In June 2012, the EU adopted changes in the framework for accounting of deferred pension liabilities (IAS19, compensation to employees). These changes were in force from 1 January 2013. SEB has in its Annual Report for 2011 and during 2012 provided information about the anticipated effect on the banks financial situation. SEB has chosen to accelerate reporting on the new standard to 31 December 2012 and through adoption of the new standard provide the full picture of how this change affects both the income and balance sheet statements, as well as the capital adequacy of SEB. In line with accounting practice, restated financial information for both 2011 and the first nine months of 2012 are provided. An update as of 31 December 2012 will be published in conjunction with the Annual Accounts 2012.
The financial effects from the restatement are in line with the estimate given in the interim report of Jan – Sep 2012. If the new accounting principles would have been adopted as of 30 September 2012, the deduction from capital would have been SEK 6.2bn. This is an unrealised amount that will decrease in a higher rate environment as the main reason for the actuarial deficit stems from the sharp fall of discount rates of latter years. The estimated deduction included the historic higher cost for pensions in the income statement, which was SEK 392m and SEK 225m for the full year of 2011 and 2012, respectively, and currently estimated at about SEK 300m for 2013.
The Basel III capital adequacy framework will encompass a higher capital requirement for counterparty risk related to OTC derivatives, the so called Credit Value Adjustment (CVA). In preparation for Basel III, SEB has further developed the risk measurement of this specific risk. The changed accounting leads to an adjustment of retained earnings from previous years and consequently equity is reduced by SEK 712m after tax. The results for 2011 and 2012 will not be affected.
The lowering of the Swedish corporate tax rate from 26.3 per cent to 22 per cent results in a positive effect on the reported net results. Deferred tax claims and tax liabilities related to Swedish income tax are revalued at 22 per cent. The effect is in line with the estimate that was provided in the interim report of Jan – Sep 2012, and will lead to a positive one-off effect of about SEK 1.1bn over the income tax expense in the Annual Accounts 2012.
SEB has concluded its review of the IT-infrastructure project that was communicated in the second quarter 2012. The original scope of the project was to develop a new platform for internet banking that would have been possible to reuse in several system applications and provide the bank with a faster and more flexible way of meeting customer demands, in all distribution channels. Similar work has also been carried out in Lithuania. Since the development started in 2007, the customers need for banking services has changed as mobile services have become more in demand. Going forward the IT development will be more flexible and agile. Parts of the previous platform will be reused, other parts of the development will not be reused; hence a cost of SEK 753m will be recognised. This cost arises as the capitalised IT-development costs for non-used parts will be fully recognised in the income statement instead of gradually being amortised over time.
The Annual Accounts 2012 will also include negative income of SEK 402m from buy-backs of covered bonds during the fourth quarter. The purpose of the buy-backs was to increase duration of SEB’s long-term funding through repurchasing covered bonds with short remaining duration and simultaneously substituting these with bonds of longer duration. Through this liability management, the balance sheet is further strengthened and the average cost of funding going forward will be lowered.
In both cases, i.e. the IT and repurchased covered bonds, the adjustments will result in one-time costs in 2012, which will be offset by lower costs in respect of both items going forward. Also, they together lower tax cost by SEK 287m in 2012.
The total effects in the results for the whole year of 2012, net, amount to SEK 7m.
|Effect on income from buy-backs
|Effect on costs from IT-adjustments
|Effect on operating profit
|Tax effect on the above
|Tax effect on deferred tax claims and liabilities
|Effect on net profit
|Effect from restated pensions pre-tax
The common equity tier 1 ratio according to Basel III is unchanged at about 13.5 per cent, the estimate for year-end provided earlier. Free cash flow is increased by about SEK 1bn over time.
SEB's costs in the business, i.e. excluding IT-adjustments mentioned above, are developing in line with the cost-cap for 2012, below SEK 23bn. The increased staff costs following the revised pension accounting principles are included in the cost-cap.