Swedbank Baltic Banking

1 October 2008

Erkki Raasuke
Head of Swedbank Baltic Banking
Content

Macro summary

Financial highlights

Asset quality
Baltic macro development
Real GDP growth, % YoY
15

• Baltic growth decelerates 10

– Less favorable global situation, e.g. weaker export Estonia

demand, more expensive borrowing 5

Latvia

%
Lithuania
– Imbalances built up during the times of rapid credit
growth weigh heavy on the economies, e.g. 0
• Economic structure skewed towards domestic demand Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08

• Domestic credit at levels close to those in developed -5

economies; further rapid growth impossible Domestic Credit and Housing Loans, % of GDP
• Rapid growth has adversely affected credit quality 100
• Excessive optimism turns into deepening pessimism EE Domestic
75 credit
EE Housing
• Need of restructuring evident loans

%
50 LV Domestic
– To return to a sustainable growth path, a move away credit
LV Housing
from non-tradables and towards tradables is necessary: 25 loans
restructuring is costly and takes time. LT Domestic
credit
0
– There are signs of restructuring underway (e.g. shift in Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08
LT Housing
loans
investment structure favoring tradables), but it is far
from complete Average Labour Productivity growth, % YoY
– The deepest slowing likely to be seen in LV where 15

imbalances (e.g. inflation, current account deficit) have

been largest 10
Estonia
Latvia
5

%
Lithuania

0
Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08

-5
Baltic macro outlook (1)

Real GDP Growth, yoy % (x-axis in quarters)

• We have benchmarked Baltic economies against
main macro variables’ dynamics during bust cycles 15 15
of industrial countries
10 10
– GDP recovery for median starts ca 9 quarters after
the bust, ca 12 quarters for lower quartile 5 5
– Unemployment starts to rise a year after the bust
0 0
– Median household consumption and investment start
to recover ca 11 quarters after the bust -5 -5
-12 -8 -4 0 4 8 12 16 20

• Baltic fall in activity expected to be shallower and

Real Growth of Private Consumption, % yoy
recovery faster than benchmark’s due to: (x-axis in quarters)
– Less institutional rigidities
– Fiscal and monetary policies likely to be less pro-
30 30
cyclical, support from EU funds
– Low actual level of leverage in the economy 20 20

10 10

• Recovery in late 2009–2010 depends on global 0 0

recovery in H2 2009 -10 -10

-12 -8 -4 0 4 8 12 16 20
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 AS Hansabank’s Q2 consolidated performance:
– Positive net effect of one-off transactions
– Recovery of trading income to average level
– Increase in loan losses mainly in real estate sector

• AS Hansabank’s consolidated 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

Net income

in millions of EUR
Q2 Q2 Q2 Norm2 150

2008 2007 %∆YoY %∆YoY 125

100
75 135
126 125 Normalized
Loans 20,341 16,885 20% 50 107 112 114
EUR 108m
25
0
Deposits 11,035 10,006 10% Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08

Income 259 241 7% 5%

Cost-income
50%
Expenses 85 94 -10% 14%
40% Normalized
Net profit 135 126 7% -15% 40% 39% 38%
44%
41% EUR 42%
33%
30%
EVA 79 87 -10% -41% Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08

Return on equity1 26.3% 32.1% 21.1% ROE on actual equity

40%
Cost-income 32.9% 39.0% 42.3% 35%
30%
25% 32%
30% 29%
Net interest margin 2.69% 2.91% 20% 24% 24% 26% Normalized
15% EUR 21%
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
Employees (FTE) 9,242 9,158

1Group ROE based actual equity

2Q2normalized 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
 Income and expenses

Income Expenses
YoY QoQ 125 YoY
300
-10%
QoQ
+7% +7%
250 -13%
100
200
EURm

75

EURm
150
50 Normalized
100
EUR 107m,
50 25 QoQ +14%

0 0
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08

• 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.
 Employee productivity

• Employee productivity improved in Q2 in

Revenue per employee cost, Baltic Banking
8
all countries though still below 2007
level
6
• There is no general bonus reserve
allocation in 2008 and total employee
efficiency has increased from 2007
4

2
2005 2006 2007 Q1 08 Q2 08
Estonia Latvia Lithuania Baltic Banking

2004 2005
Benchmarking total revenue to personnel cost
2006 2007
6 HBG 2007

0
Raiffeisen

OTP

RBC
DnB Nor

Santander
Group

Nordea

Danske

Unicredito
SHB

BBVA

RBS
SEB Baltic
Hansabank

SEB

CEE

Int.
Content

Macro summary

Financial highlights

Asset quality
 Asset quality and provisioning costs

Net loan losses Net loan losses by country

30
Q2 08 Q1 08 2007
25
Estonia 0.58% 0.38% 0.39%
20
EURm

Latvia 0.75% 0.54% 0.56%

15
Lithuania 0.31% 0.25% 0.23%
10
5
Group 0.55% 0.39% 0.40%
0
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08

Net loan losses = (changes in general and special provisions + net write offs) / credit
portfolio at the beginning of the year

Net loan losses Net loan losses

2.5%
2.0%
Q2 08 Q1 08 2007
1.5% Corporate 0.71% 0.43% 0.42%
1.0% incl real estate 0.98% 0.86% 0.57%
0.5% incl industry 0.83% 0.09% 0.31%
0.0% Private 0.32% 0.32% 0.33%
-0.5% 1999 2000 2001 2002 2003 2004 2005 2006 2007 Q1 Q2
incl home loans 0.06% 0.16% N/A
08 08
-1.0%
Group 0.55% 0.39% 0.40%
-1.5%
-2.0%
Estonia Latvia Lithuania Group
Asset quality – overdue more than 60 days

Overdue more than 60-days/12m old By country*

2.0% 2.0%
portfolio
1.6% 1.6%

1.2% 1.2%

0.8% 0.8%

0.4% 0.4%

0.0% 0.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 Q1 Q2 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
08 08
Group Est Lat Lit Group

By sector*
1.2%
By client type* 2.5%

2.0%
0.8%
1.5%

1.0%
0.4%
0.5%
0.0% 0.0%
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008
Private Corporate Real estate, rent Retail and wholesale
Construction Industry
Logistics and comm Other business services
* Overdues over 60 days / 12 months old portfolio
Baltic Banking companies’ overdues vs market

Estonia - overdue over 30 days / current Estonia - overdue over 60 days / current
portfolio portfolio

3.0% 2.0%
2.5%
1.5%
2.0%
1.5% 1.0%
1.0%
0.5% 0.5%
0.0% 0.0%
31.12.05

31.03.06

30.06.06

30.09.06

31.12.06

31.03.07

30.06.07

30.09.07

31.12.07

31.03.08

30.04.08

31.05.08

31.12.05

31.03.06

30.06.06

30.09.06

31.12.06

31.03.07

30.06.07

30.09.07

31.12.07

31.03.08

30.04.08

31.05.08
Rest of the bank market Hansapank (bank only) Rest of the bank market Hansapank (bank only)

Latvia - overdue over 30 days / current portfolio Latvia - overdue over 90 days / current portfolio

5% 3%
4% 3%
2%
3%
2%
2% 1%
1% 1%
0% 0%
31.12.04

31.03.05

30.06.05

30.09.05

31.12.05

31.03.06

30.06.06

30.09.06

31.12.06

31.03.07

30.06.07

30.09.07

31.12.07

31.03.08
31.12.04

31.03.05

30.06.05

30.09.05

31.12.05

31.03.06

30.06.06

30.09.06

31.12.06

31.03.07

30.06.07

30.09.07

31.12.07

31.03.08

Rest of the bank market Hansabanka (bank only) Rest of the bank market Hansabanka (bank only)
 Deposit and lending growth by countries

Deposit growth vs market (only resident for Latvia)*

Market Hansa
1,000

750

500

250

0
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
-250

Estonia Latvia Lithuania

Loan growth
QoQ abs growth YoY % growth
750 100%

600 80%

450 60%

300 40%

150 20%

0 0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
06 06 06 06 07 07 07 07 08 08 06 06 06 06 07 07 07 07 08 08 06 06 06 06 07 07 07 07 08 08

* Market data from respective country central banks and financial supervision authorities. Q208 market information for 2 months only
 Group lending by sectors

Portfolio, June 2008 Portfolio growth, Q2 08

Individuals Mortgage Other 43% 249 42%

Real-estate
3,110 15% 176 29%**
mgmt
Retail &
1,803 9% 2 0%
Wholesale
EURm

Industry 1,801 9% 21 4%

Transport 1,050 5% -26 -4%

Construction 580 3% -13 -2%

Other* 3,276 16% 188 31%

0 2,000 4,000 6,000 8,000 10,000 -200 0 200 400

xx% - share of portfolio and portfolio growth
*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)
Real estate portfolio

• As indicated by internal stress-tests 2.5% Real estate management overdues*

and portfolio analyses, real estate
2.0%
and in particular residential real
1.5%
estate development is the most
sensitive sector in HBG portfolio. 1.0%

‘Sensitivity’ has started to appear 0.5%

in overdue and default figures of 0.0%

corporate portfolio. Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008
-0.5%
* Overdues over 60 days / 12 months old portfolio
• Around 2/3 from total Real Estate Estonia Latvia Lithuania
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.
Swedbank has always strictly restrained from financing speculative type of properties.
• Additional defaults in residential real estate development sector are anticipated in the second half 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.
Group lending by sectors – real estate

Estonia
6%
22%
15%

Portfolio, June 2008

5% 9% 6%
9% Latvia
2%
13%
25% 15%

43% 15%
26%
10%
3%

16%
22%

Construction Other
Lithuania
Individuals Transport 4%
4% 13%
Industry Retail & Wholesale
Real-estate mgmt
38%
5%
Office
Production&Warehouse
Residential
41% Retail
Land plots
34%
Other
Sectors under close watch

2.0% Transportation overdues*

Transportation
Trucking companies are facing problems due to 1.5%

increasing fuel prices and lagging freight rates. This 1.0%

global problem has started to reflect in Baltic
0.5%
Banking provisions (especially in SME segments)
since the beginning of the year. 0.0%
Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008
Estonia Latvia Lithuania
* Overdues over 60 days / 12 months old portfolio
Retail & wholesale
Trade 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 processing
Raw 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.
 Mortgages

• Standard mortgage product allows to issue new Portfolio, June 2008 Estonia Latvia Lithuania
loans with maximum LTV below 85% and loan-
service ratio below 50%.
Average portfolio LTV 59% 74% 61%
• Mortgage portfolio LTV ratios have remained
solid at 59% in Estonia, 74% in Latvia and 61%
Average maturity 21y 23y 22y
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
Potential impact from deteriorating economic
environment
Impact from deteriorating economic environment

Possible headwinds: Potential negative effect on net profit

• Volume (loans and deposits) lowered by ca 5%
for all countries Lower volume
• Fee income lowered by ca 5% for all countries
• NLL increased by 50bp for all countries
• Increase in cost of foreign funding to be Lower fees
refinanced in 2009

Higher NLL
To maintain cost-income ratio of 40% under these
circumstances
• Operating expenses should be cut by 8% Higher cost of
• This translates to funds

– Additional personnel reduction by 700 FTEs

– 7% cut in other expenses 0 50 100 150
EURm
 Key risks and mitigating actions
Risk
Lower business volumes
Lower fee income due to
decreased economic activity
Deteriorating asset quality
Higher cost of funding
Inability to roll-over maturing
foreign funding
Capital constraint due limited
availability from Group and
higher requirement due to rating
migration
Impact
Reduced revenues and less
transactions (both, automatic as well
as in branch network)
Reduced revenues and less
transactions (both, automatic as well
as in branch network)
Increased losses, higher need for
workout/monitoring resources, higher
need for capital due to rating
migration
Reduced net interest margin
Liquidity problems
Need to reduce RWAs
Action
• Reduce overcapacity
• Reduce overcapacity
• Reduce cross-subsidies and share of negative EVA fee
products
• More proactive monitoring and workout to reduce
defaults
• Transfer higher cost of funding to customers
• Limit new business with decreasing margins
• Se up new alternative funding sources (limited)
• Increase share of domestic funding
• Reduce new sales
• Sell part of portfolio
• Reduce new sales
• Start discussion with Swedbank about capital increase
in BBO
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, AS Hansapank, AS SEB
Pank and AS 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.
Export sectors

Main export sectors - Estonia Main export sectors - Latvia

100% 9% 9% 100%
9% 9%
25% 29% 30%
80% 31% 80%
37% 33% 33%
9% 23% 11%
60% 6% 6% 60% 9%
12% 7% 7%
8%

N/A
40% 22% 23% 40% 30% 27% 24%
29% 24%
7% 7% 8%
20% 7% 20% 6% 8%
8% 16% 15% 9% 4%
3% 7% 4%
8% 7% 7% 7% 12% 14% 15%
0% 0%
2003 2005 2007 Q1 08 2003 2005 2007 Q1 08
Food, beverages, tobacco etc Mineral products Food, beverages, tobacco etc Mineral products
Chemicals Plastic, rubber, wood etc Chemicals Plastic, rubber, wood etc
Textiles, footwear Machinery and equipment Textiles, footwear Machinery and equipment
Metals + other Metals + other

Main export sectors - Lithuania

100%
27% 22% 25% 21%
80%
11% 12%
11% 14%
60% 10% 7%
15% 8% 12%
10%
9% 7% 14% 9%
40%
7% 8%
27% 14% 23%
20% 20%
17% 15%
11% 13%
0%
2003 2005 2007 Q1 08

Food, beverages, tobacco etc Mineral products

Chemicals Plastic, rubber, wood etc
Textiles, footwear Machinery and equipment
Metals + other