Capturing Baltic business opportunities Erkki Raasuke Head of - - PowerPoint PPT Presentation

Capturing Baltic business opportunities

Erkki Raasuke Head of Baltic Banking

Overview of the market

Strong long-term growth

Long-term economic growth is supported by:

– Attractive initial conditions – Prudent governance and strong institutions – Large investments in capital stock and human capital – Open and flexible economies GDP real growth

• 5%

0% 5% 10% 15% 96 97 98 99 00 01 02 03 04 05 06E 07E 08E Estonia Latvia Lithuania EU 25

Average GDP growth

1996-2006 Estonia 7.5% Latvia 7.0% Lithuania 6.5% EU 25 2.5%

But increasing short-term risks (1/3)

High credit growth

Domestic credit growth and portfolio relative to GDP

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 2002 2003 2004 2005 6m 2006 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Est / GDP Lat / GDP Lit / GDP Est growth Lat growth Lit growth

Increasing short-term risks (2/3)

Tight labour markets

2 4 6 8 10 12 14 16 18 5 10 15 unemployment, % wage growth, % Unemployment-Wage Short-term Unemployment-Wage 2 4 6 8 10 12 14 5 10 15 unemployment, % wage growth, % 5 10 15 20 25 5 10 unemployment, % wage growth, %

Estonia Lithuania Latvia

2005M5 onwards 2005Q1 onwards 2005Q1 onwards

Unemployment is close to NAIRU and further increases in employment will raise the risk of overheating and inflation

Increasing short-term risks (3/3)

High optimism

• 20
• 10

10 20 30 40 50 Sep.03 Mar.04 Sep.04 Mar.05 Sep.05 Mar.06

• 30
• 20
• 10

10 20 Sep.03 Mar.04 Sep.04 Mar.05 Sep.05 Mar.06 Consumer Manufacturing Construction

• 40
• 30
• 20
• 10

10 20 Sep.03 Mar.04 Sep.04 Mar.05 Sep.05 Mar.06

Confidence indices

Source: National statistics

Market outlook is optimistic as confidence indices remain high or continue to grow (outlook for the next 12 months) Overly optimistic? Risk that the public extrapolates the current unsustainable GDP and income growth along with low real interest rates into the future

Latvia Lithuania Estonia

Boom-bust checklist for the Baltic states (1/2)

• 1. Rapid domestic credit growth: YES

But it is unclear whether it is excessively high thereby causing a bust.

• 2. Overheating: YES

GDP growth is above its sustainable levels in LV and EE. All three countries have

• verstretched labor markets and the situation is not set to improve rapidly, thus sustaining
• verheating risks.
• 3. Foreign currency denominated debt: YES

But no significant change in real effective exchange rates during the past 7 years. Uncertainty is best avoided by joining the euro zone asap (2010 for all three Baltic economies).

• 4. Optimistic expectations on debt service: POSSIBLY

Market participants have an optimistic outlook, yet it is unclear whether it is overly

• ptimistic and thereby may cause a bust. In terms of real interest rates, LV seems to face

the highest misprediction risk due to higher volatility arising from a high inflation level.

Boom-bust checklist for the Baltic states (2/2)

Conclusions:

• Credit growth has boosted economies somewhat over their sustainable growth levels, but

the likelihood of a bust depends on the degree of mismatch between optimism and realization.

How to manage:

• Reduce market optimism and willingness to borrow.
• Rapid market fluctuations must be avoided to limit the impact on those who have already

borrowed.

Overview of Hansabank Group

Hansabank Group

• Hansabank is operating as a universal bank in the Baltics and Russia.

Our main focus is on medium-sized companies and private individuals with above the average purchasing power, however, we serve all customer groups.

• Our customer offering is based on professional service, wide distribution

capabilities and competitive prices

• Our goal is to be the leading universal bank in our home market,

measured by:

– Biggest growth in volumes (in absolute terms) – Highest profit (in absolute terms) – Highest customer satisfaction

Hansabank – the leading bank in the Baltics

September 2006

Retail banking 1 Corporate banking 1-2 Pension II 1 Cards 1

Loans

Others 38% SEB 29% Hansa 33%

Deposits

hers SEB 24% Hansa 33% Ot 43%

Market position in key areas Baltic market share

Hansabank’s business priorities (1/3)

Capturing the growth in the Baltics

– Market share in key products

• Mortgages
• Cards
• Small and medium-sized companies

– Income growth

• Consumer finance
• Corporate financing
• Investment management

Hansabank’s business priorities (2/3)

Investing into the future

– Russian expansion – Performance and talent management – Business intelligence – Development of distribution

Hansabank’s business priorities (3/3)

Understanding risks and maintaining

• rganisational flexibility

– Readiness for slowdown – Operational excellence – Variable rather than fixed costs

Financial performance

Highlights – 9m 2006

• Strong performance driven by volume growth and good asset quality

– Net income 221 EURm, +35% yoy – ROE 24.6%

• Strong lending growth in all countries and main product lines

– Total loans +5.0 EURbn yoy – Corporate financing +2.67 EURbn – Mortgage lending +1.74 EURbn

• Gradual recovery in margins supported by base-rate improvements

– NIM 2.88% in 9m 06 vs 3.09% in 9m 05

• Annual expense growth 39%

– Personnel expenses up by 33%, number of employees +20% during one year – Other expenses include 16 EURm operational risk provisions in Russia due to ongoing litigation concerning VAT refunds in leasing operations. Excluding this, annual expense growth was 29%

Key financials – 9m 2006

in millions of €

9 mos 2006 9 mos 2005 YTD % ∆ YOY 8,205 61% 33% 37% 39% 38% 35% 50% 20% 6,318 Revenues 498.6 363.8 EVA 148.8 99.5 Employees (FTE) 8,205 6,855 Expenses 232.4 167.7 175.8 164.3 23.4% 46.1% 3.09% Loans 13,212 EBT 243.4 Deposits 8,406 Net Income 221.0 Return on equity1 24.6% Cost-income1 46.6% Net interest margin 2.88%

1Excluding Russian provision in 9m 2006:

YTD ROE is 26%, cost-income ratio is 43%, expense growth 29% and net profit growth 40%.

Quarterly trends

Net profit 94 61 66 63 52 49 56 20 40 60 80 100 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Cost-income 40.5% 53.0% 47.2% 43.9% 47.5% 47.1% 53.0% 30% 40% 50% 60% 70% Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 ROE 29.2% 20.5% 23.7% 25.1% 22.4% 22.7% 20.9% 15% 20% 25% 30% Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 *Q1 06 and Q2 06 results include VAT provisions in Russia, 3.1 EURm and 12.3 EURm respectively: Excluding those provisions: Q1 06 CI ratio was 45.1% and ROE 25% Q2 06 CI ratio was 45.5% and ROE 25%

Increasing importance of Latvian and Lithuanian units

Loans

Est 41% Rus 5% Lit 25% Lat 29%

26% 51% 39% 49% 87% 54% 28% 70% 82%

YOY growth As of 09.06

Revenues

Est 42% Rus 6% Lit 24% Lat 28%

EBT

Est 49% Rus 0% Lit 21% Lat 30%

Absolute growth by BUs, 9m 2006

in millions of €

Est Lat Lit Rus Total HBG Loans (yoy abs. growth) 1,810 1,750 1,163 284 5,007 2,089 135

Net interest income 29 34 22 12 96 Net fee income 12 6 6 1 24

65

3

68 1,349 Deposits 983 504 537 64 Revenues (9m 06 vs 9m 05) 1 44 47 34 13 Expenses 1 15 15 12 24*

Net credit losses 2 3

• 2
• EBT1

27 30 24

• 11

Employees2 (FTE) 326 403 400 86

1Does not sum to total HBG due to group eliminations 2BU number of employees does not include IT and group level employees. Their growth was 134 over the year

*Russian operating expense growth includes 16 EURm VAT provisions during 9m 2006

Asset quality

Net provisions* to average portfolio

• 0.5%

0.0% 0.5% 1.0% 1.5% Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Est Lat Lit Group *Net provisions = write-offs + provisions - recoveries ** Overdue more than 30 days *** Overdue more than 60 days

in millions of €

3Q06 2Q06 1Q06 4Q05 3Q05 Overdues** 95 46 0.6% 56 78 93 50 41 0.7% 0.6% 25 0.4% 94 35 0.6% Non-performing loans (NPL)*** NPL/loans

Loan portfolio by sectors, Sept 2006

Industry 10% Retail other 9% Retail mortgage 30% Wholesale and retailing 11% Other 14% Construction 4% Real estate development 15% Transport 7%

Summary

• Good long-term growth potential
• Increasing short-term risks
• Focus on growth
• Investing into the future
• Delivering results