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Roadshow, Öhman Baltic Banking Day, Maris Avotins

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Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to …

Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our

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  • 1. Macroeconomic and Banking Sector Developments in Latvia. Performance of Swedbank in Latvia, Q3 2008. Māris Avotiņš CEO, Chairman of the Board 6 November, 2008
  • 2. Swedbank group home markets
  • 3. 3© Swedbank Overview of the region: Swedbank Group home markets - main facts • Total population: 9.2m • Private customers: 4.1m • Corp. customers: 284,000 • Organisations: 117,000 • Branches: 432 • Typical market share: 25% • GDP growth 2.7% (2007) • Swedbank Group rating: Moody’s Aa3; Fitch A+, S&P A Sweden • Total population: 141.6 m • Private customers: 3 400 • Corp. customers: 600 • Branches: 6 • Niche player in Russian market • GDP growth: 8.1% (2007) Russia • Total population: 46.4 m • Private customers: 0.1 m • Corp. customers: 19 000 • Branches: 197 •GDP growth: 7.6% (2007) Ukraine Lithuania • Total population: 3.4m • GDP growth: 8.8% (2007) • Private customers: 3.0m • Corp. customers: 82,000 • Branches: 119 • Typical market share: 30% • Total population: 2.3m • GDP growth: 10.3% (2007) • Private customers: 0.9m • Corp. customers: 58,000 • Branches: 73 • Typical market share: 30% Latvia • Total population: 1.3m • GDP growth: 7.1% (2007) • Private customers: 1.2m • Corp. customers: 92,000 • Branches: 86 •Typical market share: 50% Estonia
  • 4. 4© Swedbank Focus on credit quality and efficiency Ukraine and RussiaBalticsSweden • Stricter lending criteria • Personal contact with all customers with loans overdues • Stricter requirements on minimum margins • Process efficiency measures • Restrictive employment policy • Increased product sales • More focus on quality than growth • Implementation of Group credit and risk systems • Centralized credit decisions • Group procurement process successfully implemented • Streamlining of distribution network • Stricter lending criteria • Balanced goal for loan to deposit ratio • Personal contact with all customers with loans overdues • Increased margins for new lending • Staff reductions • Self-adjusting performance pay system Share of lending: 78 % Share of lending: 16 % Share of lending: 2 %
  • 5. Latvia: Macroeconomic Environment
  • 6. 6© Swedbank Summary • Key changes in a baseline forecast for 2009-2010 – Recession has set in, lowest point in the business cycle in late in 2009 or early 2010, recovery expected in 2010 • Economic imbalances swiftly improve – Necessity of current account deficit’s financing gap expected to narrow to ca 7% in 2009 from ca 21% in 2007 – Export potential remains strong: despite rising unit labour costs and real effective exchange rates, Latvian exporters have retained their trade shares in the key export markets – Inflation retreats: wage-inflation spiral breaks • Labour market – key to adjustment – Labour productivity growth is negative in H1 2008, adjustment still lagging – Recovery will come through productivity growth, especially via total factor productivity • Financial market – money market tightens, financial system remains stable – Rising interest rates despite easing monetary policy – Speculative attack on the lats technically close to impossible due to shallow forward market
  • 7. 7© Swedbank Baseline forecast: key changes • Reasons for downward revisions – Deepening and widening of global credit crunch, risk of global recession • Liquidity squeeze, cost of capital has risen • Slowdown of external demand limits export potential • Outlook – Recession with the lowest point in H2 2009 or early 2010, sub-trend positive growth recovery in 2010 – Contraction driven by domestic demand: household consumption recovers very gradually in H2 2010 as unemployment remains high, whereas investments bottom out in late 2009 predominately driven by exporting sectors – Economic recovery is driven by exports • Risks to the forecast Negative • Deeper global recession extending well into 2010 • Delays in domestic restructuring build up pressure of imbalances that may sharply deepen the recession • Domestic financial failures, extraordinary market volatility induces runs on banks destabilizing the financial system Positive • Global economic recovery commences in early 2H 2009 • Globally coordinated interventions by authorities effectively stop disorderly deleveraging, i.e. containing the Minsky moment • Further decrease in world commodity prices Baseline forecast 2004 2005 2006 2007 2008f 2009f 2010f GDP 8.7 10.6 12.2 10.3 -1.5 … -0.5 -5 … -2 -1 … 2 (-2…0) (-2…0) (1...3) Inflation 6.2 6.7 6.5 10.1 15.5 … 16 5 … 6.5 2 … 4 (16.0) (7.5) (4.0) CAD -12.8 -12.5 -22.5 -22.9 -16 … -14 -9 … -6 -8 … -5 (-15 … -13) (-9 … -7) (-8 … -6) Unemployment 10.4 8.9 6.8 6.0 6 … 7 9 … 11 10 … 12 (7.0) (9.0) (8.5) (…) August 2008 forecasts Source: CSB and Eurostat, Swedbank calculations Real Growth of GDP, % YoY -20 -10 0 10 20 30 2004 2005 2006 2007 2008f 2009f 2010f GDP Households consumption Government consumption Gross fixed capital formation Exports Imports
  • 8. 8© Swedbank Credit growth slows due to deleveraging • Lending growth gradually decelerating driven by deleveraging – Retreating credit demand, e.g. • Expectations of further asset price decreases reduce willingness to borrow, consumption/ investment is being postponed and/ or precautionary savings are built up • Rising uncertainty, weakening optimism, rising lending rates – Weaker supply, e.g. • Global credit crunch raises interest rates and cuts funding availability • Tighter lending standards in response to domestic slowdown and global credit crunch • Outlook – Bank lending expected to grow by 10%...15% in 2008 and remain flat or possibly even decrease in 2009 – Corporate lending expected to pick up in late 2009 depending on recovery in global growth and exports – Household credit growth expected to pick up in 2010 as households regain their confidence Domestic credit, % of GDP 0 20 40 60 80 100 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Total Households Corporate Domestic credit, % YoY 0 20 40 60 80 100 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 4 5 6 7 8 Total (l.s.) Households (l.s.) Corporate (l.s.) Average lending rate, eur, % (r.s.) Source: CSB, FCMC and Swedbank estimate Number of transactions with apartments and prices of block house apartments in Riga, EUR/m 2 0 500 1 000 1 500 2 000 Jan.05 Jan.06 Jan.07 Jan.08 Transactions EUR/m2
  • 9. 9© Swedbank Current account deficit: smaller external financing necessity • Current account deficit swiftly narrows as – Trade deficit in goods and services expected to narrow from 21% of GDP in 2007 to ca 13% in 2008 and 7% in 2009 due to decreasing domestic demand – Net interest payments rise from ca 1% of GDP in 2007 to ca 2% due to higher cost of capital – Net compensation of employees expected to remain at ca 1.5% of GDP in 2009-2010, i.e. lower than in 2007 – Net dividend payments assumed at 2% of GDP, less than a half of the past few years, due to lower profitability – Net transfers conservatively assumed at EU pre-accession average level of 2%...3% in 2009-2010, i.e. EU farming subsidies and long-term emigrants’ remittances • Necessity of external financing to finance the current account deficit shrinks to 6% of GDP in 2009-2010, with the likely funding sources: – EU structural funds expected at 2%...3% of GDP, according to 2007-2013 EU budget pre-allocation – Net FDI inflows expected at ca 2%, very conservatively assuming all dividend earnings being withdrawn – Net other borrowing expected to decrease to ca 5.5% in 2008 and ca 1% in 2009-2010, which could be met by • Banks’ borrowing, i.e. increasing external debt • Sales of residents’ foreign assets (54% of GDP in June 2008, excluding BoL reserves) • BoL reserves (18.4% of GDP in June 2008) Current account, % of GDP -30 -20 -10 0 10 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008f 2009f 2010f Transfers Dividends, net Interest (debt & portfolio) Compens.of employees, net Trade in G&S Current acc. Source: Bank of Latvia , Swedbank calculations Financing of current account deficit, % of GDP -20 -10 0 10 20 30 40 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008f 2009f 2010f BoL reserves Long-term Banks' Long-term others Short-term Banks' Short-term others FDI retained earnings, net FDI new capital, net Other borrowing, net Capital acc. Current acc. deficit
  • 10. 10© Swedbank Foreign trade: competitiveness retained • Trade balance improves as imports plunge and exports growth (albeit slowing) remains good – Trade and service deficit improved to 140 LVLm in August, back to the level of June 2006 • 8M 2008 cumulative import growth at -2% yoy reflecting weak domestic demand • 8M 2008 export growth still above 10% yoy – Imports will contract further as domestic demand weakens and global commodity prices retreat from their recent highs – Exports growth will undoubtedly moderate along with slowing global economic growth, but still expected to retain positive nominal growth throughout the cycle • Export potential remains strong – Latvia has retained and even boosted its share in key trade partners imports despite the growing unit labour cost and real effective exchange rate Growth of Goods Exports and Imports in Current Prices, YoY % -20 0 20 40 60 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Exports Imports Export market shares, 2001-2007, H1 2008, % 0.00 0.15 0.30 0.45 EU DE SE DK UK FI PL RU 0 2 4 6 8 EE LT Source: CSB, Eurostat, Bank of Latvia
  • 11. 11© Swedbank Foreign trade: swift improvement through imports Exports of Goods, LVLm 0 200 400 600 Metal etc. Wood, etc. Food, agricultural prod. Machines, equipment Transport Chemical products Textiles, wearing, leather etc. Mineral products Plastics Furniture Builiding materials Pulp and paper Other Optical instruments 8M 2007 8M 2008 -20 0 20 40 60 Annual Growth, % -60 -30 0 30 60 90 Annual Growth, %Imports of Goods, LVLm 0 300 600 900 1200 Machines, equipment Mineral products Food, agricultural prod. Metal etc. Transport Chemical products Textiles, wearing, leather etc. Plastics Pulp and paper Builiding materials Wood, etc. Furniture Optical instruments Other 8M 2007 8M 2008 • Exports show solid growth in all sectors except for – Housing related (wood and furniture): global shock – Textiles due to rising unit labour cost and price of energy: long term trend, as expected • Imports show across the board drop except for – Food and minerals: result of global price rises earlier this year – Metals, chemicals and optical instruments, which are closely related to exports and reflect global price developments Source: CSB
  • 12. 12© Swedbank 0.691 0.694 0.697 0.700 0.703 0.706 0.709 0.712 -150 -100 -50 0 50 100 150 Intervention, m LVL (r.s.) EUR/LVL (l.s.) Lower band (l.s.) Higher/Lower band (l.s.) 0% 2% 4% 6% 8% 10% 12% 14% Jan.07 Apr.07 Jul.07 Oct.07 Jan.08 Apr.08 Jul.08 Oct.08 3m Rigibor-Euribor spread RIGIBOR 1m RIGIBOR 3m EURIBOR 3m LVL/EUR exchange rate, BoL interventions and interbank interest rates • Shortage of the lats is driving rates up, the Bank of Latvia easing monetary policy – The Bank of Latvia cut reserve requirements on liabilities over 2 years from 6% to 5% and for other liabilities from 8% to 7%, effective from Oct24. Further easing of monetary policy likely – The lats interest rates have risen sharply due to outflows and uncertainty related to FX intervention • Long term stability depends on macro adjustment – A successful speculative attack on currency close to impossible (e.g. very shallow forward market) but sustainable growth and swift EMU entry requires restructuring of the economy and productivity growth Devaluation rumors BoL restricts access to liquidity and its forward market activities LVL denominated loans converted into EUR, BoL intervenes Liquidity tightening, still high credit growth State Treasury runs down accrued budget surplus FX interventions drive % rates up BoL announces cuts in reserve requirement from 8% to 7% BoL announces cuts in reserve requirement from 7% to 6% Financial market: money market tightens BoL announces cuts in reserve requirement from 6% to 5%
  • 13. 13© Swedbank Financial system remains stable • Devaluation is not a policy decision – Any benefits unlikely: strong inflationary effect, high labour mobility, imports already contracting, export competitiveness remains good – Would produce a deep negative real shock: share of forex denominated loans at ca 80% of GDP (ca 90% of domestic credit), the lats denominated deposits ca 21% of GDP • Financial system is robust to withstand global credit crunch – Support from parent banks available – Banks’ short term foreign assets other than deposits (e.g. syndicates) at 23.9% of GDP in June 2008 – BoL reserves at 18.4% of GDP in June 2008 – Government external debt at 6.6% of GDP in June 2008 Resident deposit structure, % 0 20 40 60 80 100 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 others USD EUR LVL Domestic credit structure, % 0 20 40 60 80 100 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 others USD EUR LVL Source: the Bank of Latvia and FCMC International investment position w/o FDI, % of GDP 0 20 40 60 80 100 120 140 A L A L A L 2006 2007 June 2008 BoL reserves Short-term others Banks nonresident demand dep. Short-term Banks, non deposit Long-term others Long-term Banks
  • 14. 14© Swedbank Labour market: key to adjustment • Despite Latvia entering a recession, labour market adjustment still lagging – Average labour productivity shrinking for the second quarter in a row (-1.7% and -3% YoY in Q1 and Q2 2008) – Unemployment expectations are rising fast, while unemployment rate inched up only marginally – Labour hoarding is squeezing companies’ profits and reducing their financial agility, making deleveraging more difficult and potentially introducing a drag on the future recovery – Unemployment to rise significantly very soon, e.g. anecdotal evidence: layoffs are rising, although official statistics do not illustrate it yet • Inflation retreats, wage-inflation spiral breaks – Demand side inflation factors disappear as domestic demand continuously weakens – Inflation is over its peak and core inflation decelerates – Lower world prices help disinflation Labour Market Indicators, % 0 5 10 15 20 25 Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08 -5 0 5 10 15 Harmonised unemployment rate, n.s.a. (l.s.) Official real net wage growth, YoY (l.s.) Labour productivity growth, YoY (r.s.) Consumer Price Inflation, % 0 5 10 15 20 Jan.04 Jan.05 Jan.06 Jan.07 Jan.08 -1 0 1 2 3 Contribution of core inflation, pp (l.s.) Total inflation, YoY (l.s.) Total inflation, MoM (r.s.) Source: CSB and Eurostat
  • 15. 15© Swedbank Real Convergence: progress so far • Real convergence a success: incomes relative to the Euro area up by ca 75% over the last 10 years driven by – Initial macro stabilisation and structural reforms of the 1990s to eliminate inefficiencies inherited from central planning – And further enhanced by EU accession (e.g. more efficient legal/ institutional framework, product and financial market integration, EU funds’ support, falling risk premium) • GDP per capita convergence due to – Better labour utilisation (comparison to 2007): • Employment up by 118k since 1997 • Participation rate up to 62% from 54% in 1997 for the age group of 15–74 • Population down by 6.7% (i.e. -163k) while the share of population in working age up to 79% from 75% in 1997 – Productivity growth on average 6.4% pa over 1997– 2007, which explains just over ¾ of GDP per capita growth EMPL GDP POPWA EMPL POP POPWA POP GDP ××= GDP per capita Labour utilisation Average labour productivity where POP – population POPWA – working age population EMPL – employment Source: CSB and Eurostat; Swedbank calculations GDP per capita & average labour productivity -5 0 5 10 15 20 25 30 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 H108 0 10 20 30 40 50 60 Real GDP per cap., YoY % (ls) EMPL / POPWA., YoY % (ls) POPWA / POP., YoY % (ls) Av. lab.prod., YoY % (ls) GDP per cap., PPS, % of EA (rs) Av. lab.prod., % of EA, (rs)
  • 16. 16© Swedbank Real Convergence: progress so far • Productivity growth largely in line with the neo-classical growth theory, i.e. labour vs. capital abundance and convergence of factor prices – Using Cobb-Douglas production function with constant returns to scale and α=0.36 we see that capital-labour ratio has contributed ca 2/3 of productivity growth or on average 4.5% pa – Contribution of TFP on average 1.9% pa, which is the lowest between the EU8 countries (see Arrabitel et al (2008)) • Still huge growth potential – Average labour productivity significantly less than 50% of the euro area average: must discount for a longer working week and ca a half fewer part-time workers than in the euro area countries – Recovery will come through growth of total factor productivity as investments decrease due to rising cost of capital and employment shrinks – Huge potential to be realised via TFP TFPCAPITALEMPLGDP ××= − αα )1( TFP EMPL CAPITAL EMPL GDP ×⎟ ⎠ ⎞ ⎜ ⎝ ⎛ = α Average labour productivity Total factor productivity Capital deepening Source: CSB; Swedbank calculations Capital / labour ratio and total factor productivity, YoY % -4 -2 0 2 4 6 8 1996 1998 2000 2002 2004 2006 H1 08 Total factor productivity Capital / labour
  • 17. Swedbank in Latvia. Q3 2008 Performance. Market Developments.
  • 18. 18© Swedbank Summary • Strong performance of Swedbank in 9M 2008 – Strong revenues from core business – Relatively stable margins – Asset quality materially better than the market – Focus on expense management • Lending business – Portfolio growth slowed – Focus on risk management – minimizing credit losses – Continuous monitoring and proactive work with problem clients and industries – Stricter new lending policies • Saving and investment products – Focus on resident deposits – Growing market shares in investment products • Business priorities 2009
  • 19. 19© Swedbank Strong performance in 9M 2009 EUR million 9M 2008 9M 2007 +/- Net interest income 164,6 151,4 9% Net commission income 43,7 38,0 15% Trading income 22,8 23,4 -3% Other income 6,7 4,6 44% Total income 237,8 217,4 9% Personnel expenses 44,5 40,3 11% Other expenses 46,5 36,8 27% Total expenses 91,1 77,1 18% Profit before loan losses 146,7 140,3 5% Net credit losses 35,2 15,9 121% Pre tax profit 111,5 124,4 -10% Income tax 16,9 17,4 Net profit 94,6 107,0 -12%
  • 20. 20© Swedbank Lending margins 2,65% 2,48% 2,10% 1,89% 1,88% 1,64% 0,93% 0,78% 0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% Q1 07 Q2 07 Q3 07 Q4 07 1Q 08 2Q 08 3Q 08 Estonia Latvia Lithuania Sweden Net Interest Margin (NIM) 2,78% 2,76% 2,95% 2,72% 2,76% 2,94% 1,5% 2,0% 2,5% 3,0% 3,5% Q1 07 Q2 07 Q3 07 Q4 07 1Q 08 2Q 08 3Q 08 Estonia Latvia Lithuania w/o bond portfolio revaluation Deposit margins 2,35% 1,51% 2,54% 2,07% 2,12% 2,36% 1,34% 1,25% 0% 1% 2% 3% 4% 5% Q1 07 Q2 07 Q3 07 Q4 07 1Q 08 2Q 08 3Q 08 0% 2% 4% 6% 8% 10% Estonia (ls) Latvia (ls) Lithuania (ls) Sweden (ls) Rigibor 1M (rs) Deposit margin = (FTP-interest expense)/average deposits Loan margin = (interest income-FTP)/average loans Net income drivers: stable NIM and margins Revaluation effect 2.90% in 3Q 08 Deposit margins • Growing proportion of more expensive time deposits • Deposit margins follow RIGIBOR trend Lending margins • New lending priced to reflect higher funding costs • Transferring higher funding costs to existing clients takes time
  • 21. 21© Swedbank NLL by products Financing portfolio Net loan losses (NLL) • NLL calculated as annualized net credit losses to portfolio at the beginning of the period 0.90% 0.91% 1.08% 0.76% Q3 08 0.55% 0.31% 0.75% 0.58% Q2 08 0.39% 0.25% 0.54% 0.38% Q1 08 0.40%Baltic Banking 0.23%Lithuania 0.56%Latvia 0.39%Estonia 2007NLL by country Net income drivers: asset quality 0,00% 0,50% 1,00% 1,50% 2,00% 2,50% 3,00% 3,50% 1M 07 2M 07 3M 07 4M 07 5M 07 6M 07 7M 07 8M 07 9M 07 10M 07 11M 07 12M 07 1M 08 2M 08 3M 08 4M 08 5M 08 6M 08 7M 08 8M 08 9M 08 Corporate lending Mortgage lending Consumer finance 0,00% 0,25% 0,50% 0,75% 1,00% 1,25% 1,50% 1,75% Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 NLL monthly NLL YTD 2% 34% 10% 1% 4% 13% 4% 33% Mortgage Consumer finance Other Large corporate SME Other Private car leasing Corporate ABF ABF Corporate lending Private lending
  • 22. 22© Swedbank Swedbank overdues over 90 days 3.6 times lower than for other Latvian banks as of June 30, 2008 • Swedbank level 0.91%, total market – 2.63% => other banks 3.24% (calculated based on Swedbank’s market share) Drivers of higher overdues are largely cyclical Net income drivers: credit losses much lower than in the market Delayed principal amount and interest payment starting from the 1st overdue day 1,15% 0,70% 1,15% 0,74%0,71% 0,27% 0 50 100 150 200 250 300 Q2 06 Q4 06 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 millionEUR 0,00% 0,25% 0,50% 0,75% 1,00% 1,25% 1,50% %fromportfolio total market overdues, in mEUR total Swedbank overdues, in mEUR total market overdues, % from portfolio total Swedbank overdues, % from portfolio Overdues: Swedbank vs. market (%) 1,84% 2,63% 0,09% 0,91% 1,16% 0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Market over 90 days, % of portfolio Sw edbank over 90 days, % of portfolio •Decrease in consumer confidence •High inflation •Slower GDP growth •Lower domestic consumption level
  • 23. 23© Swedbank Revenue & expense drivers ROE and CI 43% 46% 37% 40% 38% 26% 32% 23% 28% 26% 27% 23% 20% 16% 20% 13% 43% 38% 34% 35% 40% 36% 0% 20% 40% 60% Q1 06 Q2 06 Q3 06 4Q 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 555,5541,9526,9518,6Number of active private customers, th 57,856,554,852,9Number of corporate customers, th Q1 08 Q2 08 Q3 082007 Revenue growth vs 9M 2007, EUR m Revenue drivers • Stable income from core businesses • Growing number of clients Expense drivers • Adjustment of expenses to keep stable cost-income ratio • 10% employee adjustment program implemented in October • Lagging effect in administrative expenses Expense growth vs 9M 2007, EUR m 6 13 2 217 9M 07 NII fees -1 9M 08othertrading 238 +9% 5 5 4 9M 07 OtherPersonnel 91 Admin 77 9M 08 +18% Number of employees 2489 2484 2476 2499 2517 2433 2415 2502 2476 2445 2300 2400 2500 2600 2007 J 08 F 08 M 08 A 08 M 08 J 08 J 08 A 08 S 08 O 08 -10% Oct’08
  • 24. 24© Swedbank In 9 months banks earned EUR 293m, i.e. EUR 87m less than in 9M 2007 (-23%) • Market returns to steady growth rates • Administrative expenses rising • More expensive funding • Provisions increased Swedbank the most profitable in Latvia Net profit market shares 9M 2008 SEB 15,6% Parex 6,0% Nordea 7,3% DnB NORD 6,5% ab.lv 7,3% Other banks 21,7% Sw edbank 35,7% Lending market shares September 2008 SEB 14,4% Parex 11,4%DnB NORD 10,1% Nordea 12,1% ab.lv 4,1% Other banks 21,6% Sw edbank 26,4% Largest banks - net profit 108 64 38 33 41 18 21 46 24 21 18 21 19 105 0 20 40 60 80 100 120 Sw edbank SEB RietumuAizkraukles Parex Nordea DnB Nord EURm 9M 2007 9M 2008 Net profit 272 188 108 105 0 50 100 150 200 250 300 350 400 9M 2007 9M 2008 EURm Swedbank Others
  • 25. 25© Swedbank Mortgage portfolio, EUR m 167 234 684 322159 1 9451 851 1 382 13 25 52 0 500 1 000 1 500 2 000 2 500 2003 2004 2005 2006 2007 Sep 2008 Mortgage loans High margin loans Mortgage margin 0% 1% 2% 2005 2006 2007 Mar 08 Jun 08 Sep 08 Mortgage market share 27,1%27,5% 24,5% 23,0% 27,3%27,6% 29,8% 27,1% 20% 22% 24% 26% 28% 30% 32% 2003 2004 2005 2006 2007 Mar 08 Jun 08 Sep 08 Stable margins • Low pressure from competitors • Transferring higher funding costs to customers • Ability to increase margins if contract change initiated by the client Long term potential • Only 18% of households in Latvia have mortgage loans Lending portfolio: mortgage lending (1)
  • 26. 26© Swedbank Most of overdues come from people employed in industries most sensitive to slowdown in economics • Trade and personal service, RE, transportation • Data quite precisely reflect latest information in media about lay-offs in these particular sectors Stricter lending conditions applied to new lending • Precise risk profile of clients • Avoiding risky industries • Improved quality of new lending in 2Q and 3Q Mortgage clients risk scores • Rating 1 - 3- very good clients • Rating 4 - 5- good clients • Rating 6 - 7- medium-risk clients • Rating 8 - 9 monitored clients • Rating 10 - 12 risky clients Mortgage overdues, % of 12 month old portfolio 0% 1% 2% 3% 4% Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 LV >60 days LT >60 days EE >60 days Lending portfolio: mortgage lending (2) Mortgage risk profile 0% 10% 20% 30% 40% 50% 60% 1 2 3 4 5 6 7 8 9 10 11 12 Portfolio, Dec 07 Portfolio, Sep 08 New sales, September
  • 27. 27© Swedbank Yield and margin 5% 10% 15% 20% 2005 2006 2007 Mar 08 Jun 08 Sep 08 Margin Yield Consumer financing portfolio, EUR m 157 73 40 254238 0 100 200 300 2004 2005 2006 2007 Sep 08 Consumer overdues, % of 12 month old portfolio 0% 2% 4% 6% 8% Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 LV >60 days LT >60 days EE >60 days Portfolio growth slows, margins driven by funding cost • Margin decreases in short term due to fixed interest rate contracts and increasing funding costs Portfolio quality has not changed substantially in the last months • Watch list creation • Restructuring possibilities rather limited. Sale of debitor contracts preferred Lending portfolio: consumer financing
  • 28. 28© Swedbank Corporate financing market share (resident) 31,5% 28,3% 25,6% 29,3%29,5%29,6% 21,8% 26,0% 30,1% 27,6% 27,5% 27,7% 20% 25% 30% 35% 2004 2005 2006 2007 Mar 08 Jun 08 Corporate financing Corporate lending Corporate lending margin 1% 2% 3% 2005 2006 2007 Mar 08 Jun 08 Sep 08 Corporate financing portfolio, EUR m 247 421 571 682 2 032 1 160681 2 971 2 515 0 1 000 2 000 3 000 4 000 2004 2005 2006 2007 Sep 2008 Bank lending portfolio ABF portfolio Corporate financing market shares (by industries) 25,2% 33,0% 27,7% 25,0% 28,8% 36,6% 23,6% 14,2% 10% 20% 30% 40% 2005 2006 2007 Mar 08 Jun 08 Manufacturing Trade Real estate Agriculture Lending portfolio: corporate financing (1)
  • 29. 29© Swedbank Main industries in large corporate overdues are real estate and production • Proportion of RE in large corporate portfolio is slowly decreasing and in Sept’08 was 37.5% Main industries in SME overdues are transportation and production • Limited new financing in problematic industries • Pro-active monitoring of customers in these industries Monitoring targeted risk distribution of clients • Stricter lending conditions applied to new lending based on customer ratings • Restrictions in force for lending to customers in ratings 5 and 5- Large corporate risk profiles • Rating 1 - 2- low-risk portfolio • Rating 3 - 4- moderate-risk portfolio • Rating 5 - 5- vulnerable-risk portfolio • Rating 6 - 7 high-risk and non-performing loans Corporate overdue loans 0,0% 0,5% 1,0% 1,5% 2,0% 2,5% Dec 07 Mar 08 Jun 08 Sep 08 31-60 days 61-90 days over 90 days Lending portfolio: corporate financing (2) Large corporate risk profile 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% 1 1- 2 2- 3 3- 4 4- 5 5- 6 6- 7 Portfolio, Dec-07 Portfolio, Sep-08 Construction; 11% Industry; 17% Real estate; 33% Trade (incl. repairs); 13% Transport and communication; 8% Other; 18%
  • 30. 30© Swedbank • Credit portfolio losses are recognised through special and portfolio provisions • Main guidelines for estimating provisions: • Key regulations for provision estimation are: provisioning principles and provisioning rates • Supplementary regulations are: LGD methodology and rating methodology • General and special provision rates are regularly back-tested product specific LGDOverdue >90 daysFixed rate based on product typeRetail fixed LGD (based on asset type for leasing) Overdue >90 daysFixed rate for all portfolioSME Individual assessment based on Net present value (based on discounted value of revalued collateral and cashflow) Rating 6 - 7 default frequency (based on rating) * LGD (based on credit analyst estimate) Large corporate Special provisioning for impaired assets Impairment trigger Portfolio provisions (for performing portfolio) Portfolio segment LGD – loss given default Risk management: provisioning principles
  • 31. 31© Swedbank Strengthening risk management capability • Enhanced risk managment training for business units • Built capacity to work with distressed clients Portfolio monitoring • Improved quality and increased frequency of portfolio quality reporting • Regular loan review process includes – Overall portfolio stress test – Portfolio review – Proactive “watch list” report – IRB portfolio scoring once per month • On individual loan basis – Regular client rating review (rating classes 5 and higher - more frequent assessment) – Quarterly financials/covenants assessment – For SME/SSE and private portfolio regular overdue report (with client names identified) Risk management: quality monitoring (1)
  • 32. 32© Swedbank New sales quality management • Set targets for new origination quality (based on rating/score, RLSR and LTV) • Limitation of sales to sectors under watch • Internal target setting and incentives to reach targets Proactive management of watch list clients • Introduction of preventive and after-sales activities: proactive communication, frequent client meetings • Development of standard proactive solutions to ensure serviceability of the credit Overdue management • Immediate communication with client: Internet bank, SMS, telephone calls • Constant re-evaluation of the tactics on their effectiveness and adequacy Distressed debt restructuring • Defined tactics of restructuring • Effective solutions for collected collaterals handling Risk management: quality monitoring (2)
  • 33. 33© Swedbank Deposit market in Latvia: Swedbank focuses on resident business and has higher share of more profitable demand deposits Deposits by source 0 4 000 8 000 12 000 16 000 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 millionEUR Private, resident Corporates, residents Private, non-resident Corporates, non-residents 56% 44% Nearly half of total deposits in Latvia from non-residents • Non-resident deposits make 16% of private, and 61% of corporate deposits • Swedbank focuses on resident market - resident deposits make 92% of deposit portfolio Swedbank demand deposit share in total deposits higher than market average • Swedbank share of demand deposits higher than average on the market, i.e. 59.5% and 52,0% respectively Global financial market developments influence Latvian deposit market • In September total deposits of the Latvian banks declined by EUR 367 million, while Swedbank deposits declined by EUR 88 million Demand deposits share from total deposits 52,3% 56,3%59,0% 52,0% 71,6% 67,6% 62,7% 59,5% 0% 20% 40% 60% 80% 100% Sep 07 2007 Mar 08 Jun 08 Market Sw edbank
  • 34. 34© Swedbank Total deposit margins 4,8% 3,1% 2,0% 3,7% 3,4% 3,9% 0,4% 0,6% 1,1% 0,1% 0,6% 3,0% 3,9% 7,2% 5,7% 4,2% 4,5% 0% 1% 2% 3% 4% 5% 2005 2006 2007 Mar 08 Jun 08 Sep 08 0% 2% 4% 6% 8% Demand deposit margin (ls) Time deposit margin (ls) Rigibor 1M (rs) Private deposits, EUR m 195 282 490 761 716 655 676 600 731 353237167 702649 476 733 0 300 600 900 1 200 1 500 2003 2004 2005 2006 2007 Mar 08 Jun 08 Sep 08 Private time deposits Private demand deposits Deposit market share 31,3% 30,2% 27,3% 29,8%29,6% 30,2% 27,2%27,7% 28,1% 25,8% 30,2% 31,5% 25% 27% 29% 31% 33% 35% 2004 2005 2006 2007 Mar 08 Jun 08 Private resident deposits Corporate resident deposits Corporate deposits, EUR m 372 510 687 872 932 847 797 720 328 17197111 22014590 294 0 300 600 900 1 200 2003 2004 2005 2006 2007 Mar 08 Jun 08 Sep 08 Corporate time deposits Corporate demand deposits • Deposit campaigns, more competitive interest rates and flexible pricing to improve market position Saving and investment products: deposits • Number of time deposit contracts increased by 28% from September 2007, reaching 112,500 on September 30, 2008
  • 35. 35© Swedbank Assets under management, EUR m 127 85 62 274 205 0 100 200 300 2004 2005 2006 2007 Sep 08 Market share by customers 38%39% 39% 38% 30% 33% 37% 21% 5%5%5% 20%19% 16% 0% 10% 20% 30% 40% 50% 2004 2005 2006 2007 Mar 08 Jun 08 Sep 08 Pension second pillar Pension third pillar Life insurance market share by customers 10%11% 6% 14% 13%11% 16% 0% 5% 10% 15% 20% 25% 2005 2006 2007 Mar 08 Jun 08 Aug 08 Sep 08 Hansa funds • Financial market developments put pressure on growing assets under management • Investors move to less risky investments incl. deposits Pension second pillar • Swedbank the largest P2P manager in Latvia • Attracting large part of newcomers due to successful student programme “Open” Pension third pillar • Effective sales campaigns • Growing number of programme participants Saving and investment products: assets under managment growth impacted by financial market conditions
  • 36. 36© Swedbank Business priorities 2009 1 2 Manage credit portfolio through the cycle Build domestic funding base 4 5 Talent retention and development Build new operating model in Baltic banking 3 Improve operational efficiency and productivity
  • 37. Thank you!
  • 38. 38© Swedbank Appendix
  • 39. 39© Swedbank 56 55 54 15 1514 98 2 2 2 Q1 Q2 Q3 79 Other Net fees Trading 81 Net interest income 6 77 Total revenue 13 17 16 13 15 16 29 Q3 33 Q2 30 Personnel exp Other exp. Q1 Operating expenses Performance by quarters EUR millions Q1 2008 Q2 2008 Q3 2008 Net interest income 56 55 54 Net fees 14 15 15 Trading 8 9 6 Other 2 2 2 Total revenue 79 81 77 Personnel exp -16 -15 -13 Other exp. -13 -17 -16 Total operating exp. -29 -33 -30 Net loan losses -8 -11 -16 Net income 38 31 27
  • 40. 40© Swedbank 1 078 1 286 1 562 1 862 2 146 2 359 2 507 2 639 2 719 2 782 2 848 1 689 1 963 2 172 2 561 2 797 3 004 3 232 3 297 3 408 3 614 3 821 0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 millionEUR Private financing portfolio +14% Corporate financing portfolio +18% Construction; 11% Industry; 17% Real estate; 33% Trade (incl. repairs); 13% Transport and communication; 8% Other; 18% by currencies 1 886 2 299 2 730 3 378 3 859 4 436 5 114 689 772 859 912 975 816 792 709 682 688 703 4 849 5 319 5587 5821 0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 millionEUR EUR LVL USD Other by customer type Lending portfolio: structure Car leasing; 8% Consumer finance; 9% Mortgage; 78% Other; 5%

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