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
 Overview of the market

Baltics macro development

Real GDP growth

• Long-term economic growth is 14%
supported by: 12%
10%
– Attractive initial conditions 8%
– Prudent governance and strong 6%
institutions 4%
2005 2006 2007F 2008F
– Significant investment in capital Est Lat Lit
stock and human capital
– Open and flexible economies
CPI growth
• Short-term unsustainable growth 12%
caused by: 10%
8%
– EU accession and convergence 6%
– Excessive inflow of debt capital 4%
2%
2005 2006 2007F 2008F
Est Lat
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2
Baltics macro development – Signs of slowdown

GDP real growth

• All three countries are following 15%
the expected path of an 13%
economic cycle: 11%
• Estonia is clearly in the slowdown 9%
phase (expected to reach low point 6%
during H108 with slow recovery 4%
during H208) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07
• Latvia passed the turning point in
Estonia Latvia Lithuania
Q3 (expected to reach bottom
H2 08 with slow recovery during
2009) Consumer confidence
15
• Lithuania reached its peak in Q3 10
(the bottom of current cycle 5
expected in 2009. The economic 0
cycle in Lithuania will probably be -5
flatter than in Estonia and Latvia) -10
01-05 04-05 07-05 10-05 01-06 04-06 07-06 10-06 01-07 04-07 07-07 10-07 01-08
-15
-20
Estonia Latvia Lithuania

© Swedbank 5

Present situation

3
 Financial performance
Net profit (EURm) Cost-income ratio

49% 49%

463 44%
323 40%
175 205

2004 2005 2006 2007 2004 2005 2006 2007

Return on equity
Lending (EURm)
30%

27%
18,877
14,158 23% 22%
8,899
5,697

2004 2005 2006 2007 2004 2005 2006 2007

Number of employees Medium-term goals

EBT growth >20%
9,203
ROE on actual equity >20%
8,216 <42%
7,058
Cost-income
6,576
© Swedbank Net loan losses <0.35% 7
2004 2005 2006 2007

Group lending by sectors – Baltic Banking

Portfolio, December 2007, EURm Real-estate management split

3%
15% Office
Individuals 8,282 42%
24%
Production and
Real-estate warehouse
3,012 15% Residential
mgmt 8%

Land plots
Retail &
wholesale
1,736 9%
Retail
12%
Other
Industry 1,692 8%

38%
Transport 1,111 6%

Real estate development

Construction 546
3% • 38% of real estate management loan book is
related to residential real estate (Estonia
Other 2,786 14% 29%, Latvia 45%, Lithuania 38%)
– Est/Lit 1/1 development
0 2,000 4,000 6,000 8,000
– Lat 2/3 development
xx% - share of portfolio and portfolio growth • Early development projects (land) form 12%
© Swedbank of real estate management portfolio 8

4
Asset quality and provisioning cost

• Upon the Hansabank acquisition in Loan loss ratio, net*

2005, Swedbank made a general
provision of about SEK280m. In Q4 Q4 07 2007
2007, SEK70m of this was released Estonia 0.57% 0.39%
Latvia 0.61% 0.56%
• The provision was partly made Lithuania 0.09% 0.23%
because Swedbank at the time did Group level provision adjustment -0.17% -0.06%
not have full insight into
Hansabank's risk and credit Baltic Banking 0.28% 0.35%
systems and processes and thus *Loan loss ratio, net = (changes in provisions + net write-offs) / credit portfolio at
made an extra provision for the beginning of the period
potential bad loans
Share of non-performing loans*
• Since then the systems and Jun 07 Dec 07
processes have improved and have Corporate 0.56% 0.63%
also been aligned with Swedbank's
Private 0.50% 0.76%
Baltic Banking 0.53% 0.68%
*Share of non-performing loans = the volume of 60 days overdues /12m old portfolio

© Swedbank 9

Baltic Banking: looking at 2008

5
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
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

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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

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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

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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

© Swedbank 19

Additional material

© Swedbank 20

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Macro figures*
2005 2006 2007f 2008f 2009f Latest data
Economic growth, %

Estonia 10.2 11.2 7 5 6 4.5 (Q4 07)

Latvia 10.6 11.9 10.5 6 6.5 9.6 (Q4 07)

Lithuania 7.9 7.7 8.7** 7.5 6.5 7.9 (Q4 07)

EU27 1.8 3 2.9 2.4 2.4 5.6 (Q3 07)

Consumer price growth, %

Estonia 4.1 4.4 6.6** 6.5 3.8 11 (Jan 08)

Latvia 6.7 6.5 10.1** 12.5 6.5 15.8 (Jan 08)

Lithuania 2.7 3.7 5.7** 8 4.8 9.9 (Jan 08)

Harmonized unemployment level, %

Estonia 7.9 5.9 5 5.5 6 5.3 (Dec 07)

Latvia 9 6.9 5.9 6.5 6.5 5.4 (Dec 07)

Lithuania 8.3 5.6 4.3 4.6 4.7 3.9 (Dec 07)

EU27 8.7 7.9 7.1 6.8 6.6 6.8 (Dec 07)

Current and capital account balance, % of GDP

Estonia -8.1 -13.4 -12 -8 -6.5 -12.2 (Q407)

Latvia -11.2 -21.1 -22.3 -15.5 -11.5 -14.7 (Q4 07)

Lithuania -5.9 -9.6 -12.8 -12.2 -11.3 -10.0 (Q4 07)

EU27 -0.7 -0.8 -0.9 -0.9 -0.9

General government balance (ESA95), % of GDP

Estonia 2.3 3.8 2 -1.8 0.0

Latvia -0.4 -0.3 0.7 1 1.2

Lithuania -0.5 -0.6 -0.5 -0.5 0.0

©EU27
Swedbank -2.4 -1.6 -1.1 -1.2 -1.1 21
*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 Main export sectors - Latvia
100% 9% 10% 12% 100%
25% 17%
80% 31% 80%
45% 40% 9% 23%
60% 11% 60% 9%
7%
6%
N/A

40% 30%
9% 40% 30% 28%
17%
18%
20% 5% 6% 7%
6% 4% 12% 20% 9%
4% 8% 4%
11% 9% 12% 15%
7%
0% 0%
2003 2005 2007 2003 2005 2007
Food, beverages, tobacco etc Mineral products Food, beverages, tobacco etc Mineral products
Chemicals Plastic, rubber, wood etc Chemicals Plastic, rubber, wood etc
Textiles, footwear Machinery and equipment Textiles, footwear Machinery and equipment
Metals + other Metals + other

Main export sectors - Lithuania

100% 11% 11% 6%

80% 27% 22% 35%

60% 10%
15% 10% 8%
9% 7% 12%
40% 7% 9%
27% 14%
20% 20%
17%
11% 13%
0%
2003 2005 2007
Food, beverages, tobacco etc Mineral products
Chemicals Plastic, rubber, wood etc
Textiles, footwear Machinery and equipment
© Metals
Swedbank+ other 22

11
 December 2007 Commercial
real estate 5%
14% 23%

32%

EE 47% 53% 13%

11%
7%
6%
22%
38%
2%
29%
15% 12%

41% 11%

LV 44% 56% 7% 15%

7%
11%

34%

3% 45%
5%
11% Office
5%
31% Production & warehouse

12% Residential
37% 63% 9%
LT 8% 38%
Retail
40%
38% Land plots

Private loans Commercial real estate Transport Other

© Swedbank
Corporate loans Capital goods Retail 23

Other

12