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Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
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Hansabank Group
Erkki Raasuke, CEO3 September 2008
Content
Macro summary
Financial highlights
Asset quality
Baltic macro development
• Baltic growth decelerates– Less favourable global situation, e.g. weaker export demand,
more expensive borrowing– Imbalances built up during the times of rapid credit growth
weigh heavy on the economies, e.g.• Economic structure skewed towards domestic demand • Domestic credit at levels close to those in developed
economies; further rapid growth impossible • Rapid growth has adversely affected credit quality • Excessive optimism turns into deepening pessimism
• Need of restructuring evident– To return to a sustainable growth path, a move away from non-
tradables and towards tradables is necessary: restructuring is costly and takes time
– There are signs of restructuring underway (e.g. shift in investment structure favoring tradables), but it is far from complete
– The deepest slowing likely to be seen in LV where imbalances (e.g. inflation, current account deficit) have been largest
Real GDP growth, % YoY
-5
0
5
10
15
Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08
%
Estonia
Latvia
Lithuania
Domestic Credit and Housing Loans, % of GDP
0
25
50
75
100
Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08
%
EE DomesticcreditEE HousingloansLV DomesticcreditLV HousingloansLT DomesticcreditLT Housingloans
Average Labour Productivity growth, % YoY
-5
0
5
10
15
Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08
%
EstoniaLatviaLithuania
Baltic macro outlook (1)
• Baltic economies were benchmarked against median of main macro variable’s dynamics during busts in industrial countries
• Fall in activity will be shallower and recovery faster than benchmark’s– Less institutional rigidities– Fiscal and monetary policies likely to be less pro-cyclical, support from EU funds– Low actual level of leverage in the economy
• Household consumption will contract due to: – Lower real wage growth– Lower employment– Higher interest rates and tighter credit
• Investment will contract due to– Lower profit margins– Rising cost of borrowing, need to deleverage
• Imports will contract due to shrinking consumption and investment• Recovery in late 2009–2010 depends on global recovery in H2 2009
Baltic macro outlook (2)
• Export development outlook– Major trade partners - only brief slowdown– Growing global demand motivates businesses to shift from non-tradable to tradable
sectors– Producer price inflation of exported goods has swiftly decreased– By 2009 energy prices will have converged to the levels of western Europe– Companies are increasingly investing to improve their productivity thus improving their
resistance to negative shocks– EU funds will support efficiency gains/ productivity
• Real estate market will lag behind overall recovery as consumers will be unsure about the start of recovery and will try to rebuild their depleted savings first
– Despite improving affordability index, prices still too high for general public– Interest rates are rising, which adds to the cost of borrowing– Expectations of price decreases discourages demand– Unsold stocks are building up putting a downward pressure on the price– There are sufficient number of flats in comparison to EU averages
Summary – economy and banking sector
• Baltic economies have strong long term growth potential, e.g.– Average labour productivity being at 60-70% of the EU 27 average provides
ample opportunities for productivity convergence– EU funds are expected to amount to ca 2% of annual GDP till 2013, providing
support to real convergence– Only 15-25% of households have mortgages– Good institutional framework, e.g. in the World Bank’s Doing Business 2008
index Latvia ranked 22nd among 175 countries
• Significant restructuring of the economies and the banking sector is expected - different risk assessment, different pricing and labour lay-offs– Successful return to sustainable growth path and stability achieved only if
successful structural reforms are implemented to boost productivity
Content
Macro summary
Financial highlights
Asset quality
Highlights (continued operations) – Q2 2008
• Net profit EUR 135m in Q2 2008, EUR +20m vs Q1, annual growth 7%• The following factors affected Hansabank’s Q2 performance:
– Positive net effect of one-off transactions– Recovery of trading income to average level– Increase in loan losses mainly in real estate sector
• Hansabank’s results without the effect of one-off transactions was the following: – net profit EUR 108m (-15% YoY)– income EUR 255m (+5% YoY)– operating expenses EUR 108 (+14% YoY)– ROE 21.1% – cost-income ratio 42.3%
• Loans EUR +700m QoQ, 20% YoY• Deposits EUR +157m QoQ, 10% YoY• Net loan losses increased by EUR 8m from Q1 to 55bps
Key financials – Q2 2008
42.3%21.1%-41%
-15%
14%
5%
Norm2
%∆YoY
-10%
7%
-10%
7%
10%20%
Q2%∆YoY
8779EVA
9,1589,242Employees (FTE)
241259Income
9485Expenses
2.91%
39.0%32.1%
126
10,00616,885
Q22007
20,341Loans11,035Deposits
2.69%Net interest margin
32.9%Cost-income26.3%Return on equity1
135Net profit
Q22008
in millions of EUR
1Group ROE based actual equity2Q2 normalized results - for better comparison, changes in main indicators have been normalized by the effect of disposal of Russian companies, disposal of associated company and reversal of bonus
Net income
107 126 125 112 114 135
0255075
100125150
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
Normalized EUR 108m
Cost-income
40% 39% 38%44% 41%
33%30%
40%
50%
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
Normalized EUR 42%
ROE on actual equity
30% 32% 29% 24% 24% 26%15%
25%
35%
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
Normalized EUR 21%
Income and expenses
• Despite increasing financing cost net interest income decreased only EUR 0.8m compared to Q1
• Trading income recovered from poor results to an average quarterly level• Other income includes gain on the sale of PKK• Operating expenses decreased by 10% YoY to EUR 85m in Q208. Expenses include a
reversal of bonus reserve. Without this effect operating expenses grew 14% YoY• Growth in administrative expenses is to a large extent driven by professional services and
related to the bank’s investments to longer-term strategic initiatives.
Income
0
50
100
150
200
250
300
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
EU
Rm
QoQ+7%
YoY+7%
Expenses
0
25
50
75
100
125
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
EU
Rm
QoQ-13%
YoY-10%
Normalized EUR 107m, QoQ +14%
Employee productivity
Revenue per employee cost, Baltic Banking
2
4
6
8
2005 2006 2007 Q1 08 Q2 08Estonia Latvia Lithuania Baltic Banking
• Employee productivity improved in Q2 in all countries though still below 2007 level
• There is no general bonus reserve allocations in 2008 and total employee efficiency has increased from 2007
Benchmarking total revenue to personnel cost
0
2
4
6
Han
saba
nk
SE
B B
altic
SE
BG
roup
Nor
dea
DnB
Nor
Dan
ske
SH
B
Uni
cred
itoC
EE
Rai
ffeis
enIn
t. OTP
San
tand
er
RB
C
BB
VA
RB
S
2004 20052006 2007HBG 2007
Content
Macro summary
Financial highlights
Asset quality
Asset quality and provisioning costsNet loan losses
0%
50%
100%
150%
200%
250%
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 080
5
10
15
20
25
30
EU
Rm
Net loan losses NLL YoY % growth
Net loan losses
-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%
1999 2000 2001 2002 2003 2004 2005 2006 2007 Q108
Q208
Estonia Latvia Lithuania Group
0.55%0.31%0.75%0.58%Q2 08
0.39%0.25%0.54%0.38%Q1 08
0.40%Group0.23%Lithuania0.56%Latvia0.39%Estonia
2007
Net loan losses by country
Net loan losses = (changes in general and special provisions + net write offs) / credit portfolio at the beginning of the year
0.55%0.06%
0.32%0.83%0.98%
0.71%Q2 08
0.31%0.09%incl industry0.57%0.86%incl real estate
0.39%0.16%
0.32%
0.43%Q1 08
0.40%GroupN/Aincl home loans
0.33%Private
0.42%Corporate2007
Net loan losses
Asset quality – overdue more than 60 daysOverdue more than 60-days/12m old
portfolio
0.0%
0.4%
0.8%
1.2%
1.6%
2.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 Q108
Q208
Group
By sector*
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008Real estate, rent Retail and wholesaleConstruction IndustryLogistics and comm Other business services
By client type*
0.0%
0.4%
0.8%
1.2%
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
Private Corporate
By country*
0.0%
0.4%
0.8%
1.2%
1.6%
2.0%
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
Est Lat Lit Group
* Overdues over 60 days / 12 months old portfolio
Hansabank Group companies’ overdues vs market
Estonia - overdue over 60 days / current portfolio
0.0%
0.5%
1.0%
1.5%
2.0%
31.1
2.05
31.0
3.06
30.0
6.06
30.0
9.06
31.1
2.06
31.0
3.07
30.0
6.07
30.0
9.07
31.1
2.07
31.0
3.08
30.0
4.08
31.0
5.08
Rest of the bank market Hansapank (bank only)
Estonia - overdue over 30 days / current portfolio
0.0%0.5%1.0%1.5%2.0%2.5%3.0%
31.1
2.05
31.0
3.06
30.0
6.06
30.0
9.06
31.1
2.06
31.0
3.07
30.0
6.07
30.0
9.07
31.1
2.07
31.0
3.08
30.0
4.08
31.0
5.08
Rest of the bank market Hansapank (bank only)
Latvia - overdue over 30 days / current portfolio
0%
1%
2%
3%
4%
5%
31.1
2.04
31.0
3.05
30.0
6.05
30.0
9.05
31.1
2.05
31.0
3.06
30.0
6.06
30.0
9.06
31.1
2.06
31.0
3.07
30.0
6.07
30.0
9.07
31.1
2.07
31.0
3.08
Rest of the bank market Hansabanka (bank only)
Latvia - overdue over 90 days / current portfolio
0%1%1%2%2%3%3%
31.1
2.04
31.0
3.05
30.0
6.05
30.0
9.05
31.1
2.05
31.0
3.06
30.0
6.06
30.0
9.06
31.1
2.06
31.0
3.07
30.0
6.07
30.0
9.07
31.1
2.07
31.0
3.08
Rest of the bank market Hansabanka (bank only)
Loan growth
0
150
300
450
600
750
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
0%
20%
40%
60%
80%
100%QoQ abs growth YoY % growth
Deposit and lending growth by countries
Estonia Latvia Lithuania
Deposit growth vs market (only resident for Latvia)*
-250
0
250
500
750
1,000
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
Market Hansa
* Market data from respective country central banks and financial supervision authorities. Q208 market information for 2 months only
Group lending by sectors
580
1,050
1,801
1,803
3,110
3,276
0 2,000 4,000 6,000 8,000 10,000
Other*
Construction
Transport
Industry
Retail &Wholesale
Real-estatemgmt
Individuals
EUR
m
-13
-26
21
2
176
249
188
-200 0 200 400
Portfolio, June 2008 Portfolio growth, Q2 08
xx% - share of portfolio and portfolio growth
3%
5%
9%
9%
15%
0%
29%**
42%
16% 31%
4%
-4%
-2%
*Other loans includes loan amount granted to Hansa Leasing Ltd (Russia). As Russian subsidiaries were sold during Q2 this loan no longer is eliminated as intra-group loan.
**Real estate management related portfolio growth includes refinancing of existing loan from Swedbank to Latvian business unit (Nordic real estate group with significant Latvian investments)
43%Mortgage Other
Real estate portfolio• As indicated by internal stress-tests
and portfolio analyses, real estate and in particular residential real estate development is the most sensitive sector in HBG portfolio. ‘Sensitivity’ has started to appear in overdue and default figures of corporate portfolio.
• Around 2/3 from total Real Estate portfolio are cash flow generating properties with good tenant mix. Properties under development process (1/3 from portfolio) are currently affected the most by decreasing prices and liquidity in the market. Hansabank has always strictly restrained from financing speculative type of properties.
• Additional defaults in residential real estate development sector are anticipated in the secondhalf of 2008, but no major surprises are expected due to previously implemented portfolio limitations and individual level monitoring. Restructuring capacity has been put in place.
* Overdues over 60 days / 12 months old portfolio
Real estate management overdues*
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008
Estonia Latvia Lithuania
Group lending by sectors – real estate
Portfolio, June 2008
Estonia
22%
6%
26%
25%
15%
6%
3%
16%
43%
5% 9%
9%
15%
Construction OtherIndividuals TransportIndustry Retail & WholesaleReal-estate mgmt
Latvia13%
10%
38%
22%
15%2%
Lithuania13%
5%
34%
41%
4% 4%
Office
Production&Warehouse
Residential
Retail
Land plots
Other
Sectors under close watch
TransportationTrucking companies are facing problems due to increasing fuel prices and lagging freight rates. This global problem has started to reflect in Hansabank’sprovisions (especially in SME segments) since the beginning of the year.
Retail & wholesaleTrade volumes’ growth rates have slowed down and started to decrease in Estonia and Latvia in Q2 2008 (still growing in Lithuania). There is no substantial impact on portfolio quality yet, but worsening is expected along with decrease in consumption.
Wood processingRaw material price increase coupled with sales price downwards pressure are having a negative impact on Baltic wood processing industry. Current portfolio quality is around average with only few problem cases observed. Additional problems may occur after export duties will be imposed on Russian round wood as there is dependence on imported round wood in Estonia.
Transportation overdues*
0.0%
0.5%
1.0%
1.5%
2.0%
Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008Estonia Latvia Lithuania
* Overdues over 60 days / 12 months old portfolio
Mortgages• Standard mortgage product allows to
issue new loans with maximum LTV below 85% and loan-service ratio below 50%.
• Mortgage portfolio LTV ratios have remained solid at 59% in Estonia, 74% in Latvia and 61% in Lithuania.
• Quality of existing portfolio and each new customer/transaction are evaluated using automated scoring tools.
• Decision making process, product conditions, and pricing are adjusted based on creditworthiness of the clients.
• Sub-prime type of mortgage lending is not practiced in Baltics
22y23y21yAverage maturity
LithuaniaLatviaEstoniaPortfolio, June 2008
61%74%59%Average portfolio LTV
Short-term focuses and actions taken
• Manage credit portfolio in the slowdown– Proactive management of watch-list– Overdue management– Restructuring capabilities– New origination quality
• Implementation of Basel II IRB– Documents supplied, on-site visits ongoing by FSA– Process managed by Swedish FSA
• Operational excellence initiative launched in 2007 to increase efficiency
• Changing brand in the Baltics to Swedbank
Summary
• Short-term challenges– Credit quality– Operational efficiency
• Building capabilities going forward– Cross-border operating model– Business processes for more mature markets
• Committed to fulfilling medium-term goals
Thank you!
Regular process of outstanding loan review
• Portfolio quality improvement measures introduced already at the end of 2006• Real estate sector growth under control, existing portfolio regularly scrutinized• Strengthened risk units
– Increased number of people dealing with problem loans– Strengthened workout team– Improved the quality and increased frequency of portfolio quality reporting
• Set targets for new origination quality• Regular loan review process includes
– Overall portfolio stress test once a year – Portfolio review 2x per year– Quarterly “watch list” report– IRB portfolio scoring 1x per month
• On the individual loan basis:– Client rating review minimum 1x per year
• Rating classes 5 and higher are subject to more frequent assessment– Quarterly financials/covenants assessment– For SME/SSE and private portfolio weekly overdue report (with client names identified)
Credit quality management process• Proactive management of watch list clients
– Private clients - communication on step-by-step actions to take before falling into overdues. Development of standard proactive solutions to ensure serviceability of the credit
– Corporate clients - proactive communication, frequent client meetings and positive attitude to find solutions
• Overdue management - concentrates on time horizon from occurrence of distress situation (either through late payment or on the bases of client information) to moving credit over to restructuring or workout phase. The primary focuses in overdue management is:
– Process design for fast and prudent management of overdues, clear process ownership– Prudent tactics to handle overdue payments. Constant re-evaluation of the tactics on their effectiveness
and adequacy– Clearly set timing and means of client contacts– Build capacity to work with distressed clients and adequate training of employees– Internal target setting and incentives to reach targets– Up to time reporting and follow up on taken activities
• Distressed debt restructuring– Defined tactics of restructuring. Solutions to ensure client serviceability of the debt– Extended capacity to work with distressed clients– Effective solutions for collected collaterals handling
One-off effects on Q2 2008 results
• Following larger one-off events affected Q2 performance:– Sale of Russian business unit. On 12 May 2008, AS Hansapank and AS Hansa Capital entered into
an agreement with Swedbank AB for the sale of OAO Swedbank and Hansa Leasing Ltd. The transfers were made at market value and the sale resulted in a loss of EUR 3m.
– Sale of Pankade Kaardikeskus (Banks’ Cards Center, PKK). In Estonia, Hansapank, SEB Pank and Sampo Pank sold PKK to Northern Europe Transaction Services. Capital gain on the sale of the shares in associated company was EUR 7m.
– Reversal of bonus reserve. The accumulated bonus reserves were reduced by about EUR 20m during Q2 2008 due to excessive accrual in recent years; as a result performance based staff costs in Hansabank decreased with the same amount.
• The one-off effects are recorded at the Hansabank group level and not allocated to country business units.
• Current financial analysis is presented for continued operations (without OAO Swedbank and Hansa Leasing Ltd). All historical ratios have been recalculated for continued operations.
Main export sectors - Estonia
7%15%7%
29%23%6%
9%
7%7%8%3% 7% 16%7%
7%8%
22%24%
6%8%12%
33%33%37%31%
9%9%9%
0%
20%
40%
60%
80%
100%
2003 2005 2007 Q1 08
Food, beverages, tobacco etc Mineral productsChemicals Plastic, rubber, wood etcTextiles, footwear Machinery and equipmentMetals + other
Main export sectors - Latvia
12% 14% 15%4%8%
30% 27% 24%
7%11%
25% 29% 30%
9% 4%6% 8%
9% 7%
9% 23%
0%
20%
40%
60%
80%
100%
2003 2005 2007 Q1 08
Food, beverages, tobacco etc Mineral productsChemicals Plastic, rubber, wood etcTextiles, footwear Machinery and equipmentMetals + other
Main export sectors - Lithuania
17% 15%20% 27% 23%
9%12%7%11% 11% 14% 12%
21%
13%11%
14%7%
7%8%
9%10%
14%15%
10% 8%
22%27% 25%
0%
20%
40%
60%
80%
100%
2003 2005 2007 Q1 08
Food, beverages, tobacco etc Mineral productsChemicals Plastic, rubber, wood etcTextiles, footwear Machinery and equipmentMetals + other
N/A
Export sectors