.3 0.6 2.0 0.9 0.5 0.2 4.2 Tenant owner associations 80.5 0.2 0.3 0.2 0.1 0.1 0.9 Other corporate lending 19.3 0.8 1.4 2.1 1.1 0.3 5.6 Professional services 16.5 2.7 2.6 0.8 0.4 0.2 6.7 Bank 69.7 0.1 0.1 0.1 0.4 Private Mortgage 570.8 0.1 0.1 0.1 0.1 0.0 0.5 Private Other 58.4 0.2 0.5 0.3 0.2 0.1 1.3 Total 1 234.1 0.3 0.8 0.5 0.3 0.1 2.0

7-5. Credit impairments for Baltic Banking - ICAAP


2012 2013 2014 2015 2016 2017 Accumulated 2013 - 17

Agriculture, Forestry, Manufacturing 11.7 0.9 2.8 1.3 0.6 0.3 5.9 Public sector and utilities 5.3 0.2 0.8 0.3 0.2 0.1 1.6 Swedish Banking 8.5 0.9 2.8 1.4 0.6 0.3 6.0 Transportation and shipping 5.2 0.8 2.6 1.0 0.5 0.3 5.2 Construction, Hotels, Property Mgmt 19.0 0.9 2.3 1.3 0.5 0.3 5.3 Information, Finance, Banking 2.2 0.5 1.5 0.6 0.3 0.2 3.1 Professional services, Other 4.6 0.9 2.7 1.2 0.6 0.3 5.7 Private Mortgage 47.6 0.4 0.9 0.8 0.4 0.1 2.7 Private Other 8.4 0.6 1.7 0.7 0.4 0.2 3.6 Total 112.6 0.6 1.7 1.0 0.4 0.2 4.0

7-6. RWA and Capital - ICAAP SEKbn, 2012 2013 2014 2015 2016 2017 Total RWA, Basel 3 487.1 489.8 472.6 438.6 403.6 394.0 Common Equity Tier 1 capital, Basel 3 75.2 78.2 78.8 79.6 80.0 81.7 Common Equity Tier 1 capital ratio, Basel 3 (%) 15.4 16.0 16.7 18.1 19.8 20.7

Appendix 30


Definitions

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 Hypotek AB Sweden • •

Swedbank Finans AB Sweden • •

Swedbank Robur AB Sweden • •

Swedbank Asset Management S.A. Luxembourg • •

Swedbank Franchise AB Sweden • •

Swedbank BABS Holding AB Sweden • •

FR&R Invest AB Sweden • •

First Securities AS Norway • •

Swedbank First Securities LLC USA • •

Sparia Försäkrings AB Sweden • Sparia Group Försäkrings AB Sweden • Ölands Bank AB Sweden 60% •

Ektornet AB Several countries • •

Swedbank Försäkring AB Sweden • Swedbank Administration AB Sweden • •

Bankernas Kontantkort Cash Sverige AB Sweden • •

DocHotel i Stockholm AB Sweden • • Swedbank och Sparbankernas Mobile Solutions AB Sweden • •

Bart AB Sweden • •

OAO Swedbank Russia • •

OOO Leasing Russia • •

Swedbank AS Latvia • •

Swedbank AB Lithuania • •

Swedbank AS Estonia • • (excl. Insurance)

FRIR Rus OOO Russia • •

SIA Ektornet Kr Valdemara 27/29 Latvia • •

ManCo Luxembourg SA Luxembourg • •

New Tower LLC Ukraine • •

ATM Holding AB Sweden 70% •

Entercard Holding AB Sweden, Norway 50%

50%; consolidated with proportional method

Swedbank Sjuhärad AB Sweden 47.50% •

Sparbanken Rekarne AB Sweden 50% •

Färs & Frosta Sparbank AB Sweden 30% •

Vimmerby Sparbank AB Sweden 40% •

UC AB Sweden 20% 20%

BDB Bankernas Depå AB Sweden 20% •

BGC Holding AB Sweden 29% 29%

Finansiell ID-Teknik AB Sweden 28% 28%

Rosengård Invest AB Sweden 25% 25%

Getswish AB Sweden 20% 20%

http://www.swedbank.com/

Appendix 31


Swedbank definitions of risk types Credit risk The risk that a counterparty will not meet its obligations to Swedbank, and the risk that pledged collateral will not cover

the claims. Credit risk includes concentration risk, which is the risk related to large individual exposures as well as significant exposures to groups of counterparties whose probability of default is driven by common underlying factors, e.g. sector, economy, geographical location or type of instrument.

Counterparty risk FX Settlement risk

The risk that a Counterparty to a trading transaction will not meet its financial obligations towards Swedbank and that collateral held will not be enough to cover the claims. This definition encompasses repurchase agreements, derivatives, securities financing and money market transactions. The risk that a Counterparty has not fulfilled its commitment before Swedbank fulfills its commitment at the time of completion of a transaction (delivery/payment).

Market Risk The risk to value, earnings, or capital arising from movements of risk factors in financial markets, such as interest rates, exchange rates, or share prices

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. Operational risk is further broken down into the following sub-risk categories: Personnel risk, Process risk, IT & System risk, and External risk.

Terminology and abbreviations “Board” Board of directors of Swedbank AB

“Capital base” The capital base serves as a buffer against unexpected losses that can arise from risks to which a bank is exposed. The capital base must at all times be of such size that the minimum capital requirements are met. The main constituent of the capital base is the CET1 capital, which consists mainly of equity capital less proposed dividends and various deductions (e.g. goodwill) as set out in capital adequacy regulations. “Basel 2” and “Basel 3” in this report mean the EU and Swedish implementation of these international regulatory standards.

“CEO” Chief Executive Officer of Swedbank AB

“CET1” Common Equity Tier 1

“CRO” Chief Risk Officer of Swedbank AB

“CSA Agreements” Credit Support Annex Agreements

“EAD” Exposure at Default

“EBA” European Banking Authority

“EL” Expected Loss

“ERM Policy” Enterprise Risk Management Policy

“FCG” Swedbank Financial Companies Group (see definition above)

“FTP” Funds Transfer Pricing

“Group” Swedbank Group (see definition above)

“ICAAP” Internal Capital Adequacy Assessment Process

“IRBA” Advanced internal risk classification model

“ISDA” International Swaps and Derivatives Association

“LC&I” Large Corporate & Institutions

“LCR” Liquidity Coverage Ratio

“LGD” Loss Given Default

“LTV” Loan-To-Value

“MTA” Minimum Transfer Amounts

“NII” Net Interest Income

“NSFR” Net Stable Funding Ratio

“OC” Overcollateralisation

“Parent Company” Swedbank AB (publ)

“PD” Probability of Default

“RAROC” Risk Adjusted Return On Capital

“Riksbank” Sweden's Central Bank

“RWA” Risk-Weighted Assets

“SEK” Swedish Krona

“SVaR” Stressed Value-at-Risk

“Swedbank” Swedbank Financial Companies Group (see definition above)

“Swedbank Baltic” Swedbank AS (Estonia), Swedbank AS (Latvia) and Swedbank AB (Lithuania)

“Swedbank Group” Swedbank AB (publ) and all its underlying legal entities (regardless of percentages of holding), (see definition above)

“Swedbank Russia” OAO Swedbank and OOO Swedbank Leasing

“Swedbank Ukraine” JSC Swedbank

“Swedish FSA” Swedish Financial Supervisory Authority

“UL” Unexpected Loss

“VaR” Value-at-Risk

risk management and capital adequacy report pillar 3 - 2013

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