SEB's Baltic Household Outlook April 2012

Edmunds RudzitisSEB Baltic Household Outlook Julita VaranauskieneApril 2012 Triin Messimas

A bumpy jobs recoveryThe Baltics posted the largest fall in Changes in employment (% Y-o-Y) ,unemployment among EU countries. 12%A long way to return to pre-crisis 8%levels. 4% Unemployment rate* (%) 24% 0% 20% -4% 16% -8% -12% 12% -16% 8% 2Q 7 3Q 7 07 1Q 7 2Q 8 08 4Q 8 1Q 8 09 3Q 9 4Q 9 09 2Q 0 3Q 0 4Q 0 10 2Q 1 3Q 1 11 11 0 0 0 0 0 0 0 0 1 1 1 1 1 1Q 4Q 3Q 2Q 1Q 1Q 4Q 4% Latvia Lithuania Estonia Source: National Statistics 0% 2Q 7 07 4Q 7 1Q 7 08 3Q 8 4Q 8 08 2Q 9 3Q 9 4Q 9 1Q 9 10 3Q 0 4Q 0 10 2Q 1 11 4Q 1 11 Baltic economies has regained a part 0 0 0 0 0 0 0 0 0 1 1 1 1 1Q 3Q 2Q 1Q 2Q 1Q 3Q Latvia Lithuania Estonia of lost jobs, however the jobs market *Persons aged 15-74 Source: National Statistics recovery loses momentum.2012-04-18 | SEB Baltic Household Outlook - April2012 2

More money in the pockets of workersWages rise as productivity increases. R wages (% YoY) eal , 12%In Estonia the fastest labour incomegrowth. 8% Average gross wages and salaries (% YoY) , 4% 30% 25% 0% 20% -4% 15% 10% -8% 5% 0% -12% 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q -5% -10% Latvia Lithuania Estonia Source: National Statistics -15% 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Real wages up in Estonia and Latvia, Latvia Lithuania Estonia while Lithuanians’ real earnings have Source: National Statistics decreased already for 3 years.2012-04-18 | SEB Baltic Household Outlook - April2012 3

Consumption supported by earnings abroadIn 2011 household consumption rose Remittances and earnings abroad (including "other sectors") - share of disposable income (% )by 6.1% in Lithuania and 4.4% in 18%Estonia and Latvia. 15% Household consumption expenditure (% YoY) , 12% 15% 10% 9% 5% 6% 0% -5% 3% -10% 0% -15% 00 01 02 03 04 05 06 07 08 09 10 20 20 20 20 20 20 20 20 20 20 20 -20% Latvia Lithuania Estonia -25% Source: Eurostat, SEB calculations -30% 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 The remittances (incl. earnings 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Latvia Lithuania Estonia abroad) have increased the Source: National Statistics households’ disposable income.2012-04-18 | SEB Baltic Household Outlook - April2012 4

Household Consumption, Triin MessimasConfidence and Leverage SEB Estonia2012-04-18 | SEB Baltic Household Outlook - April2012 5

Vigorous growth in retail trade in the beginning of 2012 In January 2012: 14.8% in Estonia 15.1% in Latvia 11.7% in Lithuania the EU average -0.1% In February 2012: 14.8% in Estonia 10% in Latvia 4.2% in Lithuania the EU average -1.1%2012-04-18 | SEB Baltic Household Outlook - April2012 6

Increasing consumption plans in Latvia and Lithuania, decreasing in Estonia March 2012 in Estonia -35.9 in Latvia -8.1 in Lithuania -12.3 the EU average -23.7 The indicator in Estonia has decreased since Q4 2011 In Latvia and Lithuania it has showed increasing trend2012-04-18 | SEB Baltic Household Outlook - April2012 7

Consumer confidence has decreased sharply in Estonia to the same level as in Latvia and Lithuania In March 2012: in Estonia -12.9 in Latvia -18.1 in Lithuania -21.3 the EU average -19.3 The index in Estonia fell in November 2011 when households realised the possible consequences of the European debt crises.2012-04-17 | SEB Baltic Household Outlook - April20122012-04-18 8

Assessment about financial situation of households is strongest in Estonia and weakest in Latvia In March 2012: in Estonia 11.3 in Latvia -5.5 in Lithuania 2.1 the EU average 11.9 The index has been stable during the recession in Estonia while in Latvia and Lithuania it has experienced deterioration and slight recovery.2012-04-18 | SEB Baltic Household Outlook - April2012 9

Households continue to be cautious in taking financial responsibilities Households continue deleveraging. Compared to the end of 2008, the household loan portfolio in Feb 2012 has decreased: in Latvia by 17.8% in Lithuania by 13.8% in Estonia by 9.1%2012-04-18 | SEB Baltic Household Outlook - April2012 10

The highest debt levels are in Estonia and the lowest in Lithuania There was rapid increase in household leveraging since 2000. The debt-to-income ratio of households increased from 2000 to 2007: in Estonia from 15% to 88% in Latvia from 9% to 81% in Lithuania from 2% to 44% in Euro area from 75% to 94%2012-04-18 | SEB Baltic Household Outlook - April2012 11

Interest rate of housing loans has decreased • The average interest rate of housing loans have decreased since October 2008 from 6.35% to 3.27% in February 2012. • Since September 2012 the interest rate has been lower than inflation rate. • Deleveraging of household balance sheets continues. However, some households are ready to take advantage of low house prices. Hence, in 2012 the loan volumes stop to decrease.2012-04-18 | SEB Baltic Household Outlook - April2012 12

Julita VaranauskieneHousehold Savings SEB Lithuania2012-04-18 | SEB Baltic Household Outlook - April2012 13

Household savings structure: deposits still dominate 5 000 Deposits and pension savings per capita (EUR) Deposits II pillar pension funds Private pension funds and life insurance 4 000 3 000 2 000 1 000 0 2008 2011 2008 2011 2008 2011 Latvia Lithuania Estonia Latvia Lithuania EstoniaDeposits -0,5% (-19 mEUR) +8% (+567 mEUR) +20% (+728 mEUR)II pillar pension funds +89% (+587 mEUR) +83% (+536 mEUR) +55% (+402 mEUR)III pillar pension funds and +46% (+118 mEUR) +75% (+155 mEUR) +42% (+76 mEUR)life insurance Source: Central banks2012-04-18 | SEB Baltic Household Outlook - April2012 14

Banks’ collapse didn’t affect household behavior much… Household deposits change (Jan2008=100) Lithuania Latvia Estonia 150 140 Snoras 130 120 110 100 90 80 2008 2009 2010 2011 Krajbanka 2012 Source: Central banks2012-04-18 | SEB Baltic Household Outlook - April2012 15

… but people are more cautious Household deposits distribution change in Lithuania (mEUR) September 2011 January 2012 6000 +18% 5000 4000 3000 2000 -12% 1000 +6% +9% +23% 0 Banks with Banks with Banks with Credit unions State bonds higher deposit middle deposit lower deposit interest rates interest rates interest rates Sources: Central bank, Bankers association, Central depository www.indeliai.lt, SEB estimates NB "Snoras" deposits not includet in September 2011 statistics2012-04-18 | SEB Baltic Household Outlook - April2012 16

Largest savings of Estonian households, lowest loan-to-deposit ratio of Lithuanian households Loans and deposits per capita (Eur) Deposits per capita (EUR) Loans per capita (EUR) 6.000 5.000 4.000 3.000 2.000 1.000 0 1H2011 2H2011 1H2011 2H2011 1H2011 2H2011 Latvia Lithuania Estonia Source National banks2012-04-18 | SEB Baltic Household Outlook - April2012 17

Edmunds RudzitisWhat about the future? SEB Latvia2012-04-18 | SEB Baltic Household Outlook - April2012 18

What’s ahead for 2012? OR• The number of new jobs will be lower than last year. In Latvia and Lithuaniaunemployment is expected to decline further, albeit at a slow pace.• A modest average wage growth, mainly related to increase in variable part(bonuses, premiums). Moreover, wage growth will be uneven within sectors.• The slower economic growth will lead to lower inflation, however rise inenergy prices boosts expenditure related to housing and transport.• Borrowers may benefit from lower interest rates on housing loans, whilesavers are likely to see interest income dip.2012-04-18 | SEB Baltic Household Outlook - April2012 19

Demographics and the future workforceThe pace of population ageing will Population structure by age groups in 2011 and 2020 (Latvia)accelerate in the Baltic countries. 2020 80+ 2011 75-79 Crude birth rate (per 1000 inhabitants) 70-74 16 65-69 60-64 55-59 14 Children are our future 50-54 45-49 40-44 35-39 12 30-34 25-29 20-24 10 15-19 10-14 5-9 0-4 8 200 000 0 200 000 Source: CSB, SEB estimates 6 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Over the next 10 years the number of Latvia Lithuania Estonia working age people will decrease Source: National Statistics significantly.2012-04-18 | SEB Baltic Household Outlook - April2012 20

Population ageing and pension systemThe pension system are facing The ratio of old-age pension to net wagechallenges. The total dependency 60%ratio will grow considerably. 55% The total dependency ratio 90 80 50% 70 45% 60 40% 50 IVQ2008 IV2011 Latvia Lithuania Estonia 40 Source: National Statistics; SEB estimations 30 Is decline in replacement ratios 2011 2020F 2060F Latvia Lithuania Estonia imminent? Source: National Statistics;Eurostat;SEB estimations Larger support to long-term savings.2012-04-18 | SEB Baltic Household Outlook - April2012 21

Edmunds Rudzitis, SEB Latvia Thank You!Julita Varanauskiene, SEB LithuaniaTriin Messimas, SEB Estonia Questions?2012-04-18 | SEB Baltic Household Outlook - April2012 22

SEB's Baltic Household Outlook April 2012

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