roadshow, carnegie, erkki raasuke

8/8/2019 Roadshow, Carnegie, Erkki Raasuke

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Hansabank Group

Erkki Raasuke, CEO3 September 2008


2/28

Content

Macro summary

Financial highlights

Asset quality


3/28

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 developedeconomies; 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 iscostly and takes time

There are signs of restructuring underway (e.g. shift ininvestment 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 Domestic

creditEE Housing

loansLV Domestic

creditLV Housing

loansLT Domestic

creditLT Housing

loans

Average Labour Productivity growth, % YoY

-5

0

5

10

15

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

%

Estonia

Latvia

Lithuania


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Baltic macro outlook (1)

Baltic economies were benchmarked against median of main macro variables dynamics duringbusts in industrial countries

Fall in activity will be shallower and recovery faster than benchmarks

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 20092010 depends on global recovery in H2 2009


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Baltic macro outlook (2)

Export development outlook

Major trade partners - only brief slowdown

Growing global demand motivates businesses to shift from non-tradable to tradablesectors

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 theirresistance to negative shocks

EU funds will support efficiency gains/ productivity

Real estate market will lag behind overall recovery as consumers will be unsureabout 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


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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 providesample opportunities for productivity convergence

EU funds are expected to amount to ca 2% of annual GDP till 2013, providingsupport to real convergence

Only 15-25% of households have mortgages

Good institutional framework, e.g. in the World Banks Doing Business 2008index 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


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Content

Macro summary


Asset quality


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Highlights (continued operations) Q2 2008

Net profit EUR 135m in Q2 2008, EUR +20m vs Q1, annual growth 7%

The following factors affected Hansabanks 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

Hansabanks 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


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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

Q2

2007

20,341Loans11,035Deposits

2.69%Net interestmargin

32.9%Cost-income

26.3%Return on equity1

135Net profit

Q2

2008in millions of EUR

1

Group ROE based actual equity2Q2 normalized results - for better comparison, changes in main indicators have been normalized by the effect of disposal ofRussian companies, disposal of associated company and reversal of bonus

Net income

107126 125 112 114

135

0

25

50

75

100

125

150

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

NormalizedEUR 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

NormalizedEUR 21%


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Income and expenses

Despite increasing financing cost net interest income decreased only EUR 0.8m comparedto 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 areversal of bonus reserve. Without this effect operating expenses grew 14% YoY

Growth in administrative expenses is to a large extent driven by professional services andrelated to the banks 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

EURm

QoQ+7%

YoY

+7%

Expenses

0

25

50

75

100

125

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

EURm

QoQ-13%

YoY

-10%

NormalizedEUR 107m,QoQ +14%


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Employee productivity

Revenue per employee cost, Baltic Banking

2

4

6

8

2005 2006 2007 Q1 08 Q2 08

Estonia Latvia Lithuania Baltic Banking

Employee productivity improved in Q2 inall countries though still below 2007level

There is no general bonus reserveallocations in 2008 and total employeeefficiency has increased from 2007

Benchmarking total revenue to personnel cost

0

2

4

6

Hansabank

SEB

Baltic

SEB

Group

Nordea

D

nBNor

D

anske

SHB

Unicredito

CEE

Ra

iffeisen

Int. O

TP

Santander

RBC

BBVA

RBS

2004 2005

2006 2007

HBG 2007


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Content

Macro summary


Asset quality


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Asset quality and provisioning costsNet loan losses

0%

50%

100%

150%

200%

250%

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

0

5

10

15

20

25

30

EURm

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 Q1

08

Q2

08

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%Group

0.23%Lithuania

0.56%Latvia

0.39%Estonia

2007

Net loan losses by country

Net loan losses = (changes in general and special provisions + net write offs) / creditportfolio 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%Group

N/Aincl home loans

0.33%Private

0.42%Corporate

2007

Net loan losses


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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 Q1

08

Q2

08Group

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 2008

Real estate, rent Retail and wholesale

Construction 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


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Hansabank Group companies overdues vs market

Estonia - overdue over 60 days / current

portfolio

0.0%

0.5%

1.0%

1.5%

2.0%

31

.12.0

5

31

.03.0

6

30

.06.0

6

30

.09.0

6

31

.12.0

6

31

.03.0

7

30

.06.0

7

30

.09.0

7

31

.12.0

7

31

.03.0

8

30

.04.0

8

31

.05.0

8

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

.12.0

5

31

.03.0

6

30

.06.0

6

30

.09.0

6

31

.12.0

6

31

.03.0

7

30

.06.0

7

30

.09.0

7

31

.12.0

7

31

.03.0

8

30

.04.0

8

31

.05.0

8

Rest of the bank market Hansapank (bank only)

Latvia - overdue over 30 days / current portfolio

0%

1%

2%

3%

4%

5%

31.1

2.0

4

31.0

3.0

5

30.0

6.0

5

30.0

9.0

5

31.1

2.0

5

31.0

3.0

6

30.0

6.0

6

30.0

9.0

6

31.1

2.0

6

31.0

3.0

7

30.0

6.0

7

30.0

9.0

7

31.1

2.0

7

31.0

3.0

8

Rest of the bank market Hansabanka (bank only)

Latvia - overdue over 90 days / current portfolio

0%

1%

1%

2%

2%3%

3%

31.1

2.0

4

31.0

3.0

5

30.0

6.0

5

30.0

9.0

5

31.1

2.0

5

31.0

3.0

6

30.0

6.0

6

30.0

9.0

6

31.1

2.0

6

31.0

3.0

7

30.0

6.0

7

30.0

9.0

7

31.1

2.0

7

31.0

3.0

8

Rest of the bank market Hansabanka (bank only)


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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


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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-estate

mgmt

Individuals

EU

Rm

-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 fromSwedbank to Latvian business unit (Nordic real estate group with significant Latvian investments)

43%Mortgage Other


18/28

Real estate portfolio

As indicated by internal stress-tests

and portfolio analyses, real estate

and in particular residential realestate 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 themarket. 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.


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



19/28

Group lending by sectors real estate

Portfolio, June 2008

Estonia

22%

6%

26%

25%

15%

6%

3%

16%

43%

5% 9%

9%

15%

Construction Other

Individuals Transport

Industry Retail & Wholesale

Real-estate mgmt

Latvia

13%

10%

38%

22%

15%

2%

Lithuania

13%

5%

34%

41%

4%4%

Office

Production&Warehouse

Residential

Retail

Land plots

Other


20/28

Sectors under close watch

TransportationTrucking companies are facing problems due to

increasing fuel prices and lagging freight rates. Thisglobal problem has started to reflect in Hansabanksprovisions (especially in SME segments) since thebeginning of the year.

Retail & wholesaleTrade volumes growth rates have slowed down and started to decrease in Estonia andLatvia in Q2 2008 (still growing in Lithuania). There is no substantial impact on portfolioquality yet, but worsening is expected along with decrease in consumption.

Wood processingRaw material price increase coupled with sales price downwards pressure are having anegative impact on Baltic wood processing industry. Current portfolio quality is aroundaverage with only few problem cases observed. Additional problems may occur after exportduties will be imposed on Russian round wood as there is dependence on imported roundwood 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 2008




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Mortgages

Standard mortgage product allows toissue new loans with maximum LTVbelow 85% and loan-service ratiobelow 50%.

Mortgage portfolio LTV ratios haveremained solid at 59% in Estonia,74% in Latvia and 61% in Lithuania.

Quality of existing portfolio and eachnew customer/transaction areevaluated using automated scoringtools.

Decision making process, productconditions, and pricing are adjustedbased on creditworthiness of theclients.

Sub-prime type of mortgage lending is

not practiced in Baltics

22y23y21yAverage maturity

LithuaniaLatviaEstoniaPortfolio, June2008

61%74%59%Average portfolio

LTV


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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


23/28

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


24/28

Thank you!


25/28

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)


26/28

Credit quality management process Proactive management of watch list clients

Private clients - communication on step-by-step actions to take before falling into overdues. Developmentof standard proactive solutions to ensure serviceability of the credit

Corporate clients - proactive communication, frequent client meetings and positive attitude to findsolutions

Overdue management - concentrates on time horizon from occurrence of distress situation (either through latepayment or on the bases of client information) to moving credit over to restructuring or workout phase. Theprimary 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 effectivenessand 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


27/28

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 intoan agreement with Swedbank AB for the sale of OAO Swedbank and Hansa Leasing Ltd. Thetransfers 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 andSampo Pank sold PKK to Northern Europe Transaction Services. Capital gain on the sale of theshares 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 costsin Hansabank decreased with the same amount.

The one-off effects are recorded at the Hansabank group level and not allocatedto country business units.

Current financial analysis is presented for continued operations (without OAO

Swedbank and Hansa Leasing Ltd). All historical ratios have been recalculatedfor continued operations.


28/28

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 etc

Textiles, footwear Machinery and equipment

Metals + 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



Metals + 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



Metals + other

N/A

Export sectors