Baltic Banking. Agenda. Overview of the market Present situation Baltic Banking: looking at 2008

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1 Baltic Banking Mr Erkki Raasuke Head of Baltic Banking Capital Markets Day Kiev, 5 March 2008 Agenda Overview of the market Present situation Baltic Banking: looking at 2008 Swedbank 2 1

2 Overview of the market Baltics macro development Long-term economic growth is supported by: Attractive initial conditions Prudent governance and strong institutions Significant investment in capital stock and human capital Open and flexible economies Short-term unsustainable growth caused by: EU accession and convergence Excessive inflow of debt capital 14% 10% 8% 4% 10% 8% 4% 2% Real GDP growth F 2008F Est Lat Lit CPI growth F 2008F Est Lat Swedbank 4 2

3 Baltics macro development Signs of slowdown All three countries are following the expected path of an economic cycle: Estonia is clearly in the slowdown phase (expected to reach low point during H108 with slow recovery during H208) Latvia passed the turning point in Q3 (expected to reach bottom H2 08 with slow recovery during 2009) Lithuania reached its peak in Q3 (the bottom of current cycle expected in The economic cycle in Lithuania will probably be flatter than in Estonia and Latvia) 15% 13% 4% Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 GDP real growth Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Estonia Latvia Lithuania Consumer confidence Estonia Latvia Lithuania Q2 07 Q3 07 Q4 07 Swedbank 5 Present situation 3

4 Financial performance Net profit (EURm) Cost-income ratio % 40% Lending (EURm) Return on equity 30% 2 5,697 8,899 14,158 18,877 23% 22% Number of employees Medium-term goals EBT growth >20% ROE on actual equity >20% 9,203 8,216 Cost-income <42% 6,576 7,058 Swedbank Net loan losses <0.35% Group lending by sectors Baltic Banking Portfolio, December 2007, EURm Real-estate management split 3% Individuals Real-estate mgmt 3,012 15% 8,282 42% 24% 15% 8% Office Production and warehouse Residential Retail & wholesale 1,736 Land plots Retail Industry 1,692 8% Other Transport Construction Other 1, % 2,786 14% 0 2,000 4,000 6,000 8,000 xx% - share of portfolio and portfolio growth Real estate development 38% of real estate management loan book is related to residential real estate (Estonia 2, Latvia 45%, Lithuania 38%) Est/Lit 1/1 development Lat 2/3 development Early development projects (land) form of real estate management portfolio Swedbank 8 38% 4

5 Asset quality and provisioning cost Upon the Hansabank acquisition in 2005, Swedbank made a general provision of about SEK280m. In Q4 2007, SEK70m of this was released The provision was partly made because Swedbank at the time did not have full insight into Hansabank's risk and credit systems and processes and thus made an extra provision for potential bad loans Since then the systems and processes have improved and have also been aligned with Swedbank's Loan loss ratio, net* Estonia Latvia Lithuania Group level provision adjustment Baltic Banking Q % % % % *Loan loss ratio, net = (changes in provisions + net write-offs) / credit portfolio at the beginning of the period Share of non-performing loans* Corporate Private Baltic Banking Jun % 0.53% Dec % % *Share of non-performing loans = the volume of 60 days overdues /12m old portfolio Swedbank 9 Baltic Banking: looking at

6 Baltic Banking Goal is to be a clear leader in each Baltic market Biggest growth in volumes (in absolute terms) Highest profit (in absolute terms) Highest level of customer satisfaction Swedbank 11 Baltic Banking priorities 2008 Build efficient organization and reduce complexity Build new organization model Increase operational efficiency Improve employee productivity Build capabilities to work with data Grow core businesses Corporate banking - manage through the cycle Retail lending - improve credit selection and risk-based pricing Daily banking - strengthen our client offerings Investment management - build cross-border operating model Swedbank 12 6

7 Build new organization model in Baltic Banking Goal is to build a regional banking organization which leverages on cross-border capabilities Building future cross-border operating model for Swedbank Group, starting where value is most easily gained - Baltics Best practices and innovation rolled out quicker Leverage from experience of same business areas of three countries Clear decision making and execution authority Talented people can maximize their potential Priorities in 2008 Define new organizational model in Baltic Banking by May 2008 Implementation period from June to December New organizational model is expected to be fully functional in 2009 Swedbank 13 Increase operational efficiency Grow business while improving efficiency Priorities in 2008 First pilots in mortgage, debit cards run in 2007; corporate lending, consumer finance and current account/payments to be rolled out in 2008 Develop operational performance measurement system Clear internal targets for savings in monetary terms, quality, lead time, FTE reduction, customer satisfaction have been established Swedbank 14 7

8 Grow core businesses Corporate banking Priorities in 2008 Manage corporate business through the cycle strengthen the monitoring and restructuring teams maintain and enhance relationships with long-term clients Establish junior lending/ distressed debt solutions restructuring of distressed debt and launching mezzanine type of products Establish knowledge centres for specialized finance e.g. acquisition & project finance, shipping finance Attain cross-border credit solution and full-service cash management offering for pan-baltic clients unified service model implement efficient remote account opening and after-service launch regional e-channels offering Swedbank 15 Grow core businesses Retail lending Priorities in 2008 Implement risk capital logic in business strategy Develop risk selection and pricing skills Implement portfolio management Implement client value management approach Pilot ongoing in consumer finance, after that rolled out in other areas Improve process efficiency Swedbank 16 8

9 Grow core businesses Daily banking Priorities in 2008 Develop daily banking business concept and strengthen our client offerings Develop Customer Relationship Management concept Increase customer activity Core focus product - deposits maintain or increase current market share Swedbank 17 Grow core businesses Investment management Priorities in 2008 Build cross-border business model in life insurance and asset management Build standardized advisory process in retail Increased focus on investment management in private banking segment Particularly in Latvia and Lithuania Swedbank 18 9

10 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 Swedbank 19 Additional material Swedbank 20 10

11 Macro figures* f 2008f 2009f Latest data Economic growth, % Estonia (Q4 07) Latvia (Q4 07) Lithuania ** (Q4 07) EU (Q3 07) Consumer price growth, % Estonia ** (Jan 08) Latvia ** (Jan 08) Lithuania ** (Jan 08) Harmonized unemployment level, % Estonia (Dec 07) Latvia (Dec 07) Lithuania (Dec 07) EU (Dec 07) Current and capital account balance, % of GDP Estonia (Q407) Latvia (Q4 07) Lithuania (Q4 07) EU General government balance (ESA95), % of GDP Estonia Latvia Lithuania EU27 Swedbank *Estonian, Latvian and Lithuanian forecast by HBM; EU27 forecast by EC (Autumn 2007 forecast) ** for actual data in 2007 Export sectors Main export sectors - Estonia 100% 10% 80% 31% 45% 40% 60% 40% 30% 1 18% 20% 5% 4% 4% 8% 0% Food, beverages, tobacco etc Mineral products Chemicals Plastic, rubber, wood etc Textiles, footwear Machinery and equipment Metals + other 100% 80% 60% 40% 20% 0% Food, beverages, tobacco etc Chemicals Textiles, footwear Metals + other Main export sectors - Latvia N/A 25% 1 23% 30% 28% 4% 15% Mineral products Plastic, rubber, wood etc Machinery and equipment Main export sectors - Lithuania 100% 80% 2 22% 35% 60% 10% 15% 10% 8% 40% 2 20% 20% 14% 1 13% 0% Food, beverages, tobacco etc Mineral products Chemicals Plastic, rubber, wood etc Textiles, footwear Machinery and equipment Metals Swedbank + other 22 11

12 December 2007 Commercial real estate 14% 5% 23% 32% EE 4 53% 13% 38% 22% 2% 2 15% LV 44% 5 41% 15% 34% 5% 3% Office 45% 31% 5% Production & warehouse LT 3 63% 8% 40% 38% 38% Residential Retail Land plots Private loans Commercial real estate Transport Other Swedbank Corporate loans Capital goods Retail 23 Other 12