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 GDP real growth Average GDP growth 15% 1996-2006 10% Estonia 7.5% Latvia 7.0% 5% Lithuania 6.5% 0% EU 25 2.5% 96 97 98 99 00 01 02 03 04 05 06E 07E 08E -5% Estonia Latvia Lithuania EU 25 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

But increasing short-term risks (1/3) High credit growth Domestic credit growth and portfolio relative to GDP 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 2002 2003 2004 2005 6m 2006 Est / GDP Lat / GDP Lit / GDP Est growth Lat growth Lit growth

Increasing short-term risks (2/3) Tight labour markets Lithuania 14 12 2005Q1 onwards Unemployment is close to NAIRU and wage growth, % 10 further increases in employment will raise 8 the risk of overheating and inflation 6 Estonia 4 2 2005Q1 onwards 18 0 16 0 5 10 15 14 wage growth, % unemployment, % 12 10 Latvia 2005M5 onwards 25 8 6 20 wage growth, % 4 2 15 0 10 0 5 10 15 unemployment, % 5 Unemployment-Wage 0 0 5 10 Short-term Unemployment-Wage unemployment, %

Increasing short-term risks (3/3) High optimism Confidence indices Estonia Latvia 50 20 40 10 30 0 20 -10 10 -20 0 -30 -10 -20 -40 Sep.03 Mar.04 Sep.04 Mar.05 Sep.05 Mar.06 Sep.03 Mar.04 Sep.04 Mar.05 Sep.05 Mar.06 Lithuania Market outlook is optimistic as confidence 20 indices remain high or continue to grow 10 (outlook for the next 12 months) 0 -10 � Overly optimistic? Risk that the public -20 extrapolates the current unsustainable GDP -30 and income growth along with low real Sep.03 Mar.04 Sep.04 Mar.05 Sep.05 Mar.06 interest rates into the future Consumer Manufacturing Construction Source: National statistics

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 overstretched labor markets and the situation is not set to improve rapidly, thus sustaining overheating 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 optimistic 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 Market position Corporate banking 1-2 in key areas Pension II 1 Cards 1 Loans Deposits Hansa Hansa 33% 33% Others Ot hers 38% 43% Baltic market share SEB SEB 24% 29%

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 organisational 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 YTD 9 mos 9 mos in millions of € % ∆ YOY 2006 2005 61% Loans 13,212 8,205 33% Deposits 8,406 6,318 37% Revenues 498.6 363.8 39% Expenses 232.4 167.7 38% EBT 243.4 175.8 35% Net Income 221.0 164.3 50% EVA 148.8 99.5 Return on equity 1 24.6% 23.4% Cost-income 1 46.6% 46.1% Net interest margin 2.88% 3.09% 20% Employees (FTE) 8,205 6,855 1 Excluding 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 94 100 *Q1 06 and Q2 06 results include VAT provisions 61 66 80 56 in Russia, 3.1 EURm and 12.3 EURm respectively: 63 52 60 Excluding those provisions: 49 Q1 06 CI ratio was 45.1% and ROE 25% 40 Q2 06 CI ratio was 45.5% and ROE 25% 20 0 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Cost-income ROE 29.2% 70% 30% 53.0% 53.0% 25.1% 23.7% 60% 22.7% 20.9% 22.4% 20.5% 25% 47.2% 47.5% 47.1% 43.9% 50% 40.5% 20% 40% 30% 15% Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06

Increasing importance of Latvian and Lithuanian units Revenues EBT Loans Rus Rus Rus Lat 0% Lat 6% Lat 5% 28% 30% 29% Est As of 09.06 Est Est 49% 42% 41% Lit Lit Lit 24% 21% 25% 82% 51% 87% 70% 39% 54% 49% 26% YOY growth 28%

Absolute growth by BUs, 9m 2006 Est Lat Lit Rus Total HBG in millions of € Loans (yoy abs. growth) 1,810 1,750 1,163 284 5,007 Deposits 983 504 537 64 2,089 Revenues (9m 06 vs 9m 05) 1 44 47 34 13 135 Net interest income 29 34 22 12 96 Net fee income 12 6 6 1 24 Expenses 1 15 15 12 24* 65 Net credit losses 2 3 -2 - 3 EBT 1 27 30 24 -11 68 Employees 2 (FTE) 326 403 400 86 1,349 1 Does not sum to total HBG due to group eliminations 2 BU 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 Loan portfolio by sectors, Sept 2006 1.5% Other Retail mortgage Construction 1.0% 14% 30% 4% Transport 0.5% 7% Real estate 0.0% development Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 15% -0.5% Retail other Est Lat Lit Group 9% Industry 10% Wholesale and retailing 11% 3Q06 2Q06 1Q06 4Q05 3Q05 in millions of € Overdues** 95 93 78 56 94 Non-performing loans (NPL)*** 46 50 41 25 35 NPL/loans 0.6% 0.7% 0.6% 0.4% 0.6% *Net provisions = write-offs + provisions - recoveries ** Overdue more than 30 days *** Overdue more than 60 days

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