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Hansabank Group
Erkki Raasuke, CEO3 September 2008
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Content
Macro summary
Financial highlights
Asset quality
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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
Financial highlights
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
Financial highlights
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
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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.
* Overdues over 60 days / 12 months old portfolio
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
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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
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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
Estonia Latvia Lithuania
* Overdues over 60 days / 12 months old portfolio
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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
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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
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Thank you!
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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)
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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
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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.
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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
Food, beverages, tobacco etc Mineral productsChemicals Plastic, rubber, wood etc
Textiles, footwear Machinery and equipment
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
Food, beverages, tobacco etc Mineral productsChemicals Plastic, rubber, wood etc
Textiles, footwear Machinery and equipment
Metals + other
N/A
Export sectors