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As filed with the Securities and Exchange Commission on February 26, 2016

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

For the transition period from                       to                        

 

Commission file number : 001-8382

 

AKTIEBOLAGET SVENSK EXPORTKREDIT

(Exact name of Registrant as specified in its charter)

(SWEDISH EXPORT CREDIT CORPORATION)

(Translation of Registrant’s name into English)

Kingdom of Sweden

(Jurisdiction of incorporation or organization)

Klarabergsviadukten 61-63, Stockholm, Sweden

(Address of principal executive offices)

contact person:

Susanna Rystedt, Swedish Export Credit Corporation, P.O.Box 194, SE-101 23 Stockholm Email: Susanna.Rystedt@sek.se Phone 46-8-613 85 64, Fax 46-8-20 38 94 (1)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:(2)

 

Title of each class		Name of each exchange on which registered
ELEMENTS SM  Linked to the SPECTRUM Large Cap U.S. Sector Momentum Index developed by BNP Paribas due August 8, 2022		NYSE ARCA, Inc.
ELEMENTS SM  Linked to the Rogers International Commodity Index® — Agriculture Total ReturnSM due October 24, 2022		NYSE ARCA, Inc.
ELEMENTS SM  Linked to the Rogers International Commodity Index® — Energy Total Return SM  due October 24, 2022		NYSE ARCA, Inc.
ELEMENTS SM  Linked to the Rogers International Commodity Index® — Metals Total Return SM  due October 24, 2022		NYSE ARCA, Inc.
ELEMENTS SM  Linked to the Rogers International Commodity Index® — Total Return SM  due October 24, 2022		NYSE ARCA, Inc.
ELEMENTS SM  Linked to the MLCX Biofuels Index (Exchange Series) — Total Return due February 13, 2023		NYSE ARCA, Inc.
ELEMENTS SM  Linked to the MLCX Grains Index — Total Return due February 14, 2023		NYSE ARCA, Inc.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Shares

3,990,000

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes    o No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes    x No

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

x Yes    o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

 

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17    o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

o Yes    o No

 

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TABLE OF CONTENTS

 

PART I	2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS	2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE	2
ITEM 3. KEY INFORMATION	3
ITEM 4. INFORMATION ON THE GROUP AND THE PARENT COMPANY	11
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	25
ITEM 6. DIRECTORS, SENIOR MANGEMENT AND EMPLOYEES	38
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	46
ITEM 8. FINANCIAL INFORMATION	48
ITEM 9. THE OFFER AND LISTING	48
ITEM 10. ADDITIONAL INFORMATION	49
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS	54
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	54
PART II	55
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	55
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	55
ITEM 15. CONTROLS AND PROCEDURES	56
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	57
ITEM 16B. CODE OF ETHICS	57
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	57
ITEM 16D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	58
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	58
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	58
ITEM 16G.CORPORATE GOVERNANCE	58
PART III	59
ITEM 17. FINANCIAL STATEMENTS	59
ITEM 18. FINANCIAL STATEMENTS	59
ITEM 19. EXHIBITS	60

 

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INTRODUCTORY NOTES

 

In this annual report on Form 20-F (the “annual report”), unless otherwise specified, all amounts are expressed in Swedish kronor (“Skr”). See Item 3, “Key Information”, for a description of historical exchange-rates and other matters relating to the Swedish kronor.

 

In this annual report, unless otherwise indicated, all descriptions and financial information relate to the consolidated group consisting of Aktiebolaget Svensk Exportkredit (publ) (Swedish Export Credit Corporation) (the “Parent Company”), including the “State Support System” (the “S-system”), which is described in detail herein, and the Parent Company’s wholly-owned subsidiary Venantius AB (including its wholly-owned subsidiary VF Finans AB) (the “Subsidiary” and together with the Parent Company, “SEK”, the “Consolidated Group” or the “Group”). In certain instances, information relating to the S-system on a stand-alone basis is provided separately. The Consolidated Financial Statements of SEK included in Item 18 (the “Consolidated Financial Statements”) comprise the financial statements of the Parent Company and the Subsidiaries. In certain cases, comparable figures for earlier financial periods are reported in parentheses after the relevant figure for the current period. For example, “(2014: Skr 10 million)” means that the relevant figure for 2014, or as of December 31, 2014, as the context requires, was Skr 10 million.

 

As used herein, the words “we”, “our”, “us” and “ours” refer to the Parent Company or to the Group, as the context requires.

 

The Parent Company is a “public company” within the meaning of the Swedish Companies Act (2005:551). A Swedish company, even if its shares are not listed on an exchange and are not publicly traded, may choose to declare itself a “public company”. Only public companies are allowed to raise funds from the public through the issuance of debt instruments. A public company is required to add the notation “publ” to its name, unless it is evident from the company’s name that the company is a public company.

 

Additional information about SEK, including investor presentations and the Annual Report for the financial year 2015, is available at www.sek.se. Information available on or accessibly through SEK’s website is not incorporated herein by reference.

 

FORWARD-LOOKING STATEMENTS

 

This annual report contains forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These statements include but are not limited to:

 

·                          statements regarding financial projections and estimates and their underlying assumptions;

·                          statements regarding plans, objectives and expectations relating to future operations and services;

·                          statements regarding the impact of regulatory initiatives on SEK’s operations;

·                          statements regarding general industry and macroeconomic growth rates and SEK’s performance relative to them; and

·                          statements regarding future performance.

 

Forward-looking statements generally are identified by the words “expect”, “anticipate”, “believe”, “intend”, “estimate”, “should”, and similar expressions.

 

Forward-looking statements are based on current plans, estimates and projections, and therefore readers should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and SEK undertakes no obligation to update any forward-looking statement in light of new information or future events, although SEK intends to continue to meet its ongoing disclosure obligations under the U.S. securities laws (such as the obligations to file annual reports on Form 20-F and reports on Form 6-K) and under other applicable laws. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and generally beyond SEK’s control. Readers are cautioned that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, forward-looking statements. These factors include, among others, the following:

 

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·                  Disruptions in the financial markets or economic recessions may have an adverse effect on SEK’s ability to repay its debt;

·                  SEK is exposed to credit risk even in normal economic circumstances. Disruptions in the financial markets or economic recessions may further negatively affect the credit quality of borrowers and cause other risk to counterparties, which may cause credit losses or affect the value of assets;

·                  Reduced access to international capital markets for the financing of SEK’s operations, or less favorable financing terms, may have negative impacts on SEK’s profitability and its ability to fulfill its obligations;

·                  SEK may experience negative changes in the value of its assets or liabilities and may incur other losses related to volatile and illiquid market conditions;

·                  SEK’s hedging strategies may not prevent losses;

·                  Fluctuations in foreign currency exchange-rates could harm SEK’s business;

·                  Increasing competition may adversely affect SEK’s income and business;

·                  SEK is exposed to significant operational risk;

·                  Changes in law or regulation may adversely affect SEK’s business;

·                  Risk related to financial reporting and other deficiencies in internal control over financial reporting and disclosure processes could result in errors, affect operating results and cause investors to lose confidence in our reported results;

·                  Developments in emerging market countries may adversely affect the Group’s business;

·                  Negative interest rates may have an impact on SEK’s profitability and

·                  Natural disasters, social and political unrest and other factors beyond SEK’s control may disrupt financial markets and economic conditions in markets that SEK relies on.

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

Not required as this 20-F is filed as an Annual Report.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not required as this 20-F is filed as an Annual Report.

 

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ITEM 3. KEY INFORMATION

 

A                   Selected Financial Data

 

The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and related notes. The consolidated statement of comprehensive income data for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 and the consolidated statement of financial position data as of December 31, 2015, 2014, 2013, 2012 and 2011 have been derived from SEK’s Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standard Board (IASB) (herein “IFRS”).

 

While complying with IFRS, SEK also complies with additional requirements of the Swedish Annual Accounts Act for Credit Institutions and Securities Companies (1995:1559) (ÅRKL), the Recommendation RFR1. Supplementary Accounting Principles for Groups, issued by the Swedish Financial Reporting Board (RFR) and the accounting regulations of Finansinspektionen (the Swedish FSA) (FFFS 2008:25).

 

The following information should be read in conjunction with the more detailed discussion contained in Item 5 “Operating and Financial Review and Prospects”.

 

		Year Ended December 31,
(In Skr mn, unless otherwise stated)		2015		2014		2013		2012(1)		2011(1)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME DATA
Net interest revenues		1,662		1,578		1,555		1,880		1,871
Operating income		2,056		2,078		1,958		1,392		2,500
Operating profit (A)		1,535		1,629		1,408		824		1,889
Net profit (after taxes)		1,187		1,260		1,090		709		1,400
Dividend per share (Skr) (B)		89.22		94.74		81.96		53.29		105.26
Total comprehensive income (C)		1,049		1,494		823		868		1,663
Ratios of earnings to fixed charges (D)		2.31		1.74		1.54		1.23		1.47

 

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(1) Adjusted, please see Item C below

 

(A) Operating profit equals operating income minus personnel expenses, other administrative expenses, depreciation and impairment of non-financial assets and net credit losses. See the Consolidated Statement of Comprehensive Income.

 

(B) The dividend for the year ended December 31, 2015 is to be proposed to the Annual General Meeting which will be held in April 2016, and is subject to approval at that meeting.

 

(C) For the years 2012 and 2011 total comprehensive income was amended in 2013 due to the implementation of IAS 19R.

 

(D) For the purpose of calculating ratios of earnings to fixed charges, earnings consist of net profit for the year, plus taxes and fixed charges. Fixed charges consist of SEK’s interest expenses, including borrowing costs. See also Exhibit 7.1 Statement of Ratios of Earnings to Fixed Charges.

 

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		December 31,
(In Skr mn, unless otherwise stated)		2015		2014		2013		2012 (1)		2011 (1)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA
Total loans outstanding (E)		205,097		218,222		201,477		192,907		195,600
Total assets		280,411		325,166		306,554		313,136		319,702
Total debt		235,644		284,137		270,822		275,650		276,420
of which subordinated		2,088		1,945		1,607		3,013		3,174
Equity (F)		16,828		16,157		14,990		14,380		13,932
of which share capital		3,990		3,990		3,990		3,990		3,990
Number of shares		3,990,000		3,990,000		3,990,000		3,990,000		3,990,000
Total liabilities and equity		280,411		325,166		306,554		313,136		319,702

 

(1) Adjusted, please see item F below

 

(E) Loans outstanding consist of loans due from commercial and financial institutions including loans in the form of interest bearing securities. Certain deposits with banks and states are not a part of total loans, although they are included in the items Loans to Credit Institutions and Loans to the Public in the statement of financial position. For a reconciliation of loans outstanding, see Note 11 to the Consolidated Financial Statements.

 

(F) For the years 2012 and 2011 equity was amended in 2013 due to the implementation of IAS 19R.

 

B                   Foreign Exchange-rates

 

The Group’s presentation currency is the Swedish kronor (“Skr”). The following tables set forth, for the periods and dates indicated, information concerning the noon buying rates for cable transfers in Swedish kronor, expressed in Skr per $1.00, as certified for customs purposes by the Federal Reserve Bank of New York.

 

Calendar Year		High		Low		Average (A)		Period End
2015		8.8390		7.8117		8.4477		8.3524
2014		7.8117		6.3392		6.9339		7.8117
2013		6.8360		6.2940		6.5221		6.5084
2012		7.2850		6.5005		6.7747		6.5156
2011		6.9759		6.0050		6.4941		6.9234
2010		8.0593		6.5145		7.2053		6.7571

 

(A) The average of the exchange-rates on the last day of each month during the period

 

Calendar Month 2015		High		Low
September		8.4607		8.1810
October		8.5365		8.1152
November		8.7395		8.5162
December		8.7025		8.3459

 

Calendar Month 2016		High		Low
January		8.6024		8.5057
February 1st until February 19 th		8.5749		8.344

 

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The noon buying rate on February 19, 2016 was $1.00 = Skr 8.4426

No representation is made that Swedish krona amounts have been, could have been or could be converted into U.S. dollars at the foregoing rates on any of the dates indicated.

 

C                   Risk Factors

 

Disruptions in the financial markets or economic recessions may have an adverse effect on SEK’s ability to repay its debt.

 

SEK’s financial performance, as represented in its statement of financial position and of comprehensive income, may be adversely affected by a number of factors, many of which are outside the Group’s control. Disruptions in the international financial markets and the worldwide recession that we witnessed a few years ago had both direct and indirect effects on SEK’s profitability, asset quality, and its ability to finance its operations. Such future disruptions or global recessions may reduce the Group’s ability to repay its debt.

 

In addition, certain economies around the world are currently in recession and some major countries are experiencing slow growth. The decline in commodity prices are also to a large extent an effect of slower growth in the world, particularly the slowdown in growth taking place in China. This, or any return to recessive conditions in any significant market that has recently emerged from recession, may ultimately impact the industrial development of commercial or industrial entities in countries around the world, which could also affect the business volumes, profitability or asset qualities of the Group. There can be no certainty that measures taken by various governments and monetary authorities will succeed in re-establishing, on a sustainable basis, the conditions necessary for economic growth. Therefore, uncertainty remains as to the future global economic outlook, and many countries’ economies could experience long periods of slow growth or recurring recessions.

 

Additionally, even in the absence of slow economic growth or recessions, other economic circumstances — including, but not limited to, volatility in energy prices, contractions in infrastructure spending, fluctuations in market interest or exchange-rates, and concerns over the financial health of sovereign governments and their instrumentalities — may have negative consequences for the companies and industries that the Group provides financing to (as well as the financial condition of SEK’s financial counterparties) and could, in addition to the other factors cited above, have material adverse effects on the Group’s business prospects, financial condition or ability to fulfill its debt obligations.

 

SEK is exposed to credit risk even in normal economic circumstances. Disruptions in the financial markets or economic recessions may further negatively affect the credit quality of borrowers and cause other to risk counterparties, which may cause credit losses or affect the value of assets.

 

Risks arising from the credit quality of borrowers and counterparties and the recoverability of loans and amounts due from counterparties in derivative transactions are inherent in SEK’s businesses. Consequently, SEK may incur credit losses or delinquency in debt repayments even in normal economic circumstances. Financial market disruptions or economic recessions may further affect SEK’s customers and counterparties, negatively affecting their ability to fulfill their obligations. Market and economic disruptions may affect, among other things, business and consumer spending, bankruptcy rates and asset prices, creating a greater likelihood of impact on an increased number of SEK’s customers or counterparties credit demand or that they may become delinquent in their loans or other obligations to SEK. SEK has, in the recent past, been forced to write down the value of some of its assets as a result of disruptions in the financial markets, and SEK may be forced to do so again in future periods. Such disruptions may affect the recoverability and value of SEK’s assets and may necessitate an increase in SEK’s provisions for delinquent and defaulted debt and other provisions, which could in turn have a material adverse effect on SEK’s business and/or its ability to repay its debts.

 

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Reduced access to international capital markets for the financing of SEK’s operations, or less favorable financing terms, may have negative impacts on SEK’s profitability and its ability to fulfill its obligations.

 

In order to finance its operations, SEK is dependent on the international capital markets, where it competes with other issuers to obtain financing. Although SEK has been able to successfully finance its operations to date, factors outside SEK’s control may have material adverse effects on the Group’s continued ability to obtain such financing or could cause the cost of such financing to increase. Continuing market turmoil and ongoing recessions in certain major countries have made it very difficult for many issuers to obtain financing, especially for debt instruments with longer maturities. Continued market disruptions may make such borrowing more expensive and difficult to obtain, consequently reducing the Group’s profitability and/or its ability to fulfill its obligations. In addition, in the wake of the financial disruptions from 2008 and onwards, there have been proposals of new stricter regulations under the Basel regime with regard to capital adequacy and liquidity coverage. These stricter regulations (many of which have already come into force, while others are expected to become effective in the near future) will mean that, in general, financial institutions will need to have larger own funds in relation to their risk-weighted assets as well as have better matched borrowing in relation to their obligations. Furthermore, tighter rules on which assets can be defined as liquidity reserves as well as stricter requirements on clearing of derivatives are important parts of the regulations. Compliance with such new rules may increase the costs of borrowing for all financial institutions, including SEK.

 

A key factor affecting the cost and availability of financing is SEK’s credit rating. Although the Group currently has favorable credit ratings from various credit rating agencies, those credit ratings depend on many factors, some of which are outside of SEK’s control. Credit rating agencies are also increasing their scrutiny of all issuers, particularly financial institutions. Significant factors in determining SEK’s credit ratings or that otherwise could affect its ability to raise financing include its ownership structure, asset quality, liquidity profile, short- and long-term financial prospects, risk exposures, capital ratios, and prudential measures, as well as government support and SEK’s public policy role. In particular, the public policy role of SEK and corresponding level of government support might receive greater scrutiny from the rating agencies in the near future, as similar institutions within the Nordic region have recently experienced dramatic changes in their government’s definition of their public policy role. Notwithstanding regular confirmation from SEK’s owner (the Swedish State) of its continued support for SEK’s current public policy role, the risk that this view could change in the future cannot be entirely disregarded. Deterioration in any one of these factors or in any combination of these factors may lead rating agencies to downgrade SEK’s credit ratings. If the Group were to experience a downgrade in its credit ratings, it would likely become necessary to offer increased interest margins in the capital markets in order to obtain financing, which would likely substantially lower the Group’s profit margins and earnings, harm its overall liquidity and negatively affect its business and its ability to fulfill its obligations.

 

SEK may experience negative changes in the value of its assets or liabilities and may incur other losses related to volatile and illiquid market conditions.

 

Market volatility, illiquid market conditions and disruptions in the credit markets have during certain periods made it difficult to value certain of SEK’s assets and liabilities. For example, SEK is exposed to changes in fair value due to changes in credit spreads on its own debt and due to changes in currency basis spread, which it has not hedged, and such changes in fair value can have a negative impact on SEK’s results as reported under IFRS, even though SEK historically has not experienced any material realized losses related to such exposures. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the value of such assets or liabilities in future periods. In addition, at the time of any sale of any such assets, the prices SEK ultimately realizes will depend on the demand and liquidity in the market at that time and may be materially lower than such assets’ current fair value. Any of these factors could require SEK to negatively change the carrying amount of such assets or liabilities, which may have an adverse effect on the Group’s financial condition in future periods.

 

SEK’s hedging strategies may not prevent losses.

 

SEK uses hedging instruments in an attempt to manage interest rate, currency, credit, basis and other market-related risks. If any of the variety of instruments and strategies the Group uses to hedge its exposure to these various types of risk is not effective, the Group may incur losses, impairing its ability to timely repay or refinance its debts. In addition, there can be no assurance that the Group will continue to be able to hedge risks related to current or future assets or liabilities in accordance with its current policies in an efficient manner or at all. Disruptions such as market crises and economic recessions may put a strain on the availability and effectiveness of hedging instruments or strategies and could have an adverse effect on SEK’s financial condition and its ability to fulfill its obligations.

 

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Fluctuations in foreign currency exchange-rates could harm SEK’s business.

 

As an international lending institution, the Group is subject to some exchange-rate risk. The adequacy of the Group’s financial resources may be impacted by changes in currency exchange-rates that affect the value in Swedish currency of the Group’s foreign-currency obligations. The values of a majority of the items presented in the statement of financial position are subject to fluctuations as a result of changes in the exchange-rate between the Swedish krona and other currencies, such as the U.S. dollar/Swedish krona and the euro/Swedish krona exchange-rates. Even though the Group carefully monitors and hedges its foreign currency exposures, changes in currency exchange-rates adverse to the Group could harm SEK’s business, its profitability and its ability to repay its debts. Furthermore, SEK does not hedge its exposure towards currency exchange-rate effects related to unrealized changes in the fair value of its assets and liabilities. Also, any strengthening of the Swedish krona against other currencies may reduce demand for the products sold overseas by SEK’s Swedish clients and thus reduce demand for its loans from end-purchasers of such products, or cause such clients to experience increased difficulty in repaying their loans to SEK. Such eventualities could therefore have an adverse effect on SEK’s financial condition and its ability to fulfill its obligations. As part of its ordinary business activities, SEK has a material amount of euro-denominated assets reported in its statement of financial position as well as euro-denominated debt. Because of uncertainty surrounding the capacity of Eurozone countries’ ability to handle the financial problems many of these countries are currently experiencing, the euro may fluctuate against the Swedish krona or any other currency in which SEK has assets or liabilities. SEK might therefore be harmed by such fluctuations in exchange-rates. Recent developments in Russia have had a negative impact on SEK’s customers, while recent developments in Greece have only had indirect effects through their impact on financial markets.

 

Increasing competition may adversely affect SEK’s income and business.

 

Competition in the Group’s business is based on service, product innovation, product features, price, commission structures, financial strength and name recognition. The Group competes with a large number of other credit institutions, including domestic and foreign banks, as well as with the direct or indirect financing programs of exporters themselves. Some of these institutions offer a broader array of products or have more competitive pricing or greater financial resources with which to compete than does SEK. Increasing competition may have significant negative effects on the Group’s financial performance if the Group is unable to match the products and services of its competitors or has to lower its prices or rates in order to compete for customer business, investments or financing. Such changes could have material adverse effects on SEK’s business and its ability to repay its debts.

 

SEK is exposed to significant operational risk.

 

Broadly, operational risk can arise from fraud, errors by employees, failure to document transactions properly or to obtain proper internal authorizations, equipment failures, natural disasters, and information security failures or the failure of external systems such as, for example, those of SEK’s suppliers or counterparties. SEK’s businesses are dependent on the ability to process complex transactions efficiently and accurately. Failure to address operational risk may lead to additional costs, losses or damages to SEK’s reputation which may negatively affect customers’ and investors’ confidence, and thus SEK’s business, financial performance and/or ability to repay its debt. If, for example, SEK failed to properly comply with its obligations under financial guarantee contracts or other credit risk reducing arrangements or if the contracts were not properly drafted, this could result in SEK not being able to effectively seek recourse to such guarantees or other arrangements in the event the relevant borrower was unable to repay its debt to SEK.

 

There is also a risk that SEK’s reputation will be damaged if SEK fails to comply with current legislation and best practices or in any other way fails to meet its commitments, including those that are not explicit. Although operational risks can be reduced by properly documented processes, adequate systems, a culture of sensitivity to risk, compliance with regulations, effective corporate governance and other factors supporting internal control, such procedures may not be effective in controlling each single operational risk SEK faces. A significant failure in managing our operational risk could materially and adversely affect SEK’s business, financial condition, results of operation and/or ability to repay its debt.

 

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Changes in law or regulation may adversely affect SEK’s business

 

SEK’s business is subject to regulation and regulatory oversight. Any significant regulatory development could affect the manner in which SEK conducts its business and SEK’s results of operations.

 

SEK is subject to financial services laws, regulations, administrative actions and policies in each location in which SEK operates. Financial regulators around the world have responded to the recent crisis by proposing significant changes to the regulatory regime applicable to financial service companies such as SEK’s. Changes to the current system of supervision and regulation, or any failure to comply with applicable rules (and particularly those in Sweden) could materially and adversely affect SEK’s business, financial condition or results of operation and/or ability to repay its debt.

 

In December 2010, the Basel Committee on Banking Supervision presented an extensive new package of rules known as Basel III, intended to supersede the previous Basel II standard. As of January 1, 2014, new rules according to Basel III came into force within the European Union by means of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV). The CRR is directly applicable legislation in the European Union. The rules of the CRD IV must be transposed into national law, and the new Swedish laws Credit Institutions and Securities Companies (Special Supervision) Act (2014:968) and the capital Buffers Act (2014:966) were enacted and came into effect as of August 2, 2014. In some cases the new rules are subject to transitional arrangements, while in other cases binding rules are still not finalized. The areas in which rules have yet to be finalized include, but are not limited to (i) the minimum requirements on leverage, particularly the minimum leverage ratio of 3.0 percent which is intended to apply from 2018 and which may be increased following the evaluation period and (ii) minimum requirements on net stable funding, for which the final rules are yet to be finalized, and which are expected to apply from 2018 as well. As for regulations regarding deduction from own funds related to prudent valuation, the final regulatory technical standard has been approved for adoption on February 17, 2016, and could therefore significantly affect the reduction needed to be made from own funds with regard to prudent valuation of financial instruments, even though SEK already in 2015 has applied the standard in accordance with the final draft of the regulatory technical standard. On numerous topics the regulations will be further specified by means of binding technical standards or amended according to stated intentions. The implications of such changes are, as yet, not fully known. Furthermore, the new regulations have introduced a higher level of discretion for national supervisory authorities to impose further capital requirements and such decisions may adversely affect SEK. Finally, the Basel Committee on Banking Supervision continuously releases amendments or revisions to the Basel III standard. Such initiatives, following implementation within the European Union, may also adversely affect SEK.

 

In addition, the European Market Infrastructure Regulation (EMIR) regarding OTC-derivates, central counterparties and trade repositories, came into effect on August 16, 2012. EMIR will impose, in some cases, mandatory central clearing of derivatives. The future clearing obligations according to EMIR will also gradually widen, and the regulation will be further supplemented by means of binding technical standards. During 2016, additional part of the regulation will come into effect related to central clearing of certain OTC-derivatives. SEK are defined as an institution in category 2 in this context, and in November 2015 it was decided that institutions in category 2 will be obliged to clear certain OTC-derivatives from December 2016 for such transactions that was entered into from May 2016. This new regulation may affect SEK’s business by increasing costs and putting restraints on the way SEK can conduct its business with regard to derivatives, if those derivatives are not cleared through a central clearing house. EMIR may thus have a negative impact on cash flows, posting of collaterals, counterparty exposure and financial reporting.

 

Furthermore, from March 2017, it will be compulsory for SEK to post variation margin on non-cleared derivatives. This may result in significantly higher amount of negative cash flows than under the present regulatory environment.

 

The Bank Recovery and Resolution Directive (BRRD) entered into force in the European Economic Area as of January 1, 2015. The BRRD has been fully implemented in Swedish law through the Swedish Resolution Act 2016 (2015:1016) as of February 1, 2016. During 2015 part of BRRD was implemented through regulation by Finansinspektionen (the Swedish FSA) which required the establishment of a contingency borrowing plan by SEK.  As from 2016 all the requirements in accordance with BRRD have been implemented through legislation in Sweden. Pursuant to BRRD, SEK is subject to minimum requirement for own funds and eligible liabilities, which is a parallel requirement to CRR. The minimum requirement is to be determined individually for each institution by the national resolution authority, which in Sweden is Riksgäldskontoret (the Swedish National Debt Office). SEK has not yet been informed by Swedish National Debt Office which minimum requirement that is applicable to SEK, however it is not probable that the requirements will have an significant impact on minimum requirements on SEK’s capitalization.

 

The introduction of a debt write-down tool in accordance with BRRD may lead to debt instruments that could be written down or converted into share capital possibly being priced differently and the risk of a write-down being priced in, even though the principle under the regulation is that investors should not be worse off than under an ordinary bankruptcy process. Resolution action should be taken only where necessary in the public interest and any interference with rights of shareholders and creditors which results from resolution action should be compatible with the Charter of Fundamental Rights of the European Union (the Charter). In particular, where creditors within the same class are treated differently in the context of resolution action, such distinctions should be justified in the public interest and proportionate to the risks being addressed and should be neither directly nor indirectly discriminatory on the grounds of nationality. The effect of the introduction of this debt write-down tool on total capital and financing costs, as well as other possible effects, is however, still difficult to assess.

 

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For risk classification and quantification of credit risk, SEK uses an internal ratings-based (IRB) approach, the IRB Foundation Approach. The Swedish FSA has previously, however, granted the company certain exemptions from the IRB approach. For exposures covered by the exemptions the standardized approach is applied rather than the IRB approach. SEK has permanent exemptions for exposures to Swedish central and regional governments, as well as permanent exemptions for some non-material exposures. For exposures to central and regional governments outside Sweden and to multilateral development banks, SEK has an exemption until December 31, 2015. During 2015 the Swedish FSA has revised it views and will not prolong such exemptions. Therefore, SEK has asked the Swedish FSA for permission to apply an IRB approach for those exposures exempted until December 31, 2015 and until such permission has been granted to prolong the time-limited exemptions. Pillar 1 capital requirements for the exposures covered by the application could increase significantly when an IRB approach is applied.

 

On May 22, 2015, European Banking Authority (EBA) issued guidelines on the management of interest rate risk arising from non-trading activities, or interest risk in the banking book (IRRBB), which came into force on January 1, 2016. The guidelines require a significant higher degree of sophistication with regard to measuring of interest rate risk then previously that may result in increase in capital requirements related to market risk.

 

Other pending regulations that could also have a negative impact on SEK include IFRS 9, which will replace IAS 39 with regard to accounting rules for financial instruments. The implementation of IFRS 9 may lead to higher costs for SEK.

 

Risk related to financial reporting and other deficiencies in internal control over financial reporting and disclosure processes could result in errors, affect operating results and cause investors to lose confidence in our reported results.

 

SEK’s external reporting of financial and non-financial data is reliant on the Group’s internal control over financial reporting including the integrity of systems and people. Failure to report data accurately and in compliance with external standards could result in regulatory action, legal liability and damage to the Group´s reputation. For additional information on SEK’s internal control over financial reporting see Item 15.

 

Developments in emerging market countries may adversely affect the Group’s business.

 

The Group operates in a number of emerging markets and its exposure to such markets has increased in recent years, as the number and importance of investment and trade links between Sweden and emerging markets has increased. Economic and political developments in emerging markets, including economic crises or political instability, may have material adverse effects on the Group’s business prospects, results of operations and/or ability to repay its debt.

 

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Negative interest rates may have an impact on SEK’s profitability.

 

Negative interest rates may result in lower net interest income and might negatively affect the value of assets and liabilities. For example, negative interest rates may render hedges less effective if interest rate is to be paid on the hedge while there is no compensation on the hedged item. Furthermore, increased prepayments on loans and lower spread between rates on assets and liabilities might also have a negative impact on net interest income. Finally, negative interest rates leads to valuation risk due to potential changes in market practice for how to incorporate negative interest rates in the valuation.

 

Natural disasters, social and political unrest and other factors beyond SEK’s control may disrupt financial markets and economic conditions in markets that SEK relies on.

 

In order to finance its operations, SEK is dependent on the international capital markets, where it competes with other issuers to obtain financing. Although this has not been the case to date, natural disasters, such as the 2011 earthquake and tsunami in Japan, and/or social and political unrest, such as that seen in a number of Eurozone countries in recent years as well as in Ukraine and Russia recently, may have material adverse effects on the Group’s continued ability to obtain such financing or could cause the cost of such financing to increase.

 

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ITEM 4. INFORMATION ON THE GROUP AND THE PARENT COMPANY

 

A                    History and Development

 

Aktiebolaget Svensk Exportkredit (Swedish Export Credit Corporation) is a “public company” under the Swedish Companies Act (2005:551). It is wholly owned by the Swedish State through the Ministry of Enterprise and Innovation (“Sweden” or the “State”).

 

The Parent Company was founded in 1962 in order to strengthen the competitiveness of the Swedish export industry by meeting a need for long-term lending for both exporters and their foreign customers. SEK’s objective is to engage in financing activities in accordance with the Swedish Banking and Financing Business Act and, in connection therewith, to promote the development of Swedish commerce and industry as well as otherwise engaging in Swedish and international financing activities on commercial terms. The duration of the Parent Company is indefinite.

 

The address of the Parent Company’s principal executive office is AB Svensk Exportkredit (Swedish Export Credit Corporation), Klarabergsviadukten 61-63, Stockholm, Sweden; and the Parent Company’s telephone number is +46-8-613-83 00.  The Parent Company’s authorized representative in the United States is Business Sweden; Business Sweden’s contact information is as follows:

 

Business Sweden New York

The News Building,

220 E 42 nd  Street

Suite 409A,

New York, NY 10017

Tel. No.: (212) 507-9001

usa@business-sweden.se

 

B                    Business Overview

 

SEK provides financial solutions for the Swedish export industry with the aim of promoting the development and international competitiveness of Swedish industry and trade. Its business activities are focused on lending to Swedish exporters and their customers through corporate lending, export lending, structured financing, project financing, trade financing and leasing. SEK offers its financial solutions to corporations and financial institutions as well as domestic and international investors. SEK extends loans on commercial terms at prevailing fixed or floating market interest rates in “SEK exclusive of the S-system”, as well as loans on State-supported terms at fixed interest rates that may be lower than prevailing fixed market rates in the “State Support System” (the “S-system”). The S-system is administered on behalf of the State by SEK in return for compensation.

 

SEK’s mission has developed over the years since SEK began its operations in 1962. From its roots in export loans, SEK’s product range over time has expanded. However, SEK is still a niche operator in the financial market. SEK works mainly with lending and as a result SEK acts as a complement to banks which are active in Sweden. SEK’s unique position means that SEK works cooperatively with banks and other financial institutions. Over the years, SEK has been active in the creation of new financial solutions. SEK’s niche specialization in long-term export-related financing, combined with its financial capacity and flexible organization, are key factors in the management of its operations. SEK’s borrowing activities in the international capital markets have given SEK expertise in financial instruments.

 

SEK believes that its relationships with domestic, Nordic and other international investors and partners strengthen its ability to develop financial solutions which meet its customers’ requirements. This network of relationships enables SEK to participate in co-financing arrangements.

 

In 2015, SEK’s new lending to Swedish exporters and their customers amounted to Skr 104.6 billion (2014: Skr 57.1 billion), of which end-customer finance amounted to Skr 85.3 billion (2014: Skr 33.9 billion) and the volume of corporate lending was Skr 19.3 billion (2014: Skr 23.2 billion).

 

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The main reason behind the extraordinarily high volume of new lending was our signing of the financing agreement, in the third quarter, for Brazil’s purchase of the Gripen fighter aircraft from Saab. This is SEK’s largest ever lending transaction and comprises a loan from SEK corresponding to a total of Skr 41.9 billion.

 

In summer 2015, demand from Swedish exporters for SEK’s lending increased and continued in the same vein for the entire second half of 2015. SEK’s assessment is that the underlying reason is a combination of rising concern in capital markets around the world and a general increase in Swedish exporters’ activity due to improved economic conditions, particularly in Europe. During 2015, SEK has not only received numerous inquiries, primarily concerning export credits, but also closed many business deals. Another explanation for the increase in new lending is that SEK now reaches more Swedish companies than ever before. Since the start of 2015, SEK’s services have become available to medium-sized exporters, and SEK have dedicated separate resources to assist this group. Several companies have discovered the added value of having another source of financing as a complement to their bank or banks.

 

We are continuing the development of our initiatives in sustainable financing. In 2015, we issued our first green bond for a total of USD 500 million. Our new lending to green projects totalled Skr 988 million in 2015. The underlying projects of the total green portfolio help to reduce carbon dioxide emissions in the world and reflect the Swedish environmental expertise. During the year, we approved loans to five large international projects with characterized by potentially high sustainability risks. These were all subject to our in-depth examination and assessed as meeting OECD guidelines for social and environmental issues. We updated our Sustainable Business Policy to include the Equator Principles as a reference for examining and financing projects. We initiated a project to develop our responsibility for human rights in conjunction with export credits. To improve capital efficiency and because of extremely low margins on liquidity investments, we reduced the size of the liquidity portfolio during the year. However, we continue to have healthy new lending capacity, sufficient to be able to secure long-term financing for Swedish exporters.

 

During 2015, SEK had a credit facility with the Swedish National Debt Office of Skr 80 billion, in order to further enhance the ability to promote the Swedish export industry. SEK has not yet utilized the credit facility. In December 2015, the Swedish parliament decided that the credit facility for 2016 should amount to Skr 125 billion. The credit facility is only available for loans covered by the State’s export credit support (CIRR).

 

The Board of Directors has resolved to propose at the Annual General Meeting that a total dividend of Skr 356 million (2014: Skr 378 million) be paid in accordance with company’s dividend policy.

 

SEK has not made any material capital expenditure, nor engaged in any other material divestitures or acquisitions (including interests in other companies) during the three financial years preceding the date of this report.

 

Competition

 

SEK is the only institution authorized by the Swedish State to grant export financing loans under the S-system. With support from the State, SEK helps Swedish export companies compete with other export companies within OECD member countries which have similar support from their respective domestic export credit agencies, which also provide government-supported export credits. SEK’s lending exclusive of the S-system, faces competition from other Swedish and foreign financial institutions, as well as from direct and indirect financing programs of exporters themselves.

 

The following table summarizes SEK’s loans outstanding, including the S-system and debt outstanding as of December 31, 2015 and 2014:

 

		At December 31,
Skr mn		2015		2014
Total loans outstanding(A)		205,097		218,222
Total debt outstanding (B)		235,644		284,137

 

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(A) Loans outstanding consist of loans due from commercial and financial institutions including loans in the form of interest bearing securities. For a reconciliation of loans outstanding, see Note 11 to the Consolidated Financial Statements.

 

(B) Includes subordinated debt of Skr 2,088 million and Skr 1,945 million as of December 31, 2015 and 2014, respectively.

 

Lending Operations — General

 

The following table sets forth certain data regarding the Group’s lending operations, including the S-system, during the two-year period ending December 31, 2015:

 

		Year ended December 31,
Skr mn		2015		2014
Offers of long-term loans accepted		104,583		57,118
Total loan disbursements		-56,404		-57,495
Total loan repayments		70,777		65,171
Total net increase/ (decrease) in loans outstanding		-13,125		16,745
Loans outstanding		205,097		218,222
Loan commitments outstanding but undisbursed		63,438		16,028

 

(A) If a loan has been accepted by the borrower it can be disbursed immediately. However, disbursement may be delayed due to a number of factors. In some cases, an accepted loan may never be disbursed, including as a result of changes in the commercial and financial institutions’ need for the funds. Currency exchange-rate effects also affect the amount of loan commitments that will result in loans outstanding. Therefore, the volume of loans accepted does not equal the volume of loan disbursements as presented in the Statement of Cash Flows in the Consolidated Financial Statements for a single financial year. Loans accepted but not yet disbursed are presented under the heading “Commitments” as “Committed undisbursed loans”.

 

Total loans outstanding by type of loan:

 

Skr mn		2015		2014		2013		2012		2011
End-customer finance		118,284		128,165		155,137		103,973		101,142
Corporate lending		86,813		90,057		46,340		88,934		94,458
Total		205,097		218,222		201,477		192,907		195,600

 

Most of the loans granted by SEK are granted to purchasers of Swedish exports. Measured by revenues, the largest markets for the export of goods from Sweden are in Western Europe. However, exports to other markets, including less developed markets, are also important. Accordingly, the need for export financing may be related to transactions involving buyers in many different countries, with varying levels of creditworthiness. Pursuant to its credit risk exposure policy, SEK is selective in accepting such risk exposure. This policy seeks to ensure that SEK is neither dependent on the creditworthiness of individual buyers of Swedish goods and services, nor on the countries in which they are domiciled, but rather on the creditworthiness of individual counterparties to which SEK accepts credit risk exposure.  For additional information on SEK’s approach to risk, see Note 26 and Note 29 to the Consolidated Financial Statements.

 

SEK relies to a large extent on guarantees in its lending. The guarantors are principally made up of government export credit agencies, such as the Swedish Exports Credit Guarantee Board (EKN), the Export Import Bank of the United States (USEXIM), the Exports Credits Guarantee Department of the United Kingdom (ECGD), Compagnie Financière pour la Commerce Exterieure (Coface) of France and Euler Hermes Kreditversicherungs AG of Germany, as well as financial institutions and, to a lesser extent, non-financial corporations. Credit risk is allocated to a guarantor in accordance with SEK’s policy and therefore, when disclosing net credit risk exposures, the majority of SEK’s guaranteed credit exposure is shown as exposure to sovereign counterparties. At year-end 2015, government export credit agencies guaranteed a total of Skr 160,0 billion (year-end 2014: Skr 173.5 billion), or 49.0 percent (year-end 2014: 46.9 percent) of SEK’s total credit exposures. Skr 106.2 billion (year-end 2014: Skr 118.8 billion) covered corporate exposures, Skr 1.9 billion (year-end 2014:  Skr 2.6 billion) covered exposures to financial institutions, Skr 0.6 billion (year-end 2014: Skr 0.6 billion) covered exposures to regional governments and Skr 51.3 billion (year-end 2014: Skr 51.5 billion) covered sovereign exposures.

 

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The following tables show SEK’s gross and net credit exposures, respectively, to counterparties by geography and type of counterparty (taking into account applicable guarantees but not collateral) as of December 31, 2015 and 2014.

 

Gross exposure by region and exposure class, as of December 31, 2015

Skr billion		Middle East/Africa		Asia excl. Japan		Japan		North America		Oceania		Latin America		Sweden		West European countries excl. Sweden		Central- East European countries		Total
Central governments		2.2		9.9		—		1.3		—		42.8		1.2		2.2		—		59.6
Regional governments		0.6		—		—		—		—		—		5.6		1.1		0.0		7.3
Multilateral development banks		—		—		—		—		—		—		—		0.0		—		0.0
Financial institutions		2.5		4.7		0.0		4.7		2.2		2.1		13.4		17.6		0.4		47.6
Corporates		20.1		19.9		3.8		26.6		0.3		12.5		67.7		48.7		11.3		210.9
Securitization positions		—		—		—		—		—		—		—		0.8		—		0.8
Total		25.4		34.5		3.8		32.6		2.5		57.4		87.9		70.4		11.7		326.2

 

Gross exposure by region and exposure class, as of December 31, 2014

Skr billion		Middle East/Africa		Asia excl. Japan		Japan		North America		Oceania		Latin America		Sweden		West European countries excl. Sweden		Central- East European countries		Total
Central governments		2.2		8.4		—		0.4		—		43.0		7.9		4.8		0.0		66.7
Regional governments		0.7		—		—		—		—		—		11.8		0.5		—		13.0
Multilateral development banks		—		—		—		—		—		—		—		0.3		—		0.3
Financial institutions		1.5		3.6		0.2		12.5		4.0		2.0		14.2		23.5		0.4		61.9
Corporates		17.6		22.5		14.0		27.0		0.5		12.1		70.2		45.2		12.9		222.0
Securitization positions		—		—		—		1.1		1.2		—		—		4.1		—		6.4
Total		22.0		34.5		14.2		41.0		5.7		57.1		104.1		78.4		13.3		370.3

 

Item 4B Net exposure

 

Net exposure by region and exposure class, as of December 31, 2015

Skr billion		Middle East/Africa		Asia excl. Japan		Japan		North America		Oceania		Latin America		Sweden		West European countries excl. Sweden		Central- East European countries		Total
Central governments		—		4.9		—		5.9		—		0.8		137.6		20.3		3.1		172.6
Regional governments		—		—		—		—		—		—		12.7		1.3		—		14.0
Multilateral development banks		—		—		—		—		—		—		—		0.0		—		0.0
Financial institutions		2.5		4.6		0.5		3.9		2.2		2.1		8.6		27.2		0.4		52.0
Corporates		1.1		1.4		0.5		5.5		—		1.8		60.0		16.3		0.2		86.8
Securitization positions		—		—		—		—		—		—		—		0.8		—		0.8
Total		3.6		10.9		1		15.3		2.2		4.7		218.9		65.9		3.7		326.2

 

Net exposure by region and exposure class, as of December 31, 2014

Skr billion		Middle East/Africa		Asia excl. Japan		Japan		North America		Oceania		Latin America		Sweden		West European countries excl. Sweden		Central- East European countries		Total
Central governments		—		3.5		—		4.4		—		0.8		155.7		23.9		2.6		190.9
Regional governments		—		—		—		—		—		—		18.5		2.4		—		20.9
Multilateral development banks		—		—		—		—		—		—		—		0.3		—		0.3
Financial institutions		1.4		3.3		0.3		11.5		4.0		1.9		9.1		35.6		0.4		67.5
Corporates		0.7		0.9		2.3		5.6		0.1		1.0		58.9		14.4		0.5		84.4
Securitization positions		—		—		—		1		1.2		—		—		4.1		—		6.3
Total		2.1		7.7		2.6		22.5		5.3		3.7		242.2		80.7		3.5		370.3

 

SEK has no exposure to subprime, Alt-A, negative amortizing or other loans that it would characterize as high-risk lending, including loans which have been modified or would otherwise qualify as distressed debt, other than the limited amount of such assets disclosed in Note 9 to the Consolidated Financial Statements.

 

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Provisions for incurred impairment losses are made if and when SEK determines that it is probable that the obligor under a loan, or another financial asset held, and any existing guarantee or collateral, will fail to cover SEK’s full claim. Such determinations are made for each individual loan or asset. Objective evidence consists of significant financial difficulties affecting the issuer or debtor, outstanding or delayed payments or other observable factors, which suggest a measurable decrease in expected future cash flows. If there is objective evidence that an impairment loss on loans or other financial assets has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The amount of the loss is recognized in profit or loss.

 

After such individual determinations have been made and if there is no objective evidence for impairment of an individually assessed financial asset, regardless of whether the asset is individually material or not, SEK includes the asset in a group of financial assets with similar credit risk characteristics and determines collectively any need for impairment of such assets. The need for impairment is related to loan losses which have been incurred as of the balance sheet date but have not yet been identified as individual loan losses. The reserve related to such impairment not linked to a specific counterparty is based on internal assessments of the credit quality of SEK’s assets, as manifested in, among other things, the credit ratings of counterparties, as determined either externally by a credit rating agency or internally in accordance with SEK’s own model for credit rating. If there is objective evidence for a general downward trend with regard to such rating this could constitute evidence for a need for an additional provision.

 

The following tables show SEK’s net credit losses and changes in reserves of financial assets, respectively, for the periods indicated.

 

Net credit losses

 

		For the Year Ended December 31,
Skr mn		2015		2014		2013		2012		2011
Credit losses		-33		-30		-68		-72		-125
Reversal of previous write-downs		279		378		22		37		14
Net impairments and reversals		246		348		-46		-35		-111
Established losses		-211		-277		-3		-2		-4
Recovered credit losses		1		2		10		14		4
Net credit losses		36		73		-39		-23		-111
of which related to loans(1)		35		11		-32		-48		-78
related to liquidity placements(1)		1		62		-7		25		-33

 

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(1)For the definition of loans and liquidity investments, see Note 11 to the Consolidated Financial Statements.

 

Changes in reserves of financial assets

 

		For the Year Ended December 31,
Skr mn		2015		2014		2013		2012		2011
Opening balance		-464		-757		-711		-676		-565
Reserves used to cover write-offs (charge-offs)		-9		-5		—		—		—
Net impairments and reversals		246		348		-46		-35		-111
Currency effects		-9		-50		0		—		—
Closing balance		-236		-464		-757		-711		-676
of which related to loans(1)		-228		-236		-260		-221		-161
of related to liquidity placements(1)		-8		-228		-497		-490		-515

 

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(1)  For the definition of loans and liquidity investments, see Note 11 to the Consolidated Financial Statements.

 

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SEK exclusive of the S-system

 

Outside of the S-system, (or in “SEK exclusive of the S-system,” as we refer to the business of SEK other than the S-system), SEK reports loans in the following categories:

 

Loan Types and Underwriting Policies

 

(a)  Lending to Swedish exporters (corporate lending)

 

(b)  Lending to international buyers of Swedish capital goods and services (end-customer finance)

 

·                  export credits;

 

·                  loans for the funding of export lease agreements;

 

·                  trade finance;

 

·                  project finance

 

SEK’s credit underwriting policies and requirements are similar regardless of loan type. The majority of our loans are guaranteed by export credit agencies or banks, or by credit default swaps issued by banks or other financial institutions.

 

SEK’s initial loan offer and subsequent commitment set forth the maximum principal amount of the loan, the currency in which the loan will be denominated, and the repayment and disbursement schedule.

 

Loans outstanding (exclusive of those under the S-system) as of the dates indicated were distributed among SEK’s various categories of loans as follows:

 

Loans outstanding (exclusive of the S-system) by type of loans:

 

		As of December 31,
Skr mn		2015		2014		2013		2012		2011
End-customer finance		74,207		79,867		111,890		64,474		66,915
Corporate lending		86,813		90,057		46,340		88,934		94,458
Total		161,020		169,924		158,230		153,408		161,373

 

Interest Rates

 

Outside the S-system, export financing is extended at prevailing market rates of interest. The Group normally makes loan offers at a quoted interest rate that is subject to change prior to acceptance of the loan offer (a non-binding offer). When a borrower accepts a non-binding loan offer, the interest rate is normally set at the then-prevailing market rate (which might have changed since the loan commitment was made), and a binding loan commitment arises. Binding offers can also be provided and are offers with a higher degree of commitment to the customer with regard to disbursement of the loan than non-binding offers, regardless of whether the interest rate is fixed or not.

 

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Guarantees and Credit Default Swaps

 

If a guarantee or credit default swap is entered into for risk-mitigating purposes, the instrument protects a pre-defined amount of SEK’s exposure with respect to the principal amount of the underlying loan (and in some cases interest) as long as the issuer of the guarantee or credit default swap is financially sound. The amount so protected is ordinarily 75%-100% of the principal amount.  Most of the counterparties against whom SEK accepts net exposures are rated by one or more of the internationally recognized rating agencies. For export loans, where the ultimate borrower may have relatively low creditworthiness, guarantees from export credit agencies (“ECAs”) and banks are normally used.

 

Loan Maturities

 

SEK was founded in 1962 in order to strengthen the competitiveness of the Swedish export industry by meeting a perceived need for long-term loans for both exporters and their foreign customers. SEK’s historical role and competitive advantage (and one that continues today) has therefore been in the provision of long-term financing in order to promote the Swedish export industry. Since many of the projects the export industry engages in are long-term projects, both with regard to disbursement periods and repayment periods, SEK’s loans often have longer terms than those of normal commercial loan products offered by commercial banks. However, SEK also meets its customers’ needs by providing short-term financing when required. SEK’s loan maturities therefore range from very short-term loans (with terms of three to six months) through loans for as long as 20 or 30 years.

 

Offers granted by the Group for loans that borrowers accepted (exclusive of those under the S-system) were distributed among SEK’s various categories of loans as follows as of December 31, 2015 and December 31, 2014.

 

Offers accepted, type of loan

 

Skr billion		2015		2014
End-customer finance		34.5		28.2
Corporate lending		19.3		23.2
Total		53.8		51.4

 

Of the total volume of offers accepted during 2015, Skr 3.4 billion (2014: Skr 2.8 billion) had not been disbursed at the end of the respective reporting period. If a loan has been accepted by the borrower it can be disbursed immediately. However, disbursement may be delayed due to a number of factors. In some cases, an accepted loan may never be disbursed, including as a result of changes in the customer’s need for the funds. Currency exchange-rate effects also affect the amount of loan commitments that will result in loans outstanding.

 

Currency

 

SEK extends loans in different currencies, depending on the needs of its borrowers. Before the Group makes any loan commitment, it ensures that the currency in which the loan is to be funded is expected to be available for the entire loan period at an interest rate (taking into account the costs of foreign exchange derivatives) that, as of the day the commitment is made, results in a margin that the Group deems sufficient. The Group borrows, on an aggregate basis, at maturities corresponding to or exceeding those of prospective loans. The Group may accordingly decide not to hedge particular loan commitments for movements in interest rate risk until sometime after they are made. Interest rate risks associated with such unhedged commitments are monitored closely and may not exceed interest rate risk limits established by the Parent Company’s Board of Directors. SEK’s policies are described in Note 29 to the Consolidated Financial Statements.

 

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The following table shows the currency breakdown of loan offers accepted for loans with maturities exceeding one year for each year in the two-year period ending December 31, 2015.

 

		Percentage of loan offers accepted
Currency in which loan is denominated		2015		2014
Swedish kronor		34	%	22	%
Euros		14	%	20	%
U.S. dollars		47	%	51	%
Other		5	%	7	%
Total		100	%	100	%

 

S-system

 

The S-system was established by the Swedish State on July 1, 1978, as a State-sponsored export-financing program designed to maintain the competitive position of Swedish exporters of durable goods and services in world markets. With respect to the financing of services, this could relate, for example, to services provided by the exporter to a customer in connection with the export of goods.

 

After a trial period, in April 1984 the Swedish Parliament extended the S-system indefinitely. The S-system today comprises the normal export-financing program at CIRR (Commercial Interest Reference Rate) rates and a concessionary loan program (with a foreign aid element), as more fully described below. Pursuant to arrangements established in 1978 and amended from time to time thereafter, the Group administers the S-system on behalf of the State in return for compensation based mainly on outstanding loan volumes.

 

SEK’s net compensation for administrating the S-system is recognized as part of interest revenues in the statement of comprehensive income.  Pursuant to a resolution adopted by the sole shareholder at the Annual General Meeting in April 2012, the difference between interest revenues and net commission revenues related to lending and liquid assets under the S-system, on the one hand, and interest expenses related to borrowing, all other financing costs and any net foreign exchange losses incurred by SEK under the S-system, on the other hand, are reimbursed by (or paid to) the Swedish State.

 

SEK treats the S-system as a separate operation for accounting purposes. Although the deficits (or surpluses) of programs under the S-system are reimbursed by (or paid to) the State, any loan losses that may be incurred under such programs are not reimbursed by the State. Accordingly, SEK has to obtain appropriate credit support for these loans as well. All of the lending under the S-system is reported on SEK’s statement of financial position. SEK has consequently presented the operations of the S-system in the statement of comprehensive income as the amount of net commission received, accounted for as interest income rather than presenting the gross amounts collected and paid in accordance with the agreement with the Swedish State. In general, loans under the program are made with State guarantees administered by the EKN. All such loans granted by SEK must also undergo SEK’s customary approval process.

 

The following table sets forth the volumes of offers accepted, undisbursed loans at year end, new loans disbursed and loans outstanding at year-end under the various programs in the S-system for each year in the two-year period ended December 31, 2015.

 

The volume of offers accepted in the S-system increased significantly during 2015 as compared to 2014. This is mainly related to one large transaction executed during 2015. Of the total amount of outstanding loans, loans in the S-system amounted to Skr 44.1 billion (year-end 2014: Skr 48.3 billion), representing a decrease of 9 percent from year-end 2014. The decrease of credits in the S-system is partly due to currency exchange-rate effects because of the strengthening of the USD against the Swedish krona during 2015.

 

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		Concessionary Loan Program				CIRR-loans				Total
Skr mn		2015		2014		2015		2014		2015		2014
Offers accepted		—		—		50,825		5,668		50,825		5,668
Not disbursed loans at year-end		40		47		54,598		7,482		54,638		7,529
New loans disbursed		16		10		6,027		7,610		6,043		7,620
Loans outstanding at year-end		949		921		43,128		47,377		44,077		48,298

 

The following table sets forth the volume of loans outstanding in the S-system by type of loan as of December 31 in each of the years indicated.

 

Loans outstanding in the S-system by type of loans

 

Skr mn		2015		2014		2013		2012		2011
End-customer finance		44,077		48,298		43,247		39,499		34,227
Corporate lending		—		—		—		—		—
Total		44,077		48,298		43,247		39,499		34,227

 

Loan Types and Underwriting Policies

 

Within the S-system, SEK extends loans only for the medium- and long-term financing of durable goods exports. S-system lending includes financing in cooperation with intergovernmental organizations and foreign ECAs.   SEK’s credit underwriting policies and requirements for S-system loans are similar regardless of loan type. The majority of these loans are also guaranteed by export credit agencies. SEK’s initial loan offer and subsequent commitment set forth the maximum principal amount of a loan, the currency in which the loan will be denominated, the repayment schedule and the disbursement schedule.

 

Interest Rates

 

Because Sweden is a member of the Organization for Economic Cooperation and Development (the “OECD”), the S-system is designed to comply with the Arrangement on Guidelines for Officially Supported Export Credits of the OECD (the “OECD Consensus”). The OECD Consensus establishes minimum interest rates, required down payments and maximum loan periods for government-supported export loan programs.

 

SEK  offers S-system financing at commercial interest reference rates (“CIRR”) established by the OECD in accordance with the OECD Consensus. The CIRR rates for new loans are subject to periodic review and adjustment by the OECD. The OECD Consensus stipulates that loan offers may remain valid for a period of not more than 120 days. EU rules and Swedish regulations state that the commercial contract must be signed within such 120 day period. Thereafter, the CIRR rate can be locked in for a maximum period of six months in order for the loan agreement to be finalized. No commitment fee is charged by SEK for CIRR loans. The arranging/agent bank, generally a commercial bank, receives compensation of 0.25 percent per annum, based on the outstanding loan amount, to cover its costs for arranging and managing loans.

 

SEK participates with government agencies in an export-financing program (the “Concessionary Credit Program”) financed by the Swedish State to promote exports to certain developing countries, incorporating a foreign aid element of at least 35 percent. SEK has a portfolio of such credits but Sweden is no longer providing new Concessionary Credits under the program. Terms varied according to the per capita income of the importing country.

 

The  aid element is reflected in the form of lower rates of interest and/or deferred repayment schedules, and the Swedish government reimburses SEK through the S-system for the costs incurred as a result of SEK’s participation in such program as well as costs if any in the CIRR financing.

 

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Guarantees

 

In general, loans under the S-system are guaranteed by the EKN. If a guarantee is entered into for risk-mitigating purposes it protects a pre-defined amount of SEK’s exposure with respect to principal (and in some cases interest) as long as the issuer of the guarantee is financially sound. All credits granted by SEK within the S-system must also undergo SEK’s customary credit approval process.

 

Loan Maturities

 

Under the S-system, loan maturities generally range from one year up to 20-30 years.

 

Credit Support for Outstanding Loans

 

The Group’s policies with regard to counterparty exposures are described in detail in Note 29 to the Consolidated Financial Statements.

 

The following table illustrates the counterparties for the Group’s outstanding loans and guarantees as of December 31, 2015 and December 31, 2014. Although most loans fall into more than one category for any given loan, this table reflects only the counterparty (either borrower or guarantor) that SEK believes to be the stronger in terms of creditworthiness.

 

		2015		2014
Loan credit exposure to Swedish State guarantees via EKN(A)		34	%	39	%
Loan credit exposure to Swedish credit institutions(B)		3	%	3	%
Loan credit exposure to foreign bank groups or governments(C)		25	%	20	%
Loan credit exposure to Swedish counterparties, primarily corporations(D)		24	%	24	%
Loan credit exposure to municipalities		4	%	4	%
Loan credit exposure to other foreign counterparties, primarily corporations		10	%	10	%
Total		100	%	100	%

 

---

See “— Lending Operations — General” for information on the geographical distribution of borrowers.

 

(A) EKN guarantees are in substance insurance against losses caused by the default of a foreign borrower or buyer in meeting its contractual obligations in connection with the purchase of Swedish goods or services. In the case of a foreign private borrower or buyer, coverage is for “commercial” and, in most cases, “political” risks. Coverage for “commercial” risk refers to losses caused by events such as the borrower’s or buyer’s insolvency or failure to make required payments within a certain time period (usually six months). Coverage for “political” risk refers to losses caused by events such as a moratorium, revolution or war in the importing country or the imposition of import or currency control measures in such country.  Disputed claims must be resolved by a court judgment or arbitral award, unless otherwise agreed by EKN. In the table above only the particular amount of any given total loan that is guaranteed is listed as such. The amount of any such loan that is not covered by the relevant guarantee is excluded. EKN is a State agency whose obligations are backed by the full faith and credit of Sweden.

 

(B) As of December 31, 2015, loans in this category amounting to approximately 1 percent (2014: 1 percent) of total loans were obligations of the four largest commercial bank groups in Sweden including guarantees in the form of bank guarantees or credit derivatives. The remaining 2 percent (2014: 2 percent) of total loans represented loans to various financial institutions and minor commercial banks in Sweden including guarantees in the form of bank guarantees or credit derivatives.

 

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(C) As of December 31, 2015, principally obligations of other Nordic, Western European or North American bank groups, together with obligations of Western European governments including guarantees in the form of bank guarantees or credit derivatives.

 

(D) As of December 31, 2015, approximately 10 percent (2014: 9 percent) of the total loan credit exposure represented loans to the 20 largest Swedish corporations.

 

See also Note 26 to the Consolidated Financial Statements.

 

Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934

 

SEK has not entered into any new business in or with Iran since 2005.

 

However, it remains one of a number of minority sub-participants via assignment in a single legacy Euro-denominated financing arrangement dating back to 2005 that is led by a major European bank and guaranteed by a European government export credit agency.  The purpose of the financing arrangement was to finance the acquisition by the National Petrochemical Company (“NPC”) of Iran of certain equipment exported from Germany.  The obligations of NPC under the arrangement are secured by the assignment of certain receivables from oil products exported by NPC and its trading subsidiaries to buyers, mostly in Asia.  No funds under the arrangement (which has a contractual maturity of 2019) have been provided to NPC since 2010.

 

SEK’s only relationship to this legacy financing arrangement is as a holder (by means of an assignment by the lead bank) of a sub-participation interest representing less than 10% of the total facility.  SEK’s acquisition of this minority sub-participation interest in 2005 did not violate the provisions of any sanctions or related regulatory regimes applicable to SEK at that time.  SEK is not (and never has been) a party to the contractual arrangements with NPC, has never had any contact with NPC, nor has it ever had any involvement in the contractual arrangements related to, or in the physical settlement of, the oil product exports mentioned above.

 

During 2015, SEK’s sub-participation in this single legacy financing arrangement generated gross revenues of Euro 32,143.27 and net interest revenues of Euro 13,564.41. These amounts represent less than 0.03 percent of SEK’s gross revenues and net interest revenues for the year. SEK is actively exploring the possibility of exiting the arrangement through assignment of its minority sub-participation interest to another participant bank.

 

C           Organizational Structure

 

SEK organizes its activities in one Lending function which serves all customers with all products within SEK’s product range. The Lending function is responsible for all customer relations contacts and  cooperates with a Credit function and a Treasury group. SEK also maintains a risk control unit and a compliance function as well as staff and support functions.

 

Risk Control, Compliance and Internal Audit

 

SEK maintains a risk control unit and a compliance function which operate independently of the business areas. See also Note 29 to the Consolidated Financial Statements. In November 2011, upon the recommendation of the Audit Committee, SEK’s Board of Directors decided, that the independent internal audit function would be outsourced to an external company beginning in 2012. SEK’s Board of Directors has appointed KPMG to be responsible for the independent internal audit function and they have commenced their assignment in January 2012. Their assignment has been prolonged for 2013, 2014 and 2015 as well. The company’s goal in appointing an external party in order to perform the internal audit is to benefit from significant competence and experience in auditing SEK’s compliance with applicable regulations, particularly those regarding capital adequacy and the company’s internal risk model. SEK’s Risk and Compliance Committee, of which the Chief Executive Officer (CEO) is the chairman, has overall responsibility to establish the internal rules for the internal control of the financial reporting and follow-up compliance with the internal control regulations.

 

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Swedish Government Supervision

 

Supervision by the Finansinspektionen (the Swedish FSA)

 

SEK operates as a credit market institution within the meaning of the Swedish Banking and Financing Business Act (2004:297) (the “Act”). As such, it is, individually and on a consolidated basis, subject to supervision and regulation by Finansinspektionen (the Swedish FSA) which licenses and monitors the activities of credit market institutions to ensure their compliance with the Act and the regulations linked to it and such institutions’ corporate charters.

 

Among other things, the Swedish FSA requires SEK to submit reports on a daily, monthly, quarterly, semiannual and annual basis and may conduct periodic inspections. The Swedish FSA also may (but currently does not) appoint an external auditor to participate with SEK’s independent auditors in examining the Group’s and the Parent Company’s financial statements and the management of the Group.

 

In 2011, the Swedish FSA initiated an industry-wide inquiry into financial institutions’ reporting of the financial instruments they hold and certain aspects of their handling of market risk. SEK cooperated with this inquiry and SEK has had a dialogue with the Swedish FSA since, and has regularly informed about the timetable and improvements achieved within this area. In February 2015, the Swedish FSA informed SEK that it expected SEK to enhance its reporting of market risk furthermore and to address certain related issues. During 2015 a program to further improve the risk management capabilities within this area has been initiated. The work is planned to be finalized in 2016.

 

The Swedish National Audit Office may audit the activities that are conducted by the Swedish State in the form of limited companies, if the State as owner has a controlling influence over the activities. The State has such controlling influence over the activities of the Parent Company, which is a limited company. The National Audit Office appointed Authorized Public Accountant Filip Cassel as the auditor for SEK for the period from the 2010 Annual General Meeting up to and including the 2014 Annual General Meeting, with Authorized Public Accountant Anders Herjevik as the alternate for the same period. However, in April 2012 this appointment was terminated due to the fact that Mr. Cassel retired. The Swedish National Audit Office has not appointed a successor to Mr. Cassel.

 

As a credit market institution, SEK is also subject to prudential regulations relating, to among other areas, its capital adequacy, its maximal exposure to any group of interconnected clients and its liquidity position.

 

Prudential requirements

 

As of January 1, 2014, the revised capital adequacy rules of the Basel Committee on Banking Regulation and Supervisory Practices at the Bank for International Settlements (the “Basel Committee”), referred to as Basel III, came into force within the European Union. Basel III was introduced by a legislative package consisting of the Capital Requirements Regulation (CRR)(3) and the Capital Requirements Directive (CRD IV)(4). CRR is directly applicable in Sweden and contains detailed requirements in respect to capital adequacy, liquidity, large exposures, leverage ratio and supervisory reporting. CRD IV was incorporated into Swedish legislation as of August 2, 2014 and covers areas such as principles for prudential supervision, internal assessments of risk and capital, corporate governance, capital buffers, sanctions and remuneration.

 

The current regulations introduced by CRR and CRD IV replace regulations of the previous revision of the Basel accord, Basel II, which had been the prevailing standard since 2007, as it was incorporated into EU and Swedish legislation. On several topics Basel II rules are however still partially or completely in force, due to transistional periods in CRR or CRD IV. CRR, as amended, and CRD IV, as incorporated into national legislation, apply to credit institutions, including SEK, within Sweden and the European Union.

 

(3)  Regulation (EU) no 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) no 648/2012

(4)  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing directives 2006/48/EC and 2006/49/EC

 

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The main structure of Basel III, as well as the previous standard according to Basel II, consists of three “Pillars”, as follows:

 

(i)  Pillar 1 deals with minimum capital requirements for credit risks, credit valuation adjustment risks and market risks as well as for operational risks, based on explicit calculation rules. Under Pillar 1, an institution must at all times have Own funds that in size and composition are sufficient to meet those minimum capital requirements. The capital requirements and the Own funds are calculated in accordance with the CRR (until year-end 2014: Capital Adequacy Act (2006:1371) and the Swedish FSA’s regulations and general guidelines regarding capital adequacy and large exposures (FFFS 2007:1)). The stricter minimum requirements that were introduced with the CRR are subject to transitional arrangements, however the Swedish FSA has chosen to, in most cases, require institutions to comply with those rules immediately according to their respective regulations regarding prudential requirements and capital buffers (FFFS 2014:12). Pillar 1 allows institutions to choose between various alternatives based on their level of development; with regard to credit risks, the standardized approach is the simplest approach. It is similar to the approach required by Basel I, but contains more risk weights, all of which are established by national authorities. Institutions can expand upon the supervisory authorities’ risk weights by using risk assessments from recognized credit rating agencies such as Moody’s, Standard & Poor’s and Fitch. The next level of sophistication under Pillar 1 regarding credit risk is called the Foundation IRB approach (internal ratings-based approach). Under the Foundation IRB approach, the risk weights, and therefore the capital requirements, are partially based on institutions’ internal risk classifications. The Swedish FSA approved SEK’s application to be allowed to use a Foundation IRB approach in February 2007. SEK’s permission to base its capital requirement for credit risk on the IRB approach covers a large proportion of the company’s exposures. Certain exposures are, by permission from the Swedish FSA, exempted from application of the IRB approach, and then the standardized approach is applied instead. SEK has permanent exemptions for exposures to Swedish central and regional governments. SEK was also in 2014 granted a permanent exemption, which superseded a previous temporary but otherwise equivalent exemption, from the IRB approach regarding exposures in the Customer Finance business area. This permanent exemption is subject to the prerequisite that the exposures covered will not have a significant impact on the risk profile of SEK. Also, SEK has time-limited exemptions until December 31, 2015 for its exposures to central and regional governments outside Sweden and to multilateral development banks. SEK has applied to the Swedish FSA for approval of an IRB approach for those exposures with time-limited exemptions. SEK has also applied for a temporary prolongation of the time-limited exemptions until an IRB approach for the affected exposures is approved. Minimum capital requirements for these exposures will increase when, subject to approval from the Swedish FSA, an IRB approach is applied.

 

(ii) Pillar 2 concerns national supervisory authorities’ evaluation of risks and describes requirements on institutions’ processes for risk and capital management. It also establishes the supervisory authorities’ functions and powers. Further, under Pillar 2 each financial institution must identify risks and assess risk management from a wider perspective, to supplement the capital requirements calculated within the scope of Pillar 1. This Internal Capital Adequacy and Liquidity Assessment Process (ICAAP) also takes into account qualitative risks. SEK annually assesses the development of its future capital and liquidity requirements and available capital primarily in connection with the three-year business plan being updated.

 

(iii)  Pillar 3 concerns, and places requirements on, openness and transparency and how institutions, in a broad sense, should report their operations to the market and the public. The disclosure of capital and risk management must follow the requirements of the CRR and some additional regulations issued in Sweden, most notably the above mentioned FFFS 2014:12 (until year-end 2014: the Swedish FSA’s regulations and general guidelines regarding public disclosure of information concerning capital adequacy and risk management (FFFS 2007:5)). SEK reported in accordance with Pillar 3 for the first time in the Annual Report for 2007. Since 2008, SEK has also published a separate report in accordance with Pillar 3:” Capital Adequacy and Risk Management Report, Pillar 3 ”.

 

As mentioned above, CRR also introduces new liquidity standards: liquidity coverage ratio (LCR) and net stable funding ratio (NSFR). LCR requires that a bank holds enough high quality liquid assets to cover their projected net cash outflows in a 30-day stress scenario. The EU Commission has published a delegated act on LCR. The detailed LCR rules came into force on 1 October 2015 with phase-in of 60% in 2015, 70% in 2016, 80% in 2017 and 100% in 2018. In Sweden, the Swedish FSA has progressed faster in liquidity regulations and implemented a tougher LCR requirement already in the beginning of 2013. NSFR requires that a bank maintain a stable borrowing profile in relation to the composition of their assets and off-balance sheet activities under both normal and stressed conditions. Minimum requirements will however not come into force until 2018.

 

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The principal measure of capital adequacy, according to previous (Basel II) and current (Basel III as it is implemented with the CRR) standards, is a capital to risk exposure amount ratio, which compares the Own funds, as defined in the CRR, to the total of risk-weighted exposures, that is assets and off-balance sheet items measured according to the risk level. According to CRR, Own funds consist of three components with different level of quality from a loss absorption perspective. The highest quality is the Common Equity Tier 1 capital, which includes equity capital after certain adjustments and deductions. The next level is the Additional Tier 1 capital which, subject to detailed requirements, consists of some kinds of highly subordinated, perpetual debt or hybrid capital. Tier 1 capital is the sum of Common Equity Tier 1 capital and Additional Tier 1 capital. Tier 2 capital constitutes the third component and consists of, subject to detailed requirements, some kinds of subordinated debt that among other things must have an original maturity no less than five years. The measure on Common Equity Tier 1 capital was formally introduced with the CRR. Most items previously deducted from total Own funds will according to CRR be deducted directly from Common Equity Tier 1 capital. One of the key purposes of the Basel III standards is to improve the quality of the Own funds of financial institutions and to increase transparency standards regarding the different components that comprise the Own funds. The introduction of Basel III with CRR have imposed a narrower definition of Tier 1 capital with stricter requirements on included instrument and an overall focus on Common Equity Tier 1 capital. Also, the CRR introduced stricter capital requirements related to exposures to financial institutions and a new capital requirement for credit valuation adjustment risks, covering additional risks related to derivatives positions.

 

The minimum total capital ratio requirement under Pillar 1 is 8.0 percent, a requirement that not has changed with the CRR. However, the CRR introduced additional requirements on the higher quality components of capital, with a minimum requirement of 4.5 percent and 6.0 percent relating to Common Equity Tier 1 capital and Tier 1 capital, respectively. These additional requirements are subject to transitional arrangements according to CRR, but the Swedish FSA has opted to require financial institutions, including SEK, to fulfill them already as of January 1, 2014. In addition to these minimum ratios there are capital buffers requirements that SEK must meet with Common Equity Tier 1 capital with the result, as of December 31, 2015, that SEK’s actual Common Equity Capital Ratio must exceed 7.7 percent (year-end 2014: 7.0 percent). Failure to meet the additional buffer requirements triggers among other things restrictions on distributions. SEK’s policy is to maintain Own funds well in excess of the regulatory minimum requirements.

 

The Common Equity Tier 1 capital ratio is a new metric that became a required disclosure as of January 1, 2014. This ratio, as it has been disclosed prior to January 1, 2014 has been based on a definition where Common Equity Tier 1 capital consists of Tier 1 capital excluding additional Tier 1 capital (in the form of perpetual subordinated debt). As of January 1, 2014 and henceforth the Common Equity Tier 1 capital is calculated according to CRR, in some cases subject to transitional arrangements. SEK’s Common Equity Tier 1 capital ratio was 21.6 percent as of December 31, 2015 (year-end 2014: 16.9 percent). As of December 31, 2015, SEK’s total capital ratio was 24.5 percent (2014: 19.2 percent), while its Tier 1 capital ratio was 21.6 percent (2014: 16.9 percent). Contributing factors to the increase in the capital ratios are revised risk parameters, reduced exposures from liquidity investments and increases in Own funds due to increased retained earnings.  See Note 25 to the Consolidated Financial Statements for further details on the capital adequacy and capital buffers of SEK.

 

In August, 2013 SEK exercised its right to redeem outstanding perpetual subordinated debt totaling USD 350 million, instruments that up to that time had been included in Additional Tier 1 capital. The reason for the early redemption of these debentures is that, due to regulatory changes that were to be (and subsequently also were) introduced with the CRR, they would not qualify as Tier 1 capital and therefore they would not fulfill an effective function in the company’s capital structure going forward. In November 2013, a Tier 2-eligible bond amounting to USD 250 million with a maturity of 10 years and a redemption option after 5 years was issued.

 

For further information on prudential regulations, and forthcoming changes regarding these, see Note 29 to the Consolidated Financial Statements.

 

Large exposures

 

According to the CRR (until year-end 2014: the Swedish FSA’s regulation FFFS 2007:1), a large exposure refers to an exposure that accounts for at least 10 percent of an institution’s eligible capital, which effectively for SEK is the total of Own funds. The aggregate amount of SEK’s large exposures as of December 31, 2015 was 236.7 percent of SEK’s total Own funds, and consisted of risk-weighted exposures to 18 different counterparties, or counterparty groups, of which the majority relate to combined exposures for which more than one counterparty is responsible for the same payments (year-end 2014: 342 percent and 25 different counterparties or counterparty groups).

 

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In order to monitor large exposures, SEK has defined internal limits, which are monitored daily, along with other limits.

 

AB SEK Securities

 

The Parent Company’s wholly owned subsidiary AB SEK Securities was merged into the Parent Company on December 5, 2014. The subsidiary was previously licensed to conduct a securities business and as such was regulated by the Swedish FSA under the Securities Operations Act. The Parent Company has obtained the same license and is thus now subject to the same regulations and conditions, which follows from such a license. Among other things, the Swedish FSA requires a licensee to submit reports on a regular basis and may request to conduct periodic inspections. The Swedish FSA had the option to appoint (but did not) an external auditor for the subsidiary. Furthermore, AB SEK Securities was also subject to regulation of its capital adequacy and limits on credit to any single customer pursuant to the CRR, as amended, as the Parent Company is now and was before the merger.

 

D           Property, Plant and Equipment

 

SEK’s current headquarters, which occupy approximately 4,490 square meters of office space in central Stockholm, are leased.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A           Operating Results

 

A major part of SEK’s operating profit derives from net interest revenues, which are earned mainly on loans to customers, but also to a lesser extent on liquidity investments. Funding for these assets comes from equity and from securities issued in international capital markets. Accordingly, the key determinants of SEK’s operating profit are: the interest rate on interest-bearing assets, the interest rate of issued securities, the outstanding volume of interest-bearing assets and the proportion of assets financed by equity. The relative proportions of assets funded by debt and equity are also crucial.

 

SEK issues debt instruments with terms that may be fixed, floating or linked to various indices. SEK’s strategy is to economically hedge these terms at floating rates with the aim of matching the terms of its debt-financed assets. The quality of SEK’s operating profit, its relatively stable credit ratings and SEK’s public role have enabled SEK to achieve borrowing at levels that are competitive within the market.

 

In addition to net interest revenues, another key influence on SEK’s operating earnings has been changes in the fair value of certain assets, liabilities and derivatives reported at fair value. The factors that mainly impact unrealized changes in fair value are credit spreads on own debt and basis spreads. The credit spread on own debt is related to the creditworthiness SEK’s investors believe that SEK has. Basis spread is the deviation in the nominal interest rate between two currencies in a currency interest rate swap that depends on the difference between the base interest rate of the currencies.

 

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Operating profit for 2015 amounted to Skr 1,535 million (2014: Skr 1,629 million), a decrease of 6 percent compared to the previous year. The decrease was mainly attributable to lower net results of financial transactions.

 

Critical Accounting Policies and Estimates

 

When applying the Group’s accounting policies, management makes judgments and estimates that have a significant effect on the amounts recognized in the financial statements. These estimates are based on past experience and assumptions that the company believes are fair and reasonable. These estimates and the judgments behind them affect the reported amounts of assets, liabilities and off-balance sheet items, as well as income and expenses in the financial statements presented. Actual outcomes can differ from the estimates and the assumptions made. Please see below for items for which critical estimates have been made. SEK assesses that the judgments made related to the following critical accounting policies are the most significant:

 

·       The functional currency of the Parent Company;

·       The selection of the appropriate valuation techniques when prices from active markets are not available for derivatives and other financial instruments carried at fair value; and

·       The judgment that SEK should be regarded as an agent with respect to the S-system.

 

Furthermore, SEK has identified the following key sources of estimation uncertainty when applying IFRS:

·   Provisions for probable credit losses;

·   Estimates of fair values when quoted market prices are not available; and

·   Valuation of derivatives without observable market prices.

 

The functional currency of the Parent Company

 

SEK has determined that the Swedish krona (Skr) is its functional currency under IFRS. This judgment bears the risk of a change if the net exposure in any currency will increase significantly, and SEK’s statement of financial position as a consequence will become mainly denominated in other currency than the Swedish krona.  In the past the net result of currency exchange-rate effects has not been of a material amount in relation to total assets and liabilities in foreign currency. Due to the economic substance of SEK’s policy of holding assets financed by liabilities denominated in, or hedged into, the same currency, this is not reasonably likely to change in the future.  See Note 1 to the Consolidated Financial Statements for more information and Note 26 to the Consolidated Financial Statements for information on SEK’s positions in foreign currency.

 

The selection of the appropriate valuation techniques when prices from active markets are not available for derivatives and other financial instruments carried at fair value

 

When reporting the amounts of its assets, liabilities and derivatives, as well as its revenues and expenses, assumptions and estimates must be made in assessing the fair value of financial instruments and derivatives, especially where unquoted or illiquid securities or other debt instruments are involved. SEK makes judgments regarding what the most appropriate valuation techniques are for the different financial instruments based on their categories. In all cases, the decision is based on a professional assessment pursuant to SEK’s accounting and valuation policies. If the conditions underlying these assumptions and estimates were to change, the amounts reported could be different. The use of a valuation model demands a validation and thereafter an approval. See Note 26 to the Consolidated Financial Statements for disclosure of change in value of assets and liabilities if the market interest rate rises or falls by one percentage point and see Note 13 to the Consolidated Financial Statements for disclosure of change in value of assets and liabilities if non-observable parameters are changed.

 

The judgment that SEK should be regarded as an agent with respect to the S-system

 

SEK has determined that the S-system should be considered to be an assignment where SEK acts as an agent on behalf of the Swedish State rather than being the principal in the individual transactions. This assessment has been made based on a number of factors such as the following: (i) although it does in form, SEK does not in substance bear risks and make decisions associated with ownership; (ii) SEK does not have discretion in establishing prices; and (iii) SEK receives compensation in the form of a fixed commission. SEK has consequently presented the economic activities of the S-system on a net basis in the statement of comprehensive income, recording the net commission received, rather than the gross amounts collected, in accordance with the instruction from the State. The underlying factors that the assessment has been arisen from the instruction of the State. If the instruction from the State would change, the judgment might change. If SEK were regarded as a principal with respect to the S-system, all revenues and expenses in the S-system would be revenues and expenses of SEK. However, the net effect on SEK’s operating profit would be unchanged. See more information regarding the S-system in Note 24 and Note 1 (d)(i) to the Consolidated Financial Statements.

 

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