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Welcome to Landshypotek Bank

Welcome to Landshypotek Bank. 17 June 2019. Table of contents. This is Landshypotek Bank Sustainability Agriculture market overview Financial update Asset quality Capital Adequacy Funding & Liquidity Cover Pool Summary . 1 . This is Landshypotek Bank.

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Welcome to Landshypotek Bank

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  1. Welcome to Landshypotek Bank 17 June 2019

  2. Table of contents This is Landshypotek Bank Sustainability Agriculture market overview Financial update Asset quality Capital Adequacy Funding & Liquidity Cover Pool Summary

  3. 1. This is Landshypotek Bank Executive Summary • Landshypotek Bank’s vision is to enhance life in the countryside • A leading low risk bank in the agriculture and forestry sectors • From 2017 expanding business by introducing mortgage loan to private residential houses • Landshypotek Bank is using proactive strategies to cope with the ever changing environment • Enhance customer focus with efficient customer segmentation to meet different needs and preferences • Continue with development of digital solutions in order to reduce cost of sales and meet customers’ demand • Owner directives: • “Landshypotek Ekonomisk Förening aim to promote member’s financial interests by ensuring that owners and landlords to agricultural and forestry properties receive competitive funding for their business trough the wholly-owned bank” 3

  4. This is Landshypotek Bank Landshypotek Bank’s history 1836 – the first mortgage association is founded in Scania, Skånska hypoteksföreningen 1861 – Sveriges Allmänna Hypoteksbankis founded in order to ease funding 1995 – Landshypotek AB is founded and regional associations are merging into one. Parting “ownership” and “operation” 2014 – a new brand is launched and Landshypotek becomes Landshypotek Bank

  5. This is Landshypotek Bank Landshypotek structure 39 000 members 11 regions General Meeting Board of Directors Nominating Committee General Meeting Board of Directors CEO and management Employees Nominating Committee

  6. This is Landshypotek Bank Landshypotek Bank’s vision Vision Landshypotek Bank finances initiatives for a richer life in the countryside It started in 1836 with the very first building society. By that time, we were already contributing to the development of a living in the countryside The main task is to provide competitive financing and to offer financial services to Sweden's farmers and foresters Landshypotek Bank strives to be a sustainable bank by promoting and supporting the Swedish agriculture and forestry industry by offering solid and sustainable financial services It is also the bank for everyone who wants competitive terms for savings and who wants to contribute to a richer life in the countryside In 2017 Landshypotek Bank decided to increase the customer base by launching a new product, mortgage loan for private residential houses

  7. This is Landshypotek Bank Low risk bank in the agriculture and forestry sectors Key facts Loans outstanding to the agriculture &forestry sectors of SEK 69bn and mortgage loans of SEK 4.3bn 99.5 % of the loan portfolio is first-lien mortgages Deposit is SEK 14.4bn Market leader with about 26 per cent of total lending to the sector Owned by our 39,000 loan customers, who are members of LandshypotekEkonomiskFörening Profit is returned to the agriculture and forestry sectors, through reinvestment in operations and through payment of dividends to members 80,000 customers (deposits and borrowing) 190 employees, 70 account managers – all with a degree in or experience from farming and forestry Offices in 19 regional places S&P Covered Bonds rating AAA, S&P rating (long) A-, Fitch rating (long) A Landshypotek Bank is considered as a systemically important bank and subject to full resolution planning

  8. This is Landshypotek Bank Landshypotek Bank is focusing on proactive strategies to cope with the ever changing environment Environment Strategic focus areas Strategic actions Customer orientation Gradual development towards larger agriculture and forestry units • Enhance customer focus with efficient customer segmentation to meet different needs and preferences • Continue with marketing activities to increase awareness of LandshypotekBank • Clearer product offering for cost efficiency and to meet different segment needs Increase awareness Improve product offering Regulatory burden for banks keeps increasing Improve efficiency Enhance credit approval process and streamline system support Continue with development of digital solutions in order to reduce cost of sales and meet customers’ demand Growth in mortgage loans to achieve greater economy of scale Improve in-house development capabilities and work in cross-functional teams to share knowledge and experience Economy of scale Increase competence

  9. 2. Sustainability • Embedded within the business – providing finance to the agriculture and forestry sectors • Member-owned bank – business model contributes to an economically and socially sustainable society • Swedish agriculture and forestry are important factors in Sweden's climate challenges and goals • High focus on AML even if the bank’s product offering is not traditionally associated with high risk of money laundering or terrorist financing

  10. Sustainability LandshypotekBank focus on sustainability Embedded within the business – providing finance to the agriculture and forestry sectors Main purpose: Provide competitive financing to Swedish agriculture and forestry sectors – requires sustainability through economic, social and environmental responsibility Sustainability considerations are integrated parts of the credit assessment for relevant customers Increased transparency of internal governing policies on website By being member-owned, the bank’s business model contributes to an economically and socially sustainable society Issued the first Swedish green covered bond in May 2018 financing sustainable forestry, SEK 5.25bn Participating in sustainability discussions in the financial market through Swedish Banker’s Association Increased focus on sustainable finance and climate change from EU and other external bodies and organisations – the bank needs to be updated and take actions Together with our customers, we make Sweden grow sustainably by financing the country’s farmers and foresters as well as living outside the main cities

  11. Sustainability Sustainability for Landshypotek Bank Environmental sustainability Economic sustainability Social sustainability • Sound and responsible lending • Simplicity and transparency in credit process – all customers • High ethical standards e.g. conflict of interests, AML and low risk culture • Ethics are included in employee training • Sound profit generation • Profit reinvested or paid as dividend to members and thus returned to agriculture and forestry sectors • Long-term customer relationships – hundred years for a forest to be ready for harvest • Following customers through one generation to next • Sustainable ownership structure – one member one vote • Financing a flourishing and sustainable countryside – in open landscapes, well preserved forests and locally produced food • Job opportunities and living in all of Sweden • Swedish agriculture and forestry are important factors in Sweden's climate challenges and goals • Environmental analysis is required in new commitments • Sustainability risks are key part of the customer analysis • Digital solutions, e.g. new house lending and deposits • Forest is a key factor in the transition to a fossil-free society

  12. Sustainability KYC and AML • The bank’s product offering today consists solely of lending and deposits which traditionally are not associated with high risk of money laundering or terrorist financing • Landshypotek Bank does not offer payment products such as cards and payment accounts. International transactions are also not available • The bank is using a system for monitoring transactions in order to detect suspicious behavior/transactions connected to money laundering/terrorist financing • Landshypotek Bank strengthened the bank’s processes and activities against money laundering and terrorist financing in 2016-2017 • A project during this period contributed to a significantly increased level of customer awareness • External expertise was hired to develop a detailed project plan for the bank and activities in the area of ​​money laundering and terrorist financing. An AML manager has been hired in the first line of defense to implement the project • The policy, guidelines, instructions and templates in the area have been updated so that they are permeated by a proactive approach to achieving customer knowledge and paying attention to deviations in customer behavior

  13. 3.Agriculture market overview • 99% of Landshypotek Bank’s customers are private individuals with personal liability • Structural changes lead to larger units and fewer clients • Stable performance overall despite negative impact from the drought • The drought had a negative impact on prices for farmland

  14. Agriculture market overview Agriculture market overview Swedish agriculture (0,5 % of GDP) and forestry (3 % of GDP) • Business is conducted as sole proprietorship (Sw. enskildnäringsidkare) – due to Swedish legislation on land ownership • Sole proprietorship is a private individual with personal liability • 99% of Landshypotek Bank’s customers are private individuals with personal liability • Customers post collateral with mortgage deed in real estate • Capital intense in relation to turnover and earnings • Structural changes lead to larger units and fewer clients • The structural changes have been gradual and continuing

  15. Agriculture market overview Agriculture market overview Cattle Pork Poultry Dairy Cereals Forestry • Production in Sweden grew more than it did in the rest of the EU in 2018 • Swedish beef’s share of consumption has increased to just over 56 percent in 2018 which was 50 percent five years ago • Increased focus on sustainability, animal welfare and low use of antibiotics in Sweden is the probable cause of higher demand • Swedish production has captured a greater market share of the country’s total consumption of pork meat • Rising prices in the EU for recent weeks is another positive trend • Higher feed prices have squeezed margins for poultry farmers and egg producers • Through the start of the year the price for eggs is five percent higher year-to-year in Sweden, while the price in the EU is 15 percent lower • The price for chicken in the first quarter has remained around five percent higher than in 2018 • Milk production continues to decline while dairy companies show increased willingness to invest • Prices in Sweden and the EU have remained stable through the start of the year • As result of last summer’s drought, recorded harvests in 2018 were at historical lows • The start of the growing season 2019 appears promising, due to large areas of winter wheat in good condition. • Cereal prices in Europe have declined since the autumn and are lower year-on-year • Export prices for timber, pulp and paper have been relatively stable in recent months. There is a potential risk for declining prices in the future • Last year’s heat and droughtcombined with greater infestations of bark beetle have resulted in some negative consequences for forestry

  16. Agriculture market overview Agriculture market overview Land use: • 7 % arable and 70 % forest land • 50 % of the forest is privately owned Fewer but larger farms: • 63 000 agricultural holding (97 500 in 1990), 15 500 full time enterprises • average farm 48 hectares and 85 dairy cows (22 in 1990), large geographical differences • less than 2 % of the economically active population are engaged in farming • 3/4 of farmers are older than 50 years Geographical differences 100 more hours of sunshine here than here Agriculture market overview in Sweden

  17. Agriculture market overview Agriculture market overview Property price development 2010-2018 1Y 5Y Farm land -5% +22% Forestry +3% +18% • Property prices for farmland had a slight decline in 2018, possibly as a result of the year’s drought. The long-term trend is increased price levels. • Average price for forestry properties increased in 2018. The exception was northern Sweden which experienced a slight decline in prices. The five year-trend is increased price levels for all areas in Sweden. *Data source: LRF, referstoonlyopen market purchasesmediated by LRF

  18. 4. Financial update • Stable growth in core business • Stable Net interest income • Cost increase according to plan • Credit losses has positive impact from IFRS9 impairments • Positive contribution from mortgage loans going forward 18

  19. Financial update Stable result • Net interest income was higher in 2017 compared with 2018 due to an one-off effect and a higher resolution fee in 2018. • 2019 Q1 has higher net interest income partly because of increased volume • Investment costs are according to plan.

  20. Financial update Stable growth in loan portfolio, positive effect in NII Loan portfolio, SEKbn Net interest income, SEKm

  21. Financial update Stable cost levels Cost income ratio excl loan losses Total expenses

  22. Financial Update Landshypotek Bank’s low risk business model also reflected in the balance sheet structure Core balance sheet structure

  23. 5. Asset quality Summary • Historically very low loan losses • 99% of customers have personal liability and post collateral with mortgage deed in real estate • Loan portfolio is collateralised with low LTV assets • The value of arable land and forestry compose the vast majority of the collateral • Well diversified portfolio in terms of geographical and business distribution • Exposures are classified out of loan size, turnover and income • Almost 2/3 of the portfolio are mortgages to customers with less than SEK 15m in loans 23

  24. Asset quality Great performance in credit losses due to high asset quality and improved processes Credit losses • Losses in 2018 amounted to SEK 8.0m (0.01%), compared with SEK 12.5m for 2017 (0.02%) • Previous years had higher losses but we are now seeing signs of better performance • Total credit losses since 1985 amounts to SEK 390m which makes an average per year of 0.03% • Continuous review of processes in identifying, monitoring and controlling credit risk in order to avoid potential credit loss • The insolvency department and the workout unit are proactively handling customer insolvency

  25. Asset quality Well diversified portfolio in terms of geographical and business distribution Asset portfolio district distribution, SEKbn Asset portfolio, business distribution, % Average loan per customer is SEK 1.7m

  26. Asset quality Portfolio overview Loan portfolio is collateralisedwith low LTV assets Collateral Loan to value Value 99.5 % of the loan portfolio is first-lien mortgages with LTV of 45 %

  27. Asset quality Exposures are in general classified out of loan size, turnover and income from employment Schematic overview of asset exposure Retail Residential Customers with income from employmentand mortgage loan for house Customers mainly with income from employment, limited turnover from hobbies/business operations Customers 41% Customers 10% Volume 17% Volume 6% LOW SMALL Retail EMPLOYMENT Customers 43% Volume 37% Retail SME Customers with double income from employment and business operations closely associated with the individual LOAN SIZE INCOME TURNOVER Customers 6% Volume 40% Corporate SME Customers with significant turnover in their business operations and larger loans BUSINESS LARGE HIGH

  28. Asset quality Landshypotek is not offering loans for tenant-owned flats Characteristics of Retail Residential & statistics Property price development 2000-2017 • The Retail Residential consists of individuals with income from employment • Majority of customers have more than SEK 300t in income from employment and in average SEK 481t in income • Customers in Retail Residential have low LTV 42% and small mortgage loans, in average SEK 1m per customer • Lending volume SEK 4bn • LandshypotekBank has successfully increased Retail Residential since the launch of mortgage loans • Steepest increase in property prices for tenant-owned flats • Landshypotek accepts only collateral in agricultural real estate (including forestry) and one- and two dwelling buildings

  29. Asset quality Internally used estimates are significantly lower than estimates for capital adequacy Exposure weighted estimates used internally Exposure weighted estimates used for capital adequacy Internally used estimates are significantly lower for PD, LGD and consequently EL. Exposure weighted LTV ratio is 45%. Losses for the total IRB lending portfolio has been 0.03% in average 2012-2018*. *Excladmincosts

  30. 6.Capital adequacy • Stable growth in member contributions • Regulatory deductions has a large effect on the capital base • Strong leverage ratio • Relatively weak CET1

  31. Capital adequacy Increasing equity investments from owners Members’ equity investments in Landshypotek Bank SEKm

  32. Capital adequacy Members contribution • Customers in agricultural and forestry automatically becomes members • Obliged to post initial contribution of at least SEK 500 • Contribution shall reach 4 % of outstanding loan either through voluntary contribution or withhold dividend • Customers will have their contribution paid back three years after final repayment of loan • Repayment of contributions first requires an approval by the board • The approval also needs a confirmation by the Swedish FSA

  33. Capital adequacy Capital development over the years Total capital (SEKm) - Consolidated situation • The deduction regarding AT1 and T2 capital at the consolidated level between 2017 and 2018 are explained by the fact that subordinated loans issued by Landshypotek Bank AB, after a clarification from EBA regarding the scope of Articles 82, 85-88 of CRR, cannot be fully utilized in the calculation of capital at the consolidated level. However, as the utilization rate is calculated based on the surplus of capital compared to capital requirement (sum of pillar 1, pillar 2 and buffers), if the capital requirement were to be identical with the capital base, the subordinated loans would be fully included also at the consolidated level. Deductions

  34. Capital adequacy Higher leverage ratio compared to other banks but lower CET1 Leverage ratio CET1 Cover pol LTV

  35. Capital adequacy Higher riskweights despite lower LTV Riskweights Cover pool LTV Cover pol LTV

  36. Capital adequacy High leverage ratio compared to other banks despite large deductions Leverage ratio Deductions Cover pol LTV

  37. 7. Funding and liquidity • Landshypotek Bank’s low risk business model is also reflected in the balance sheet structure • 13 % of liabilities will be loss absorbing post SNP issuance • Deposits reduce funding need going forward and deposit is now close to 20% of funding • Landshypotek Bank takes a conservative liqudity risk position • Landshypotek Bank has a low appetite for market risk

  38. Funding and liquidity Deposits reduce funding need going forward Funding profile Average maturity 3.1 years Covered bonds 67% Senior + Subordinated 18% Deposits 18% International funding 7%

  39. Funding and liquidity Landshypotek Bank’s low risk business model also reflected in the balance sheet structure Core balance sheet structure SEKbn

  40. Funding and liquidity BRRD implementation  Resolution – Landshypotek critical to financial system On 20 December 2017 the Swedish National Debt Office (the Resolution Authority) decided that Landshypotek Bank is one of nine institutions to be subject to full resolution planning and MREL requirement SNDO preferred resolution strategy: (i) bail in combined with restructuring or (ii) bail in combined with bridge institution All liabilities used by the bank to meet the MREL requirements shall be subordinated The bank must gradually build up the volume of subordinated liabilities required to meet the minimum requirement by 2022 Still some uncertainty whether SNDO will follow BRRD2 Landshypotek Group MREL as percentage of total liabilities and own funds 10.1%. Recapitalization amount is SEK 3 623m The bank plans to issue 4 000m of SNP to have a conservative buffer to the requirement 40

  41. Funding and liquidity Landshypotek Bank’s balance sheet structure after BRRD implementation 13 % of liabilities will be loss absorbing

  42. Funding and liquidity Still solid increase in deposits, currently SEK 14.4bn Deposits, SEKbn Deposit portfolio Member Non member 16% 53% Included in deposit insurance 9% 22% Excluded from deposit insurance

  43. Funding and liquidity Conservative liqudity and market risk position • LCR 686% • NSFR 107% • Stressed liquidity coverage is 229 days, internal limit 180 days • Liquid assets SEK 12.8bn. Duration 2.42 years • High quality assets AAA and AA+ rated Swedish Covered Bonds and Swedish Municipalities • Eligible as collateral for transactions with the Swedish Central Bank • No FX-risk • No option risk • No basis risk • Internal IR-risk limit +/- 10 SEKm, 100 bps parallel shift

  44. 8.Cover pool • Low average LTV • Long term relationship with customers • High degree of amortizing loans • Voluntary OC > 30 %

  45. Cover pool Cover pool Cover pool data (1/2) Rating S&P AAA Interest Lending volume SEK 69 521m Floating 61% Fixed 39% Geographic distribution Sweden 100% Average loan size SEK 704 664 Amortisation Number of loans 98 658 Amortising 98% Number of properties 33 138 Non amortising 2% Substitute Assets SEK 3 975m Mortgage type Swedish Covered Bonds, AAA SEK 800m Agriculture properties 93% Municipalities SEK 3 175m Residential properties 7% Average LTV Cover bonds SEK -53 700m Volume weighted 43% Over Collateralisation SEK 19 796m Over Collateralisation 36.86% 45

  46. Cover pool Cover pool Cover pool data (2/2) Years Month Volume % of volume Seasoning Concentration (borrowers) Loan level 6.28 75 Top 5 SEK 819m 1.18% Customer level 18.95 227 Top 10 SEK 1 403m 2.02% Property level 27.57 331 Top 20 SEK 2 364m 3.40% 46

  47. Cover pool Cover pool Geographical distribution, county % of total volume Stockholm 5% Halland 4% Uppsala 4% Västra Götaland 13% Södermanland 4% Värmland 6% Östergötland 11% Örebro 7% Jönköping 4% Västmanland 2% Kronoberg 3% Dalarna 2% Kalmar 5% Gävleborg 2% Gotland 4% Västernorrland 2% Blekinge 1% Jämtland 2% Skåne 16% Västerbotten 2% Norrbotten 1%

  48. Cover pool Cover pool Loan amount by LTV bucket Stress test LTV – 15% price drop Total change in cover pool – 4.08%

  49. 9.Summary • Landshypotek Bank’s vision is to enhance life in the countryside • A leading low risk bank in the agriculture and forestry sectors • Stable financial performance • From 2017 expanding business by introducing mortgage loan to private residential houses • Landshypotek Bank is using proactive strategies to cope with the ever changing environment • Enhance customer focus with efficient customer segmentation to meet different needs and preferences • Continue with development of digital solutions in order to reduce cost of sales and meet customers’ demand 49

  50. Landshypotek Bank – contacts For further information • Åke Källström • Head of Treasury • ake.kallstrom@landshypotek.se +46 8 459 0487 • Martin KihlbergGeneral Counsel and Chief Sustainability Officer • martin.kihlberg@landshypotek.se+46 8 459 0486 Address Visiting Regeringsgatan 48, Stockholm Postal P.O. Box 14092, SE-104 41 Stockholm

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