- Unemployment is decreasing in the Baltic states due to job creation and emigration. However, long-term unemployment remains high, reflecting structural problems. - Wages have grown the most in Estonia, exceeding Latvia and Lithuania by 30-40%. However, real wage growth has been negative in Lithuania. - Household spending has supported economic growth, indicated by rising payment card usage. However, consumers in Estonia and Lithuania are more concerned about the future due to European issues.

1. Edmunds Rudzitis
SEB Baltic Household Outlook
Julita Varanauskiene
October 2012
Triin Messimas

2. Income, Spending and
Sentiment Edmunds Rudzitis

3. Economic growth means more jobs
Changes in employment (%, Y-o-Y)
• Unemployment is decreasing due to both job
12%
creation and emigration.
• The share of long-term unemployed persons
8% are close or above 50 per cent, reflecting
structural problems in labour market.
4%
Unemployment (job-seekers) rate* (%)
0% 21
-4% 18
-8% 15
-12% 12
-16% 9
10
10
12
10
10
11
11
12
11
11
4Q
4Q
2Q
2Q
2Q
3Q
3Q
1Q
1Q
1Q
6
Latvia Lithuania Estonia
Source: National Statistics
3
2Q 8
3Q 8
4Q 8
1Q 8
2Q 9
09
4Q 9
09
2Q 0
3Q 0
4Q 0
10
2Q 1
3Q 1
4Q 1
1Q 1
12
12
• Estonia posted the biggest increase in 0
0
0
0
0
0
1
1
1
1
1
1
1
1Q
3Q
1Q
1Q
2Q
employment – in the 2nd quarter by 3.6 per cent Latvia Lithuania Estonia
(adjustments
y-o-y. In Latvia and Lithuania employment grew from 1Q2011 according * Persons aged 15-74
by 2.2 per cent and 1.4 per cent respectively. Population Census) Source: National Statistics
22.10.12 3

4. Uneven wage growth
Average gross wages and salaries (%, YoY) • Households in Estonia and Latvia have
8% experienced improvement in the purchasing
power, while in Lithuania real wages remain
6%
on a downward trend.
4%
2%
0% Real wages (%, YoY)
-2% 4%
-4%
-6% 0%
-8%
-10% -4%
10
10
12
10
10
11
11
12
11
11
4Q
4Q
2Q
2Q
2Q
3Q
3Q
1Q
1Q
1Q
Latvia Lithuania Estonia -8%
Source: National Statistics
-12%
• In the 2nd second quarter the average gross
10
10
12
10
10
11
11
12
11
11
4Q
4Q
2Q
2Q
2Q
3Q
3Q
1Q
1Q
1Q
wage in Estonia reached EUR 900. It was by 32 Latvia Lithuania Estonia
per cent larger than in Latvia (EUR 684) and by
44 per cent higher than in Lithuania (EUR 624). Source: National Statistics
22.10.12 4

5. Household spending support economic growth
Household consumption expenditure (%, YoY) • Payment card statistics shows more rapid
10% increase in household consumption.
8% • Due to lower prices households are willing to
6% buy goods abroad, incl. in the online stores.
4%
2%
0%
Changes in amount of transactions at POS
-2%
terminals (1H2012 compared to 1H2011)
-4%
40%
-6%
-8%
30%
-10%
-12%
20%
10
10
12
10
10
11
11
12
11
11
4Q
4Q
2Q
2Q
2Q
3Q
3Q
1Q
1Q
1Q
Latvia Lithuania Estonia 10%
Source: National Statistics
0%
• In Latvia and Lithuania growth of consumption Local Abroad Local Abroad Local Abroad
market market market
expenditures was faster than disposable
income increase. Explanations: quite large LV LT EE
share of shadow economy and improvements Source: Central Banks
in consumer confidence.
22.10.12 5

6. Only in Latvian consumers don’t lose their temper
Consumer sentiment index Expectations about household's financial
situation and general economic situation in the
0 future (September, 2012)
-5
-10 5
-15 0
-20 -5
-25 -10
-30
-15
August
September
October
November
December
January
February
March
April
May
June
July
August
September
-20
-25
Latvia Lithuania Estonia
2011 2012
General economic situation
Latvia Lithuania Estonia Household financial situation
Source: Eurostat Source: Eurostat
• Estonians and Lithuanians are more concerned about future due to European problems and
increasing expenditure (prices).
• Latvians’ optimism is fueled by increased purchasing power and national economy
achievements
22.10.12 6

7. To spend or to save?
Intentions to spend more and probability to save
Energy prices are increasing. This
(September, 2012)
heating season expected to be the
0 most expensive.
-10
• In Riga and Tallinn heat prices
-20 would rise by 20 per cent year-
on-year this autumn while in
-30
Vilnius heating price is likely to
-40 increase by 9 per cent.
-50 • Only Estonians intend to spend
Estonia Latvia Lithuania less and to save more.
Intentions to spend more on big ticket purchase
Probability to save
Source: Eurostat
22.10.12 7

8. Household
financial assets Julita Varanauskienė

9. Deposits keep growing
Deposits per capita (Eur)
4000 3410
3126
2586 2652
3000
1980 2026
2000
1000
0
Latvia Lithuania Estonia
June 2011 June 2012
Source: Central Banks, National Statistics
• The growth is conditioned by increasing income of households
• Households prefer safe and stable place for their savings/assets
• Precautionary motives are still important
22.10.12 9

10. Term deposits lose their appeal…
Deposits without agreed maturity share
Preference of deposits without
maturity to term deposits signal 60%
about: 55%
Ÿ plans to spend money in the 50%
nearest future
45%
Ÿ waiting for momentum to invest
money elsewhere 40%
Ÿ lack of interest to earn interest 35%
30%
2011 2012
Latvia Lithuania Estonia
Source: Central Banks
22.10.12 10

11. …due to decreased interest rates
Real deposit interest income
(12 month lagged interest rate on 1 year maturity deposit in
national currency less annual inflation)
20
15
10
5
0
-5
-10
-15
2005 2007 2009 2011 2013
Estonia Latvia Lithuania
Source: Central Banks, National statistics, SEB estimations
22.10.12 11

12. Cash holdings are increasing
Cash and deposits ratio
Different sizes of cash holdings
35%
reflect:
30%
25% Ÿ different size of shadow
20% economy
15% Ÿ different level of penetration of
10%
financial services
5%
0%
Ÿ different level of trust in financial
2008 2009 2010 2011 2012 institutions
Latvia Lithuania Estonia
Source: Eurostat Growth trend in all three countries
reflects weaker motivation to keep
money in deposit accounts
22.10.12 12

13. Household Liabilities Triin Messimas

14. The level of household leverage in all Baltic countries on
reasonable levels
Household debt to GDP (2011)
140 131 132
120
96 99
100
81
76 80
80 70
62
57
60 52 53 53 56 56
42 44 46
40 35 37
30
25 25 25 27 29
18
20
0
RO LT SK BG SI CZ HU PL LV IT EE AT EL LU FR DE BE FI MT IE SE ES PT NL UK CY DK
Source: European Credit Research Institute
• At the end of 2011 the household debt to GDP was in Estonia 44%, in Latvia 37% and in
Lithuania 25%.
• The level of deleveraging depends on the rates of credit expansion before the crisis.
Estonia and Latvia had one of the highest credit growth until 2007.
22.10.12 14

15. The stucture of household loan portfolio resembles the one of
the Northern EU countries
Structure of household loan portfolio
120%
100% 8% 8% 8% 8% 16% 12%
11% 9% 12% 12% 9%
80% 14%
60%
40% 81% 84% 79% 81% 79%
69%
20%
0%
2008 IIQ 2012 2008 IIQ 2012 2008 IIQ 2012
Estonia Latvia Lithuania
Other loans Consumer loans Housing loans
Source: National Central Banks
Ÿ The share of housing loans in total loan portfolio of households has increased in all
the Baltic countries and has reached 80 per cent or above.
Ÿ In the Northern EU countries the share of housing loans make up ca 75 per cent, in the
Southern EU countries ca 70 per cent and in New Member States ca 60 per cent of the
total loan portfolio
22.10.12 15

16. Households continue to decrease their liabilities
Changes in housing loan portfolio, Y-o-Y Changes in consumer credit portfolio, Y-o-Y
4% 0%
2%
-5%
0%
-10%
-2%
-4% -15%
-6%
-20% Exclusion of loan
-8% portfolio of Snoras Bank
-25%
-10%
-12% -30%
Ma 9
M 9
De 9
De 9
Ju 0
Ju 0
Se 9
Ju 2
Ju 2
Ma 0
M 0
De 0
De 0
Se 0
Se 0
1
Ju 1
12
12
Ma 1
M 11
De 1
De 1
Se 1
11
0
0
-1
r-1
0
0
1
-1
-1
r-1
0
r-1
1
1
1
1
1
1
1
1
1
c-
c-
c-
c-
p-
c-
c-
p-
n-
p-
p-
n-
p-
p-
n-
n-
n-
n-
n-
ar
ar
ar
Se
Ju
Ju
Se
Estonia Latvia Lithuania Estonia Latvia Lithuania
Source: National Central Banks Source: National Central Banks
• At the end of second quarter in Estonia and Lithuania the volume of housing credit
decreased at 1.5 and 1.6 per cent year-on-year, respectively, while in Latvia the speed of
deleveraging has increased to 11.2 per cent
Ÿ Since the beginning of 2012 the deleveraging of consumer credit has slowed down in
Estonia and Lithuania.
22.10.12 16

17. Households experience most favourable
mortgage interest rates
6-month Euribor interest rate (%)
Majority of the housing loans are
6
related to Euribor rate that is at
historically low level: in Sept 2012 5
at 0.48 per cent. 4
3
The average interest rate of 2
housing loans in EUR in June 2012: 1
Ÿ In Estonia 2.9% 0
Ÿ In Latvia 3.5%
07 8
07 9
10 8
10 9
04 8
01 8
04 9
01 9
09 10
10 10
07 12
.12
04 10
01 10
07 11
04 12
.11
04 11
01 11
.0
.0
.0
.0
.0
.0
.0
.0
.
.
.
.
.
.
.
.
.
01
10
Ÿ In Lithuania 3.2% Source: European Banking Federation
22.10.12 17

18. Households continue to improve their living conditions
Share of population occupying in flats (vs. houses) Useful floor area of dwellings per capita, in sq m
80 35
66 65
68 30 30
70 65 30 27 27 27
58 57 25
60
25 23 22
50
41 42 20
40
15
30
10
20
10 5
0 0
Estonia Latvia Lithuania EU 27 Estonia Latvia Lithuania
countries
2005 2010 1999 2009 2011
Source: Eurostat Source: National statistics
• There is a slow trend from flats towards houses in all Baltic countries. Still the share of flats
is far above the EU average,
Ÿ Households have been increasing their living space but it is still below the one in the
Western Europe (ca 40 sq m)
22.10.12 18

19. Households would need to increase their investment rate
Gross investment rate of households
20
16
12
8
4
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
European Union (27 countries) Estonia Latvia Lithuania
Source: Eurostat
• The investment rate of household sector is below the EU average that is 9%: in 2010 it
was 7.6% in Estonia, 3.8% in Latvia and 3.5% in Lithuania.
Ÿ In Estonia the investment rate peaked at 17.6%in 2006 while in Latvia the peak was in
2007 at 8.2% and Lithuania in 2008 at 6.2%.
22.10.12 19

20. In the Baltic countries the home-ownership is one of the highest in the EU
Share of population in owner-occupied accomodation • As a result of the privatisation
100 93,1 process most households own
85,5 84,1 their housing.
80
70,7
• The highest home-ownesrhip is
60
in Lithuania (93%), in Estonia it
is 86% and in Latvia 84%. The
40
EU average is 71%.
20
Ÿ Hence, housing is an important
0 asset of households and
Estonia Latvia Lithuania EU 27 developments in the real estate
countries
2010 sector impact households
Source: Eurostat
directly
22.10.12 20

21. So far - better than expected
• Employment has increased
• Real wages have grown
• Employment growth and rising wages have supported private consumption
• Spending abroad has outpaced the rise in domestic spending
• Households have increased their net financial worth
• Short term deposits were losing their attractiveness, holdings of cash were
increasing
• The fall of loan volumes is slowing down and households benefit from
historically low Euribor rates
• The households should invest in order to increase the useful floor area of
dwellings
22.10.12 21

22. Questions?
Edmunds Rudzitis, SEB Latvia
Julita Varanauskiene, SEB Lithuania
Triin Messimas, SEB Estonia
22.10.12 22