roadshow, carnegie, erkki raasuke06

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


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


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.


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


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


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


N/A

Export sectors

roadshow, carnegie, erkki raasuke06

Economy & Finance