Board of Directors’ report

The capital base has been strengthened through a rights issue, which has resulted in a high core tier 1 capital ratio.

Strong profit despite a turbulent market.

Swedbank consists of Swedbank AB (the parent company), its subsidiaries, associates and a joint venture. The Group structure, with the parent company and the principal wholly and partly owned entities, is shown in the illustration below. Swedbank also operates branches in Copenhagen, Helsinki, New York, Oslo and Shanghai. Holdings of shares in associates and group entities are reported in Notes 24 and 25 to the balance sheet.
Five-year summary contains a summary of the group’s financial development, with key ratios, income statements and balance sheets for the last five years.

CHANGES IN THE GROUP STRUCTURE

Branch sales to savings banks

On 1 January 2008, Swedbank transferred its operations in Lerum to Sparbanken Alingsås. On the same date, Swedbank’s seven branches in the municipalities of Osby and Hässleholm were transferred to Sparbanken 1826 (formerly Kristianstads Sparbank and Tyringe Sparbank). At year-end, business volumes in the transferred branches amounted to SEK 12.9bn, of which bank lending accounted for SEK 1.4bn and deposits for SEK 3.6bn. Business volumes related to lending in Swedbank Mortgage and Swedbank Finans and investment volumes in Swedbank Robur’s mutual funds and Swedbank’s index-linked bonds remained with Swedbank after the transaction. The sale price was SEK 440m.

Swedbank Robur expands

On 2 January 2008, Swedbank Robur acquired all the shares in Folksam Fond AB. The acquisition was settled in cash for SEK 463m. The difference between the acquisition value and the subsidiary’s net assets of SEK 43m was allocated to intangible assets. Fund management services was allocated SEK 583m, and deferred tax liabilities, SEK 163m. The useful life has been estimated at 20 years.

In November, Swedbank Robur AB acquired two equity funds – a small-cap fund and a Sweden fund – from Carnegie. Assets under management amounted to SEK 1.1bn.

Acquisition of ZAO OKO Capital Vostok

During the first quarter, Swedbank AB completed the acquisition of ZAO OKO Capital Vostok from Finland’s Pohjola Bank. The acquisition cost was SEK 5m, which was allocated to goodwill. The company, which changed its name to ZAO Swedbank Markets, is active in investment banking focusing on financial advice to Nordic and Russian companies in connection with acquisitions and divestments of companies and operations in Russia. At the time of acquisition, the company had seven employees.

Ownership of Swedbank’s Russian operations was
transferred from AS Hansabank to Swedbank AB

On 12 May, ownership of the Russian operations of OAO Swedbank and Hansa Leasing Ltd was transferred from AS Hansabank to Swedbank AB.

Swedbank AB sells SPS Reinsurance S.A.

Sparia Försäkringsaktiebolag, which exclusively insures risks within the Swedbank Group, sold Luxembourg-based SPS Reinsurance S.A. in September to AEF Holding S.A.R.L. The sale produced a capital gain of SEK 95m. The risks that had been previously reinsured by SPS were taken over by Sparia.

Swedbank AB sells its shares in NCSD Holding AB

Swedbank AB sold its shareholding in NCSD Holding AB to Euroclear Group. The capital gain of SEK 680m was reported in the fourth quarter. NCSD’s operations affected Swedbank’s earnings positively by SEK 82m in 2007 and negatively by SEK 13m
in 2006.

OTHER IMPORTANT EVENTS IN 2008

Swedbank’s Annual General Meeting

Swedbank’s 2008 Annual General Meeting (AGM) was held in Stockholm on 25 April. The AGM elected one new member to the Board of Directors, Helle Kruse Nielsen. Board members Gail Buyske, Simon F.D. Ellis, Ulrika Francke, Berith Hägglund-Marcus, Göran Johnsson, Anders Nyblom and Carl Eric Stålberg were re-elected. Carl Eric Stålberg was also elected as Chair.

The dividend to the shareholders of SEK 9.00 per share (8.25) was approved in accordance with the Board’s proposal. The dividend was paid through VPC (the Swedish Central Securities Depository) on 6 May 2008.

The Board and the President were discharged from liability for the year 2007.

The AGM decided on the guidelines for the Nomination Committee. In accordance with the Swedish Code of Corporate Governance, the bank will announce the names of the members of the committee no later than six months before the next AGM. The composition of the Nomination Committee is shown on the Corporate governance report.

Rights issue

On 27 October 2008, the Board of Directors of Swedbank AB announced a rights issue of preference shares totalling SEK 12.4bn.

An Extraordinary General Meeting on 25 November approved the Board’s proposal to issue no more than 257 686 706 preference shares with preferential rights for existing shareholders. In the rights issue, every two (2) existing ordinary shares entitled the holder to subscribe for one (1) new preference share. It was also resolved to amend the articles of association and thereby introduce a new class of shares with the preferential right to dividends (preference shares), change the limits regarding the bank’s share capital and number of shares, and declare that all shares currently in issue shall be ordinary shares.

During the period 2–16 December 2008, new preference shares were issued at a price of SEK 48 per share. The quota value of the shares was SEK 21 per share. As of 31 December, a total of 194 985 456 preference shares had been issued in the amount of SEK 9 359m, and 62 701 250 preference shares in the amount of SEK 3 010m were in issue. The preference shares in issue were registered on 19 January 2009. The rights issue increased the Group’s equity as of 31 December by SEK 11 976m after transaction expenses.

The preference shares have preference to an annual, non-cumulative dividend of up to SEK 4.80 per preference share, provided that the AGM resolves to pay a dividend. If a higher dividend is declared on the ordinary shares, the equivalent dividend will also be paid on preference shares. The exception is 2009, when the preference shares will have preference to a dividend of SEK 2.40 per share and nothing more.

In February and August of each year, starting in August 2009, holders of preference shares may request to convert their preference shares to ordinary shares. The request must pertain to the shareholder’s entire holding. If the shareholder previously has not requested a conversion, all their preference shares outstanding will be converted to ordinary shares in the month immediately after the month in which the AGM is held in 2013.

Preference shares carry the same voting rights as ordinary shares.

Swedbank’s preference share approved for trading

NASDAQ OMX Stockholm AB decided to admit Swedbank’s preference shares for trading as of 22 December 2008.

The preference share has the ticker symbol SWED PREF and is traded in the Large cap segment.

Swedish state’s guarantee programme

In November, the National Debt Office approved Swedbank’s
application to participate in the Swedish state’s guarantee
programme.

Swedbank Robur named best Nordic fund manager

For the second consecutive year, Swedbank Robur was named the best fund manager in the Nordic region by the international analyst firm Lipper. Swedbank Robur received a total of eight awards, two for the best fund company and six for individual funds. In 2008 Swedbank Robur was also named Sweden’s Fund Manager of the Year for 2007 by investment research firm Morningstar and business daily Dagens Industri for its strong fund performance during 2007.

Michael Wolf appointed new CEO as of 1 March 2009

Michael Wolf was appointed the new President and CEO. He started his new position at Swedbank on 1 December 2008. Michael Wolf will be introduced to the bank’s operations during a three-month period until he officially takes up his new position on 1 March 2009. Jan Lidén remains at the bank’s disposal until his contract expires on 25 April 2009.

No dividend for 2008

The Board of Directors proposes that the AGM approve no dividend for preference shares and ordinary shares (SEK 9.00 per ordinary share).

Remuneration guidelines for senior executives

The most recent guidelines adopted by the 2008 AGM, which apply until the 2009 AGM, are as follows. The Remuneration Committee annually reviews the guidelines and prepares a proposal for the Board of Directors, which each year proposes remuneration guidelines for senior executives to the AGM for
approval. The CEO is responsible for ensuring that the relevant decision-making bodies in each subsidiary establish rules in accordance with the guidelines. The guidelines cover the remuneration agreements with Swedbank’s CEO and executives reporting to the CEO who are also members of the Group Executive Management (GEM) (“senior executives”), including any changes in remuneration for senior executives decided on after establishment of the guidelines. Based on the principles of the guidelines, the Board, in accordance with the Compensation Committee’s proposal, decides on specific remuneration terms for each senior executive. The Board may, under special circumstances, deviate from the guidelines in individual cases. The remuneration package for senior executives may include the following main components: base salary, short-term incentive programmes (STI programmes), long-term incentive programmes (LTI programmes), benefits and pension. All senior executives may be entitled to the general benefits the bank offers to its employees as well as certain additional benefits. Generally, pension benefits shall be paid in accordance with the local laws, agreements and customs of each country. Pension benefits can be defined benefit schemes or defined contribution schemes and are vested. In addition to pension benefits (defined benefit) according to collective agreements (which apply to all Swedish employees),
a defined contribution pension shall apply to all senior executives employed after 2006 in Sweden, provided that a pension benefit is granted. The pensionable salary for these senior executives shall have a ceiling. For more information on current pension agreements, see note 8 in the annual report. Pensionable salaries may not exceed a specific amount. The total remuneration cost includes annual costs for base salaries, STI, LTI, benefits and pensions, including social insurance charges and employer’s contributions. The following maximum remuneration costs
apply until the AGM 2009: CEO, 400 income base amounts (the income base amount for income year 2007 was SEK 45 900 and for income year 2008 SEK 48 000); and executives who report to the CEO and are members of the GEM, 350 income base amounts. When determining individual remuneration, each executive is evaluated in accordance with an established, structured benchmarking process to determine and compare salary and benefit levels.

STI programmes are structured in accordance with the bank’s general policy for incentive programmes. Relevant performance goals, which promote the interests of the bank and its shareholders, are established in advance. These goals are tied to the senior executive’s business area. They also serve as a basis for an ongoing, structured evaluation and dialogue concerning goal achievement and remuneration between the bank and the
senior executive. Any outcome is based on an assessment of whether relevant performance goals have been achieved, and payment is made in cash after the end of each financial year. All STI programmes must be limited to a maximum amount based on a percentage of base salary or a fixed amount. Performance goals for STI programmes are normally based on performance during a financial year. Due to market changes, the bank may want to adjust performance goals in order to achieve an effective incentive structure before an accounting year begins. Consequently, the Board may adopt STI programmes beginning at the start of an accounting year, subject to approval by the AGM. At present, the bank has not adopted any LTI programmes. All LTI programmes must be approved by the AGM. All fixed compensation is paid by the bank in accordance with outstanding agreements. Payment of bonuses in accordance with STI or
LTI programmes must be approved by the Board for each
programme in the form of a total sum per programme.

Salary during a notice period and severance pay must generally comply with the laws, agreements and customs in each country. For senior executives employed after 2006, the following shall apply: In case of notice of termination of employment by the bank, salary can be paid for a notice period of 0–12 months. In addition, severance pay can be paid for 6–12 months. For certain senior executives employed prior to 2006, longer periods may apply. For more information, see note 8 in the
annual report.

Disclosures regarding the Swedbank share, etc.

The total number of registered shares in Swedbank as of 31 December 2008 included 515 373 412 ordinary shares and 194 985 456 preference shares, in addition to which binding agreements were signed prior to year-end to acquire an additional 62 701 250 preference shares, which were registered
after the turn of the year. The total number of registered and subscribed preference shares amounted to 257 686 706 as of year-end. There are two classes of shares, ordinary shares (Class A shares) and preference shares. All shares carry one vote and have equal rights to participate in the bank’s assets. However, the preference shares have certain preferential rights to dividends. There are no limitations on the transferability of the Swedbank share by law or according to the articles of association.

There is one shareholder with at least a tenth of the votes of all the shares, Sparbanksstiftelsernas Förvaltnings AB, which held 93 000 000 ordinary shares and 20 000 000 preference shares, or 14.62 percent of the total number of shares as of 31 December. Employees owned 12 036 400 ordinary shares and
6 018 200 preference shares in Swedbank AB through the Kopparmyntet profit-sharing fund, 1 431 000 ordinary shares through the Kärven profit-sharing fund as well as 656 035 ordinary shares and 328 017 preference shares through the Guldeken profit-sharing fund. In addition, Guldeken signed binding agreements before year-end to acquire an additional 324 942 preference shares, which were registered after the turn of the year (total number of preference shares: 652 959). Voting rights for these shares may not be exercised directly by employees.

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

The 2008 AGM resolved that the bank, until the 2009 AGM, may acquire at any given time in its securities operations, to
facilitate these operations, its own shares, according to the Securities Business Act, without restriction on the method of acquisition, at a price corresponding to the prevailing market value and such that the total holding of such shares at any given time does not exceed 1 percent of all shares in the bank. The bank may also divest shares that, in accordance with the resolution of the AGM, have been acquired in the securities operations at a price that corresponds to the prevailing market value.

The 2008 AGM also authorized the Board to decide to acquire its own shares in addition to those acquired in the securities operations. However, the bank’s holding of such shares, over and above than those acquired in the securities operations, may at no time exceed 5 percent of the total number of shares in the bank. The authorization was not utilized in 2008.

There are no significant agreements that the company is party to that take effect or are amended or cease to apply if control over the company changes as a result of a public takeover offer.

According to the employment agreement with the Chairman of the Board dated September 2002, Carl Eric Stålberg shall, if the reason why Carl Eric Stålberg is not re-elected is that the company is the target of an acquisition or merger, receive pensionable remuneration in an amount corresponding to his prior salary for the period remaining until he turns 60 years of age. The right to remuneration is conditional on, among other things, the deduction of 50 percent of his income from any new employment from the remuneration unless the Board decides otherwise.

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

ACCOUNTING POLICIES

No significant changes were made in the accounting policies during the year. However, the accounting standards have been updated with an amendment in IAS 39 that the International Accounting Standards Board (IASB) issued on 13 October 2008 and that the EU adopted on 15 October 2008. The change – Reclassification of Financial Assets – means that financial
assets, excluding derivatives, which were previously held for trading purposes can be reclassified as of 1 July 2008 to another category in exceptional circumstances. The fair value of the assets at the time of reclassification is henceforth deemed to be its cost. In the parent company, calculated pension costs and pension settlements are no longer reported. As a result, the cost of self-managed pension assets is fully reported as a staff cost. Comparative figures have been restated.

Valuation issues

Because the market for interest-bearing securities became increasingly inactive in 2008, valuations were based to a significantly greater extent than before on valuation models, i.e., on quoted prices on inactive markets or on prices on active markets for similar instruments.

As of 31 December, around 19 percent of the Group’s interest-bearing securities were valued in accordance with these valuation models, against around 81 percent as of 30 September and around 5 percent as of 31 December 2007.

On 1 July 2008, Swedbank chose to reclassify certain interest-bearing securities which had become illiquid due to the extraordinary market conditions. The holdings, listed in the table below, were reclassified to the category Held to Maturity since the instruments are no longer tradable but are deemed financially justified to be held to maturity. Reporting at fair value would have raised net gains and losses on financial items at fair value by SEK 460m during the fourth quarter. The corresponding change in value of the holding during the third quarter was SEK –610m. No write-offs were needed as of 30 December. The average effective interest rate on the holding at the time of reclassification was 5.62 percent. Of the holdings listed below, Residential Mortgage Backed Securities (RMBS) and Commercial Mortgage Backed Securities (CMBS) accounted for 90 percent of the exposure, while the remaining 10 percent consists of a bond issued by companies controlled by the U.S. government.

SEKm 2008 31 Dec 2008 30 Sep 2008 1 Jul
Book value 8 138 7 662 7 376
Nominal value 8 328 7 828 7 558
Fair value 7 988 7 052 7 376

Carrying amounts and nominal values are affected by changes in exchange rates. Carrying amounts are also affected by the allocation of discounts in accordance with the effective interest method.

EVENTS AFTER 31 DECEMBER 2008

Swedbank Robur AB acquires Banco Fonder AB

Swedbank Robur is acquiring Banco Fonder AB, with assets in the form of customer agreements from Alfred Berg. The acquisition, which comprises assets under management of approximately SEK 7bn, was finalized on 20 January 2009. Banco Fonder AB has around 128 000 customers and 26 mutual funds. The difference between the purchase price and acquired net
assets in the company, as well as the acquired customer agreements, which has an equivalent value of approximately SEK 281m, constitutes intangible assets and deferred tax liabilities.

Repayment of fund fees

During an internal audit in the beginning of February it was detected that Swedbank Robur had client terms that were not in-line with the fund rules set out for two funds, namely the Russia and Mixed fund, which resulted in a notification to the Swedish Financial Supervisory Authority. The mistake is down to human error in connection with a re-authorisation process of all Robur’s funds in 2004. All affected customers will be compensated for the error. Swedbanks preliminary assessment is that the net cost for the compensation will be around SEK 300m.