ANNUAL REPORT 2008 CONTENTS Annual Report 2008 PAGE MANAGEMENT’S REVIEW 4 TO READERS OF THE ANNUAL REPORT 6 PERFORMANCE INDICATORS AND FINANCIAL RATIOS FOR THE GROUP - CORE EARNINGS - YEAR 8 PERFORMANCE INDICATORS AND FINANCIAL RATIOS FOR THE GROUP - CORE EARNINGS - QUARTER 11 THE YEAR IN REVIEW - THE GROUP 22 CORPORATE GOVERNANCE 25 VISION AND STRATEGY STAKEHOLDERS: 28 • CUSTOMERS 30 • EMPLOYEES 32 • SHAREHOLDERS BUSINESS AREAS: 34 • SPAR NORD’S LOCAL BANKS 37 • FINANS NORD 39 • TRADING, FINANCIAL MARKETS & THE INTERNATIONAL DIVISION RISKS: 42 • CREDIT RISK 52 • MARKET RISK 58 • OPERATIONAL RISK MANAGEMENT’S STATEMENT AND AUDITORS’ REPORTS 60 STATEMENT BY THE SUPERVISORY AND EXECUTIVE BOARDS ON THE ANNUAL REPORT 61 REPORT BY THE INTERNAL AUDIT DEPARTMENT 62 INDEPENDENT AUDITORS’ REPORT PARENT COMPANY’S FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENTS 64 INCOME STATEMENT 65 BALANCE SHEET 66 STATEMENT OF CHANGES IN EQUITY 68 CASH FLOW STATEMENT LIST OF NOTES TO THE PARENT COMPANY’S FINANCIAL STATEMENTS AND THE CONSOLIDATED FINANCIAL STATEMENTS 70 NOTES TO THE PARENT COMPANY’S FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENTS OTHER DISCLOSURES 120 THE BANK’S MANAGEMENT 122 DIRECTORSHIPS, ETC. AND MANAGEMENT’S SHAREHOLDINGS 125 ORGANIZATIONAL UNITS AND MANAGEMENT 129 STOCK EXCHANGE ANNOUNCEMENTS 2008 P. 3 P. 3 TO READERS OF THE ANNUAL REPORT Annual Report 2008 2008 - A YEAR OF EXTREMES to about DKK 170 million. To this should be added our After a number of years with handsome profi ts, most share of the overall capped guarantee, and any increase recently DKK 833 million in 2007, the pre-tax profi ts for thereof, in the amount of up to DKK 450 million. Already 2008 ended at only DKK 124 million - and that in a year in 2008, this amounted to an expense of DKK 81 million when Spar Nord’s core business continued to grow regarding guarantee and sector-targeted solutions. respectably! The sour bond-market climate in 2008 marked another As an ambitious business accustomed to growth, we turn in investor sentiment. As a derivative effect of inves- cannot be satisfi ed with an annual profi t 85% down on tors’ wish to obtain maximum security, demand shifted the previous year. A look at the market conditions under from mortgage-credit bonds to government bonds. This which this profi t was generated, however, makes it some- resulted in a heavily widened yield spread, the brunt of what more acceptable. which Spar Nord took on its market-value adjustments and earnings from investment portfolios - and which had As a matter of fact, 2008 proved the worst for many dec- a negative effect on profi ts in the amount of more than ades across a wide range of areas. DKK 300 million. For one thing, we ran into the most serious liquidity At the same time, the Danish stock market dove more crisis since the 1930s. In the wake of the collapse of the than 50%, and fi nancials even more. The Spar Nord subprime mortgage market and the losses it infl icted share lost more than 63% of its value - an unsatisfac- on some of the largest fi nancial institutions globally, the tory decrease, which incidentally was the second lowest confi dence - so necessary for the globalized fi nancial among major Danish banks. For by far the majority of system to operate - evaporated. listed companies, the development served to wipe out several years’ return in the course of a few months. Instead of allowing liquidity to seep into the market, banks worldwide began holding onto the money - an Finally, 2008 was the year when we saw a downturn in understandable reaction but untenable in the long term. business trends, particularly in Q4. Many businesses experienced declining demand, economic growth ground Denmark resolved the problem with a “bank package”, to a halt, and unemployment began to rise. whereby the fi nancial sector and the Government joined forces to provide depositors with a guarantee that pro- tects them against the losses dreaded by both profes- sional and private depositors. The guarantee scheme was necessary and effective, but also an expensive solution for the fi nancial sector, carrying a combined price tag of DKK 35 billion (max.) over a two-year period. Spar Nord’s share of the annual guarantee commission will amount P. 4 P. 4 TO READERS OF THE ANNUAL REPORT Annual Report 2008 For us as a bank, this development is refl ected in higher We also expect our existing core business to continue its losses and loan impairment. Thanks to our subdued risk favourable growth trend. Despite the gloomy business profi le, and thus our excellent credit quality, we have not developments, we have fashioned an excellent platform been struck by heavy ‘fi nancial lightning’. But after two for sustained growth via our geographical expansion in years of having reported net income regarding the item, recent years. impairment of loans and advances, etc. - most recently DKK 111 million in 2007 - we had to report an expense of Nonetheless, we must expect 2009, and 2010 as well, to DKK 236 million in 2008 in respect of this item. yield more moderate fi nancial profi ts. The expenses con- nected with our participation in the two-year guarantee Focusing on all the external events puts the sharp decline scheme and the expected higher loan losses mean that in our profi t performance for the year in a somewhat dif- the fi gures on our bottomline - and that of other banks ferent light. In fact, our core business is running no less - will not reach the highs seen in recent years. well than in the past. On the contrary, 2008 was a satis- factory year for both Spar Nord’s Local Banks and Finans All the same, we believe that Spar Nord has an excellent Nord, with sustained growth in both customer numbers and solid platform with the potential for continued busi- and in business volume. ness growth. After a number of years in which the Spar Nord chain Sincerely yours, grew by establishing new local banks outside North Jutland, the growth we saw in 2008 was the result of ac- quisitions. Thus, in Q4 we acquired seven branches from Roskilde Bank and on this basis established three new Torben Fristrup Lasse Nyby bank regions: Spar Nord Roskilde, Spar Nord Holbæk Chairman of the Chief Executive Offi cer and Spar Nord Helsingør. Supervisory Board If we look ahead at the rest of 2009, the outlook is tainted by somewhat greater uncertainty than usual. The guarantee scheme from October and the new ”credit package” introduced in January 2009 by the ’Folketing’, the Danish parliament, calmed troubled liquidity and capital markets. Thus, we expect to have the opportu- nity to make the most of our fi nancial and distributive strength during the year and thus bolster our market position even further. P. 5 P. 5 PERFORMANCE INDICATORS AND FINANCIAL RATIOS Annual Report 2008 FOR THE GROUP - CORE EARNINGS - YEAR PERFORMANCE INDICATORS INCOME STATEMENT DISCLOSURES 2004 2005 2006 2007 2008 DKK million Net interest income 862.4 890.4 1,010.7 1,149.7 1,502.3 Net income from fees, charges and commissions 299.0 392.1 470.3 482.9 402.1 Dividends on shares, etc. 24.8 11.0 17.1 13.7 14.9 Market-value adjustments 126.5 204.5 191.5 168.2 -83.1 Other operating income 55.8 73.7 61.4 75.6 89.6 Profit/loss on equity investments in associates and group enterprises 33.5 49.2 84.0 99.1 31.5 Core income 1,402.0 1,620.9 1,835.0 1,989.2 1,957.3 Operating costs, depreciation and amortization 925.2 1,031.6 1,161.8 1,286.3 1,380.1 Core earnings before impairment 476.8 589.3 673.2 702.9 577.2 Impairment of loans and advances, etc. 170.8 33.9 -172.5 -111.3 235.8 Core earnings 306.0 555.4 845.7 814.2 341.4 Earnings from investment portfolios *) 58.0 58.1 35.2 18.8 -229.3 Totalkredit (sale of shares) 44.3 0.0 152.3 0.0 92.9 Profit/loss on ordinary operations 408.3 613.5 1,033.2 833.0 205.0 The Danish Banking Sector Emergency Fund *) 0.0 0.0 0.0 0.0 -81.3 Profit/loss before tax 408.3 613.5 1,033.2 833.0 123.7 Tax 84.6 134.2 204.6 152.7 28.4 Profit/loss after tax 323.7 479.3 828.6 680.3 95.3 BALANCE SHEET DISCLOSURES **) DKK million Total assets 36,677 45,962 58,565 63,394 69,268 Loans and advances 19,611 27,134 34,318 40,939 45,376 - bank loans and advances 19,509 27,134 32,409 40,506 43,156 - reverse transactions 102 0 1,909 433 2,220 Deposits 20,658 22,289 26,259 31,416 38,019 - bank deposits 18,418 19,243 22,166 27,387 33,833 - repo transactions 101 155 537 0 0 - deposits in pooled schemes 2,139 2,891 3,556 4,029 4,186 Subordinated debt 1,087 1,693 1,458 1,770 1,652 Shareholders’ equity 2,361 3,039 3,649 4,138 4,024 Contingent liabilities 4,714 6,394 7,017 4,048 4,561 Risk-weighted assets 25,619 31,665 38,289 43,656 42,813 Core capital (incl. hybrid core capital) after deductions 2,176 3,137 3,727 4,098 4,154 Impairment of loans, advances and guarantees 694 688 525 444 606 Non-performing loans 91 41 48 27 48 Business volume 44,983 55,817 67,594 76,403 87,956 *) The definition and breakdown of earnings from investment portfolios and the Danish Banking Sector Emergency Fund, which have been segregated, appear from note 2.