Macroeconomic and Banking Sector Developments in Latvia.

Performance of Swedbank in Latvia, Q3 2008.

Māris AvotiņšCEO, Chairman of the Board

6 November, 2008

Swedbank group home markets

3© Swedbank

Overview of the region:Swedbank Group home markets - main facts

• Total population: 9.2m• Private customers: 4.1m• Corp. customers: 284,000• Organisations: 117,000• Branches: 432• Typical market share: 25%• GDP growth 2.7% (2007)• Swedbank Group rating: Moody’s Aa3; Fitch A+, S&P A

Sweden

• Total population: 141.6 m• Private customers: 3 400• Corp. customers: 600• Branches: 6• Niche player in Russian market• GDP growth: 8.1% (2007)

Russia

• Total population: 46.4 m• Private customers: 0.1 m• Corp. customers: 19 000• Branches: 197•GDP growth: 7.6% (2007)

UkraineLithuania

• Total population: 3.4m• GDP growth: 8.8% (2007)• Private customers: 3.0m• Corp. customers: 82,000• Branches: 119• Typical market share: 30%

• Total population: 2.3m• GDP growth: 10.3% (2007)• Private customers: 0.9m• Corp. customers: 58,000• Branches: 73• Typical market share: 30%

Latvia

• Total population: 1.3m• GDP growth: 7.1% (2007)• Private customers: 1.2m• Corp. customers: 92,000• Branches: 86•Typical market share: 50%

Estonia

4© Swedbank

Focus on credit quality and efficiency

Ukraine and RussiaBalticsSweden• Stricter lending criteria• Personal contact with all

customers with loans overdues• Stricter requirements on

minimum margins• Process efficiency measures• Restrictive employment policy• Increased product sales

• More focus on quality than growth

• Implementation of Group credit and risk systems

• Centralized credit decisions• Group procurement process

successfully implemented• Streamlining of distribution

network

• Stricter lending criteria• Balanced goal for loan to

deposit ratio• Personal contact with all

customers with loans overdues• Increased margins for new

lending• Staff reductions• Self-adjusting performance pay

system

Share of lending: 78 % Share of lending: 16 % Share of lending: 2 %

Latvia: Macroeconomic Environment

6© Swedbank

Summary

• Key changes in a baseline forecast for 2009-2010– Recession has set in, lowest point in the business cycle in late in 2009 or early 2010, recovery expected in 2010

• Economic imbalances swiftly improve– Necessity of current account deficit’s financing gap expected to narrow to ca 7% in 2009 from ca 21% in 2007

– Export potential remains strong: despite rising unit labour costs and real effective exchange rates, Latvian exporters have retained their trade shares in the key export markets

– Inflation retreats: wage-inflation spiral breaks

• Labour market – key to adjustment– Labour productivity growth is negative in H1 2008, adjustment still lagging

– Recovery will come through productivity growth, especially via total factor productivity

• Financial market – money market tightens, financial system remains stable– Rising interest rates despite easing monetary policy

– Speculative attack on the lats technically close to impossible due to shallow forward market

7© Swedbank

Baseline forecast: key changes

• Reasons for downward revisions– Deepening and widening of global credit crunch, risk of global

recession• Liquidity squeeze, cost of capital has risen• Slowdown of external demand limits export potential

• Outlook– Recession with the lowest point in H2 2009 or early 2010, sub-trend

positive growth recovery in 2010– Contraction driven by domestic demand: household consumption

recovers very gradually in H2 2010 as unemployment remains high,whereas investments bottom out in late 2009 predominately driven by exporting sectors

– Economic recovery is driven by exports

• Risks to the forecastNegative

• Deeper global recession extending well into 2010• Delays in domestic restructuring build up pressure of

imbalances that may sharply deepen the recession• Domestic financial failures, extraordinary market volatility

induces runs on banks destabilizing the financial systemPositive

• Global economic recovery commences in early 2H 2009• Globally coordinated interventions by authorities effectively stop

disorderly deleveraging, i.e. containing the Minsky moment• Further decrease in world commodity prices

Baseline forecast2004 2005 2006 2007 2008f 2009f 2010f

GDP 8.7 10.6 12.2 10.3 -1.5 … -0.5 -5 … -2 -1 … 2(-2…0) (-2…0) (1...3)

Inflation 6.2 6.7 6.5 10.1 15.5 … 16 5 … 6.5 2 … 4(16.0) (7.5) (4.0)

CAD -12.8 -12.5 -22.5 -22.9 -16 … -14 -9 … -6 -8 … -5(-15 … -13) (-9 … -7) (-8 … -6)

Unemployment 10.4 8.9 6.8 6.0 6 … 7 9 … 11 10 … 12(7.0) (9.0) (8.5)

(…) August 2008 forecasts

Source: CSB and Eurostat, Swedbank calculations

Real Growth of GDP, % YoY

-20

-10

0

10

20

30

2004 2005 2006 2007 2008f 2009f 2010f

GDP Households consumptionGovernment consumption Gross fixed capital formationExports Imports

8© Swedbank

Credit growth slows due to deleveraging

• Lending growth gradually decelerating driven by deleveraging

– Retreating credit demand, e.g.• Expectations of further asset price decreases reduce

willingness to borrow, consumption/ investment is being postponed and/ or precautionary savings are built up

• Rising uncertainty, weakening optimism, rising lending rates

– Weaker supply, e.g.• Global credit crunch raises interest rates and cuts

funding availability• Tighter lending standards in response to domestic

slowdown and global credit crunch

• Outlook– Bank lending expected to grow by 10%...15% in 2008 and

remain flat or possibly even decrease in 2009– Corporate lending expected to pick up in late 2009

depending on recovery in global growth and exports– Household credit growth expected to pick up in 2010 as

households regain their confidence

Domestic credit, % of GDP

0

20

40

60

80

100

Q1

04

Q3

04

Q1

05

Q3

05

Q1

06

Q3

06

Q1

07

Q3

07

Q1

08

Total

Households

Corporate

Domestic credit, % YoY

0

20

40

60

80

100

Q1

04

Q3

04

Q1

05

Q3

05

Q1

06

Q3

06

Q1

07

Q3

07

Q1

08

Q3

08

4

5

6

7

8 Total (l.s.)

Households (l.s.)

Corporate (l.s.)

Average lendingrate, eur, % (r.s.)

Source: CSB, FCMC and Swedbank estimate

Number of transactions with apartments and prices of block house apartments in Riga, EUR/m 2

0

500

1 000

1 500

2 000

Jan.05 Jan.06 Jan.07 Jan.08

Transactions

EUR/m2

9© Swedbank

Current account deficit: smaller external financing necessity

• Current account deficit swiftly narrows as – Trade deficit in goods and services expected to narrow from

21% of GDP in 2007 to ca 13% in 2008 and 7% in 2009 due to decreasing domestic demand

– Net interest payments rise from ca 1% of GDP in 2007 to ca 2% due to higher cost of capital

– Net compensation of employees expected to remain at ca 1.5% of GDP in 2009-2010, i.e. lower than in 2007

– Net dividend payments assumed at 2% of GDP, less than a half of the past few years, due to lower profitability

– Net transfers conservatively assumed at EU pre-accession average level of 2%...3% in 2009-2010, i.e. EU farming subsidies and long-term emigrants’ remittances

• Necessity of external financing to finance the current account deficit shrinks to 6% of GDP in 2009-2010, with the likely funding sources:

– EU structural funds expected at 2%...3% of GDP, according to 2007-2013 EU budget pre-allocation

– Net FDI inflows expected at ca 2%, very conservatively assuming all dividend earnings being withdrawn

– Net other borrowing expected to decrease to ca 5.5% in 2008 and ca 1% in 2009-2010, which could be met by

• Banks’ borrowing, i.e. increasing external debt• Sales of residents’ foreign assets (54% of GDP in

June 2008, excluding BoL reserves)• BoL reserves (18.4% of GDP in June 2008)

Current account, % of GDP

-30

-20

-10

0

10

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

f20

09f

2010

f

Transfers

Dividends, net

Interest (debt &portfolio)Compens.ofemployees, net

Trade in G&S

Current acc.

Source: Bank of Latvia , Swedbank calculations

Financing of current account deficit, % of GDP

-20

-10

0

10

20

30

40

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

f20

09f

2010

f

BoL reserves

Long-term Banks'

Long-term others

Short-term Banks'

Short-term others

FDI retainedearnings, netFDI new capital, net

Other borrowing, net

Capital acc.

Current acc. deficit

10© Swedbank

Foreign trade: competitiveness retained

• Trade balance improves as imports plunge and exports growth (albeit slowing) remains good

– Trade and service deficit improved to 140 LVLm in August, back to the level of June 2006

• 8M 2008 cumulative import growth at -2% yoy reflecting weak domestic demand

• 8M 2008 export growth still above 10% yoy– Imports will contract further as domestic demand

weakens and global commodity prices retreat from their recent highs

– Exports growth will undoubtedly moderate along with slowing global economic growth, but still expected to retain positive nominal growth throughout the cycle

• Export potential remains strong– Latvia has retained and even boosted its share in key

trade partners imports despite the growing unit labour cost and real effective exchange rate

Growth of Goods Exports and Imports in Current Prices, YoY %

-20

0

20

40

60

Jan04

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Exports

Imports

Export market shares, 2001-2007, H1 2008, %

0.00

0.15

0.30

0.45

EU DE SE DK UK FI PL RU0

2

4

6

8

EE LT

Source: CSB, Eurostat, Bank of Latvia

11© Swedbank

Foreign trade: swift improvement through imports

Exports of Goods, LVLm

0 200 400 600

Metal etc.Wood, etc.

Food, agricultural prod.Machines, equipment

TransportChemical products

Textiles, wearing, leather etc.Mineral products

PlasticsFurniture

Builiding materialsPulp and paper

OtherOptical instruments

8M 20078M 2008 -20 0 20 40 60

Annual Growth, %

-60 -30 0 30 60 90

Annual Growth, %Imports of Goods, LVLm

0 300 600 900 1200

Machines, equipmentMineral products

Food, agricultural prod.Metal etc.Transport

Chemical productsTextiles, wearing, leather etc.

PlasticsPulp and paper

Builiding materialsWood, etc.

FurnitureOptical instruments

Other8M 20078M 2008

• Exports show solid growth in all sectors except for– Housing related (wood and furniture): global shock– Textiles due to rising unit labour cost and price of energy: long term trend, as expected

• Imports show across the board drop except for– Food and minerals: result of global price rises earlier this year– Metals, chemicals and optical instruments, which are closely related to exports and reflect global price developments

Source: CSB

12© Swedbank

0.691

0.694

0.697

0.700

0.703

0.706

0.709

0.712

-150

-100

-50

0

50

100

150Intervention, m LVL (r.s.) EUR/LVL (l.s.)Lower band (l.s.) Higher/Lower band (l.s.)

0%

2%

4%

6%

8%

10%

12%

14%

Jan.07 Apr.07 Jul.07 Oct.07 Jan.08 Apr.08 Jul.08 Oct.08

3m Rigibor-Euribor spreadRIGIBOR 1mRIGIBOR 3mEURIBOR 3m

LVL/EUR exchange rate, BoL interventions and interbank interest rates• Shortage of the lats is driving rates up, the Bank of Latvia easing monetary policy

– The Bank of Latvia cut reserve requirements on liabilities over 2 years from 6% to 5% and for other liabilities from 8% to 7%, effective from Oct24. Further easing of monetary policy likely

– The lats interest rates have risen sharply due to outflows and uncertainty related to FX intervention

• Long term stability depends on macro adjustment

– A successful speculative attack on currency close to impossible (e.g. very shallow forward market) but sustainable growth and swift EMU entry requires restructuring of the economy and productivity growth

Devaluation rumors

BoL restricts access to liquidity and its forward market activities LVL denominated loans

converted into EUR, BoL intervenes

Liquidity tightening, still high credit growth

State Treasury runs down accrued

budget surplus

FX interventions drive % rates up

BoL announces cuts in reserve

requirement from 8% to 7%

BoL announces cuts in reserve

requirement from 7% to 6%

Financial market: money market tightens

BoL announces cuts in reserve

requirement from 6% to 5%

13© Swedbank

Financial system remains stable• Devaluation is not a policy decision

– Any benefits unlikely: strong inflationary effect, high labour mobility, imports already contracting, export competitiveness remains good

– Would produce a deep negative real shock: share of forex denominated loans at ca 80% of GDP (ca 90% of domestic credit), the lats denominated deposits ca 21% of GDP

• Financial system is robust to withstand global credit crunch– Support from parent banks available– Banks’ short term foreign assets other than deposits (e.g.

syndicates) at 23.9% of GDP in June 2008– BoL reserves at 18.4% of GDP in June 2008– Government external debt at 6.6% of GDP in June 2008

Resident deposit structure, %

0

20

40

60

80

100

Q1

04

Q3

04

Q1

05

Q3

05

Q1

06

Q3

06

Q1

07

Q3

07

Q1

08

others

USD

EUR

LVL

Domestic credit structure, %

0

20

40

60

80

100

Q1

04

Q3

04

Q1

05

Q3

05

Q1

06

Q3

06

Q1

07

Q3

07

Q1

08

others

USD

EUR

LVL

Source: the Bank of Latvia and FCMC

International investment position w/o FDI, % of GDP

0

20

40

60

80

100

120

140

A L A L A L

2006 2007 June 2008

BoL reserves

Short-term others

Banks nonresident demanddep.Short-term Banks, non deposit

Long-term others

Long-term Banks

14© Swedbank

Labour market: key to adjustment

• Despite Latvia entering a recession, labour market adjustment still lagging

– Average labour productivity shrinking for the second quarter in a row (-1.7% and -3% YoY in Q1 and Q2 2008)

– Unemployment expectations are rising fast, while unemployment rate inched up only marginally

– Labour hoarding is squeezing companies’ profits and reducing their financial agility, making deleveraging more difficult and potentially introducing a drag on the future recovery

– Unemployment to rise significantly very soon, e.g. anecdotal evidence: layoffs are rising, although official statistics do not illustrate it yet

• Inflation retreats, wage-inflation spiral breaks – Demand side inflation factors disappear as domestic

demand continuously weakens– Inflation is over its peak and core inflation decelerates– Lower world prices help disinflation

Labour Market Indicators, %

0

5

10

15

20

25

Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08-5

0

5

10

15

Harmonised unemployment rate, n.s.a. (l.s.)Official real net wage growth, YoY (l.s.)Labour productivity growth, YoY (r.s.)

Consumer Price Inflation, %

0

5

10

15

20

Jan.04 Jan.05 Jan.06 Jan.07 Jan.08-1

0

1

2

3

Contribution of core inflation, pp (l.s.)Total inflation, YoY (l.s.)Total inflation, MoM (r.s.)

Source: CSB and Eurostat

15© Swedbank

Real Convergence: progress so far

• Real convergence a success: incomes relative to the Euro area up by ca 75% over the last 10 years driven by

– Initial macro stabilisation and structural reforms of the 1990s to eliminate inefficiencies inherited from central planning

– And further enhanced by EU accession (e.g. more efficient legal/ institutional framework, product and financial market integration, EU funds’ support, falling risk premium)

• GDP per capita convergence due to– Better labour utilisation (comparison to 2007):

• Employment up by 118k since 1997• Participation rate up to 62% from 54% in 1997

for the age group of 15–74 • Population down by 6.7% (i.e. -163k) while the

share of population in working age up to 79% from 75% in 1997

– Productivity growth on average 6.4% pa over 1997–2007, which explains just over ¾ of GDP per capita growth

EMPLGDP

POPWAEMPL

POPPOPWA

POPGDP

××=

GDP percapita Labour utilisation Average

labourproductivity

where POP – population POPWA – working age population EMPL – employment

Source: CSB and Eurostat; Swedbank calculations

GDP per capita & average labour productivity

-5

0

5

10

15

20

25

30

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

H1

08

0

10

20

30

40

50

60

Real GDP per cap., YoY % (ls) EMPL / POPWA., YoY % (ls)POPWA / POP., YoY % (ls) Av. lab.prod., YoY % (ls)GDP per cap., PPS, % of EA (rs) Av. lab.prod., % of EA, (rs)

16© Swedbank

Real Convergence: progress so far

• Productivity growth largely in line with the neo-classical growth theory, i.e. labour vs. capital abundance and convergence of factor prices

– Using Cobb-Douglas production function with constant returns to scale and α=0.36 we see that capital-labour ratio has contributed ca 2/3 of productivity growth or on average 4.5% pa

– Contribution of TFP on average 1.9% pa, which is the lowest between the EU8 countries (see Arrabitel et al (2008))

• Still huge growth potential– Average labour productivity significantly less than 50%

of the euro area average: must discount for a longer working week and ca a half fewer part-time workers than in the euro area countries

– Recovery will come through growth of total factor productivity as investments decrease due to rising cost of capital and employment shrinks

– Huge potential to be realised via TFP

TFPCAPITALEMPLGDP ××= − αα )1(

TFPEMPL

CAPITALEMPLGDP

×⎟⎠⎞

⎜⎝⎛=

α

Averagelabour

productivity

Total factorproductivity

Capital deepening

Source: CSB; Swedbank calculations

Capital / labour ratio and total factor productivity, YoY %

-4

-2

0

2

4

6

8

1996 1998 2000 2002 2004 2006 H1 08

Total factorproductivity

Capital /labour

Swedbank in Latvia. Q3 2008 Performance.

Market Developments.

18© Swedbank

Summary

• Strong performance of Swedbank in 9M 2008

– Strong revenues from core business

– Relatively stable margins

– Asset quality materially better than the market

– Focus on expense management

• Lending business

– Portfolio growth slowed

– Focus on risk management – minimizing credit losses

– Continuous monitoring and proactive work with problem clients and industries

– Stricter new lending policies

• Saving and investment products

– Focus on resident deposits

– Growing market shares in investment products

• Business priorities 2009

19© Swedbank

Strong performance in 9M 2009

EUR million 9M 2008 9M 2007 +/-

Net interest income 164,6 151,4 9%

Net commission income 43,7 38,0 15%

Trading income 22,8 23,4 -3%Other income 6,7 4,6 44%

Total income 237,8 217,4 9%

Personnel expenses 44,5 40,3 11%Other expenses 46,5 36,8 27%

Total expenses 91,1 77,1 18%

Profit before loan losses 146,7 140,3 5%Net credit losses 35,2 15,9 121%

Pre tax profit 111,5 124,4 -10%Income tax 16,9 17,4

Net profit 94,6 107,0 -12%

20© Swedbank

Lending margins2,65%

2,48%2,10%

1,89%

1,88% 1,64%

0,93%0,78%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

Q1 07 Q2 07 Q3 07 Q4 07 1Q 08 2Q 08 3Q 08

Estonia Latvia Lithuania Sweden

Net Interest Margin (NIM)

2,78%2,76%

2,95%

2,72%

2,76%2,94%

1,5%

2,0%

2,5%

3,0%

3,5%

Q1 07 Q2 07 Q3 07 Q4 07 1Q 08 2Q 08 3Q 08Estonia LatviaLithuania w/o bond portfolio revaluation

Deposit margins

2,35%

1,51%

2,54%

2,07%2,12%

2,36%

1,34%

1,25%

0%

1%

2%

3%

4%

5%

Q1 07 Q2 07 Q3 07 Q4 07 1Q 08 2Q 08 3Q 080%

2%

4%

6%

8%

10%

Estonia (ls) Latvia (ls) Lithuania (ls)Sweden (ls) Rigibor 1M (rs)

Deposit margin = (FTP-interest expense)/average depositsLoan margin = (interest income-FTP)/average loans

Net income drivers: stable NIM and margins

Revaluation effect

2.90% in 3Q 08

Deposit margins• Growing proportion of more expensive time deposits • Deposit margins follow RIGIBOR trend

Lending margins • New lending priced to reflect higher funding costs• Transferring higher funding costs to existing clients takes time

21© Swedbank

NLL by products

Financing portfolio

Net loan losses (NLL)

• NLL calculated as annualized net credit losses to portfolio at the beginning of the period

0.90%0.91%1.08%0.76%Q3 08

0.55%0.31%0.75%0.58%Q2 08

0.39%0.25%0.54%0.38%Q1 08

0.40%Baltic Banking0.23%Lithuania0.56%Latvia0.39%Estonia

2007NLL by country

Net income drivers: asset quality

0,00%

0,50%1,00%

1,50%

2,00%

2,50%3,00%

3,50%

1M 07

2M 07

3M 07

4M 07

5M 07

6M 07

7M 07

8M 07

9M 07

10M07

11M07

12M07

1M08

2M08

3M08

4M08

5M08

6M08

7M08

8M08

9M08

Corporate lending Mortgage lending Consumer f inance

0,00%

0,25%

0,50%

0,75%

1,00%

1,25%

1,50%

1,75%

Jan07

Feb07

Mar07

Apr07

May07

Jun07

Jul 07

Aug07

Sep07

Oct07

Nov07

Dec07

Jan08

Feb08

Mar08

Apr08

May08

Jun08

Jul08

Aug08

Sep08

NLL monthly NLL YTD

2%

34%

10%

1%4%

13%

4%

33%

MortgageConsumer financeOtherLarge corporateSMEOtherPrivate car leasingCorporate ABF ABF

Corporate lending

Private lending

22© Swedbank

Swedbank overdues over 90 days 3.6 times lower than for other Latvian banks as of June 30, 2008

• Swedbank level 0.91%, total market – 2.63% => other banks 3.24% (calculated based on Swedbank’s market share)

Drivers of higher overdues are largely cyclical

Net income drivers: credit losses much lower than in the market

Delayed principal amount and interest payment starting from the 1st overdue day

1,15%

0,70%

1,15%

0,74%0,71%

0,27%

0

50

100

150

200

250

300

Q2 06 Q4 06 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08

mill

ion

EU

R

0,00%

0,25%

0,50%

0,75%

1,00%

1,25%

1,50%

% fr

om p

ortfo

lio

total market overdues, in mEUR total Swedbank overdues, in mEUR

total market overdues, % from portfolio total Swedbank overdues, % from portfolio

Overdues: Swedbank vs. market (%)

1,84%

2,63%

0,09%

0,91%1,16%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Market over 90 days, % of portfolio Sw edbank over 90 days, % of portfolio

•Decrease in consumer confidence •High inflation

•Slower GDP growth•Lower domestic consumption level

23© Swedbank

Revenue & expense drivers

ROE and CI43% 46%

37% 40% 38%

26%32%

23% 28% 26% 27% 23% 20% 16%20%13%

43%38% 34% 35%

40% 36%

0%

20%

40%

60%

Q106

Q206

Q306

4Q06

Q107

Q207

Q307

Q407

Q108

Q208

Q308

555,5541,9526,9518,6Number of active private customers, th

57,856,554,852,9Number of corporate customers, th

Q1 08 Q2 08 Q3 082007

Revenue growth vs 9M 2007, EUR m

Revenue drivers• Stable income from core businesses• Growing number of clients

Expense drivers

• Adjustment of expenses to keep stable cost-income ratio

• 10% employee adjustment program implemented in October

• Lagging effect in administrative expenses

Expense growth vs 9M 2007, EUR m

6

13

2

217

9M 07 NII fees

-1

9M 08othertrading

238

+9%

55

4

9M 07 OtherPersonnel

91

Admin

77

9M 08

+18%

Number of employees

2489 2484 24762499 2517

2433 2415

25022476

2445

2300

2400

2500

2600

2007 J 08 F 08 M 08 A 08 M 08 J 08 J 08 A 08 S 08 O 08

-10% Oct’08

24© Swedbank

In 9 months banks earned EUR 293m, i.e. EUR 87m less than in 9M 2007 (-23%) • Market returns to steady growth rates• Administrative expenses rising• More expensive funding• Provisions increased

Swedbank the most profitable in LatviaNet profit market shares

9M 2008

SEB15,6%

Parex6,0%

Nordea7,3%

DnB NORD6,5%

ab.lv7,3%

Other banks21,7%

Sw edbank35,7%

Lending market sharesSeptember 2008

SEB14,4%

Parex11,4%DnB NORD

10,1%

Nordea12,1%

ab.lv4,1%

Other banks21,6%

Sw edbank26,4%Largest banks - net profit

108

64

38 3341

18 21

46

24 21 18 21 19

105

0

20

40

60

80

100

120

Sw edbank SEB RietumuAizkraukles Parex Nordea DnB Nord

EURm

9M 20079M 2008

Net profit

272

188

108

105

0 50 100 150 200 250 300 350 400

9M 2007

9M 2008

EURmSwedbank Others

25© Swedbank

Mortgage portfolio, EUR m

167234

684322159

1 9451 8511 382

13

25

52

0

500

1 000

1 500

2 000

2 500

2003 2004 2005 2006 2007 Sep 2008

Mortgage loans High margin loans

Mortgage margin

0%

1%

2%

2005 2006 2007 Mar 08 Jun 08 Sep 08

Mortgage market share

27,1%27,5%

24,5%

23,0%

27,3%27,6%

29,8%

27,1%

20%

22%

24%

26%

28%

30%

32%

2003 2004 2005 2006 2007 Mar 08 Jun 08 Sep 08

Stable margins• Low pressure from competitors• Transferring higher funding costs to customers• Ability to increase margins if contract change initiated by the

client

Long term potential• Only 18% of households in Latvia have mortgage loans

Lending portfolio: mortgage lending (1)

26© Swedbank

Most of overdues come from people employed in industries most sensitive to slowdown in economics

• Trade and personal service, RE, transportation

• Data quite precisely reflect latest information in media about lay-offs in these particular sectors

Stricter lending conditions applied to new lending

• Precise risk profile of clients

• Avoiding risky industries

• Improved quality of new lending in 2Q and 3Q

Mortgage clients risk scores

• Rating 1 - 3- very good clients

• Rating 4 - 5- good clients

• Rating 6 - 7- medium-risk clients

• Rating 8 - 9 monitored clients

• Rating 10 - 12 risky clients

Mortgage overdues, % of 12 month old portfolio

0%

1%

2%

3%

4%

Sep 07 Dec 07 Mar 08 Jun 08 Sep 08

LV >60 days LT >60 days EE >60 days

Lending portfolio: mortgage lending (2)

Mortgage risk profile

0%

10%

20%

30%

40%

50%

60%

1 2 3 4 5 6 7 8 9 10 11 12

Portfolio, Dec 07Portfolio, Sep 08New sales, September

27© Swedbank

Yield and margin

5%

10%

15%

20%

2005 2006 2007 Mar 08 Jun 08 Sep 08

Margin Yield

Consumer financing portfolio, EUR m

157

7340

254238

0

100

200

300

2004 2005 2006 2007 Sep 08

Consumer overdues, % of 12 month old portfolio

0%

2%

4%

6%

8%

Sep 07 Dec 07 Mar 08 Jun 08 Sep 08

LV >60 days LT >60 days EE >60 days

Portfolio growth slows, margins driven by funding cost

• Margin decreases in short term due to fixed interest ratecontracts and increasing funding costs

Portfolio quality has not changed substantially in the last months

• Watch list creation

• Restructuring possibilities rather limited. Sale of debitor contractspreferred

Lending portfolio: consumer financing

28© Swedbank

Corporate financing market share (resident)

31,5%

28,3%

25,6%

29,3%29,5%29,6%

21,8%

26,0%

30,1%

27,6% 27,5% 27,7%

20%

25%

30%

35%

2004 2005 2006 2007 Mar 08 Jun 08

Corporate f inancing Corporate lending

Corporate lending margin

1%

2%

3%

2005 2006 2007 Mar 08 Jun 08 Sep 08

Corporate financing portfolio, EUR m

247

421

571682

2 0321 160681

2 9712 515

0

1 000

2 000

3 000

4 000

2004 2005 2006 2007 Sep 2008

Bank lending portfolio ABF portfolio

Corporate financing market shares (by industries)

25,2%

33,0%

27,7%

25,0%

28,8%

36,6%

23,6%

14,2%10%

20%

30%

40%

2005 2006 2007 Mar 08 Jun 08

Manufacturing Trade Real estate Agriculture

Lending portfolio: corporate financing (1)

29© Swedbank

Main industries in large corporate overdues are real estate and production

• Proportion of RE in large corporate portfolio is slowly decreasing and in Sept’08 was 37.5%

Main industries in SME overdues are transportation and production

• Limited new financing in problematic industries• Pro-active monitoring of customers in these industriesMonitoring targeted risk distribution of clients • Stricter lending conditions applied to new lending based

on customer ratings• Restrictions in force for lending to customers in ratings 5

and 5-Large corporate risk profiles• Rating 1 - 2- low-risk portfolio• Rating 3 - 4- moderate-risk portfolio• Rating 5 - 5- vulnerable-risk portfolio• Rating 6 - 7 high-risk and non-performing loans

Corporate overdue loans

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

Dec 07 Mar 08 Jun 08 Sep 08

31-60 days 61-90 days over 90 days

Lending portfolio: corporate financing (2)

Large corporate risk profile

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

1 1- 2 2- 3 3- 4 4- 5 5- 6 6- 7

Portfolio, Dec-07 Portfolio, Sep-08

Construction; 11%

Industry; 17%Real estate; 33%

Trade (incl. repairs); 13%

Transport and communication; 8%

Other; 18%

30© Swedbank

• Credit portfolio losses are recognised through special and portfolio provisions• Main guidelines for estimating provisions:

• Key regulations for provision estimation are: provisioning principles and provisioning rates• Supplementary regulations are: LGD methodology and rating methodology • General and special provision rates are regularly back-tested

product specific LGDOverdue >90 daysFixed rate based on product typeRetail

fixed LGD (based on asset type for leasing)Overdue >90 daysFixed rate for all portfolioSME

Individual assessment based on Net present value (based on discounted value of revalued collateral and cashflow)

Rating 6 - 7default frequency (based on rating) * LGD (based on credit analyst estimate)Large corporate

Special provisioning for impaired assetsImpairment triggerPortfolio provisions

(for performing portfolio)Portfolio segment

LGD – loss given default

Risk management: provisioning principles

31© Swedbank

Strengthening risk management capability

• Enhanced risk managment training for business units

• Built capacity to work with distressed clients

Portfolio monitoring

• Improved quality and increased frequency of portfolio quality reporting

• Regular loan review process includes

– Overall portfolio stress test

– Portfolio review

– Proactive “watch list” report

– IRB portfolio scoring once per month

• On individual loan basis

– Regular client rating review (rating classes 5 and higher - more frequent assessment)

– Quarterly financials/covenants assessment

– For SME/SSE and private portfolio regular overdue report (with client names identified)

Risk management: quality monitoring (1)

32© Swedbank

New sales quality management

• Set targets for new origination quality (based on rating/score, RLSR and LTV)

• Limitation of sales to sectors under watch

• Internal target setting and incentives to reach targets

Proactive management of watch list clients

• Introduction of preventive and after-sales activities: proactive communication, frequent client meetings

• Development of standard proactive solutions to ensure serviceability of the credit

Overdue management

• Immediate communication with client: Internet bank, SMS, telephone calls

• Constant re-evaluation of the tactics on their effectiveness and adequacy

Distressed debt restructuring

• Defined tactics of restructuring

• Effective solutions for collected collaterals handling

Risk management: quality monitoring (2)

33© Swedbank

Deposit market in Latvia: Swedbank focuseson resident business and has higher share of more profitable demand deposits

Deposits by source

0

4 000

8 000

12 000

16 000

Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208

mill

ion

EU

R

Private, resident Corporates, residents

Private, non-resident Corporates, non-residents

56%

44%

Nearly half of total deposits in Latvia from non-residents

• Non-resident deposits make 16% of private, and 61% ofcorporate deposits

• Swedbank focuses on resident market - resident deposits make 92% of deposit portfolio

Swedbank demand deposit share in total deposits higher than market average

• Swedbank share of demand deposits higher than average on the market, i.e. 59.5% and 52,0% respectively

Global financial market developments influence Latvian deposit market

• In September total deposits of the Latvian banks declined by EUR 367 million, while Swedbank deposits declined by EUR 88 million

Demand deposits share from total deposits

52,3%56,3%59,0%52,0%

71,6% 67,6% 62,7% 59,5%

0%

20%

40%

60%

80%

100%

Sep 07 2007 Mar 08 Jun 08Market Sw edbank

34© Swedbank

Total deposit margins4,8%

3,1%

2,0%

3,7%3,4%

3,9%

0,4%0,6%

1,1%

0,1%

0,6%3,0%

3,9%

7,2%

5,7%

4,2% 4,5%

0%

1%

2%

3%

4%

5%

2005 2006 2007 Mar 08 Jun 08 Sep 080%

2%

4%

6%

8%

Demand deposit margin (ls) Time deposit margin (ls)Rigibor 1M (rs)

Private deposits, EUR m

195282

490

761716 655 676 600

731353237167

702649476

733

0

300

600

900

1 200

1 500

2003 2004 2005 2006 2007 Mar 08 Jun 08 Sep 08

Private time deposits Private demand deposits

Deposit market share

31,3%

30,2%27,3%

29,8%29,6%30,2%

27,2%27,7%28,1%

25,8%

30,2%

31,5%

25%

27%

29%

31%

33%

35%

2004 2005 2006 2007 Mar 08 Jun 08Private resident deposits Corporate resident deposits

Corporate deposits, EUR m

372 510687 872

932 847 797 720

32817197111 22014590

2940

300

600

900

1 200

2003 2004 2005 2006 2007 Mar 08 Jun 08 Sep 08

Corporate time deposits Corporate demand deposits

• Deposit campaigns, more competitive interest rates andflexible pricing to improve market position

Saving and investment products: deposits

• Number of time deposit contracts increased by 28% fromSeptember 2007, reaching 112,500 on September 30, 2008

35© Swedbank

Assets under management, EUR m

12785

62

274

205

0

100

200

300

2004 2005 2006 2007 Sep 08

Market share by customers

38%39% 39% 38%30% 33%

37%

21%

5%5%5%

20%19%16%

0%

10%

20%

30%

40%

50%

2004 2005 2006 2007 Mar 08 Jun 08 Sep 08

Pension second pillar Pension third pillar

Life insurance market share by customers

10%11%

6%

14%13%11%

16%

0%

5%

10%

15%

20%

25%

2005 2006 2007 Mar 08 Jun 08 Aug 08 Sep 08

Hansa funds • Financial market developments put pressure on growing assets

under management• Investors move to less risky investments incl. deposits

Pension second pillar• Swedbank the largest P2P manager in Latvia• Attracting large part of newcomers due to successful student

programme “Open” Pension third pillar• Effective sales campaigns• Growing number of programme participants

Saving and investment products: assets under managment growth impacted by financial market conditions

36© Swedbank

Business priorities 2009

1

2

Manage credit portfolio through the cycle

Build domestic funding base

4

5 Talent retention and development

Build new operating model in Baltic banking

3 Improve operational efficiency and productivity

Thank you!

38© Swedbank

Appendix

39© Swedbank

56 55 54

15 1514

982 2 2

Q1 Q2 Q3

79

Other

Net fees

Trading

81

Net interest income

677

Total revenue

1317 16

1315

16

29

Q3

33

Q2

30

Personnel exp

Other exp.

Q1

Operating expenses

Performance by quarters

EUR millions Q1 2008 Q2 2008 Q3 2008Net interest income 56 55 54Net fees 14 15 15Trading 8 9 6Other 2 2 2Total revenue 79 81 77

Personnel exp -16 -15 -13Other exp. -13 -17 -16Total operating exp. -29 -33 -30

Net loan losses -8 -11 -16

Net income 38 31 27

40© Swedbank

1 078 1 286 1 562 1 862 2 146 2 359 2 507 2 639 2 719 2 782 2 8481 689

1 9632 172

2 5612 797

3 004 3 232 3 297 3 408 3 614 3 821

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08

milli

on E

UR

Private financing portfolio +14% Corporate financing portfolio +18%

Construction; 11%

Industry; 17%Real estate; 33%

Trade (incl. repairs); 13%

Transport and communication; 8%

Other; 18%

by currencies

1 886 2 299 2 730 3 378 3 859 4 4365 114

689772

859912

975816

792 709 682 688 703

4 849 5 319 5587 5821

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08

mill

ion

EU

R

EUR LVL USD Other

by customer type

Lending portfolio: structure

Car leasing; 8%

Consumer finance; 9%

Mortgage; 78%

Other; 5%