AS HANSAPANK

ANNOUNCEMENT

10.03.99

 

 

HANSABANK GROUP'S 1998 AUDITED FINANCIAL STATEMENTS

 

Result of Operations

The year 1998 included many significant events both for 

Hansapank's operating environment, as well as for the 

organization itself. Excluding the results of the banks that were 

closed during the year, the aggregate losses in the Estonian 

banking sector reached 600 million kroons in 1998. According to 

different assessments the respective losses in Latvia could even 

be as high as 800 million kroons.  All together the number of 

banks registered in Estonia fell by six as the result of mergers 

and bankruptcies. 

 

On the background of those changes Hansabank Group's result of 

60.5 million kroons loss is a relatively good outcome, however it 

is definitely not a satisfactory outcome for the shareholders.  

The results of the different enterprises belonging to the 

Hansabank Group were the following: Hansabank 31,1 million 

kroons, Hansa Capital 151.3 million kroons, Hansabank Insurance 

together with Estonian Insurance Company -51.1 million kroons, 

Hansabank-Latvia -77.5 million kroons and Hansa Asset Management 

-6.7 million kroons. When looking at the mother company's profit 

number, one should consider the dividends from the subsidiaries 

as extraordinary income (97.2 million kroons).

 

The following section describes the events of the year that 

either directly or indirectly affected the operating environment 

of Hansabank Group.

- In January long and complicated merger talks were started 

between Hansabank and Estonian Savings Bank, as the result of 

which a merger agreement was signed on June 11 and approved by 

the shareholders on July 12. The process was legally concluded on 

July 20, 1998, when an entry was made into the Commercial 

Register. However, organizationally, the process will be 

finalized in 1999; as the last stage, both banks' IT systems will 

be merged during spring.

- In March, the second largest merger in Estonia was started. 

Estonian Union Bank (Ühispank) made a merger proposal to Tallinna 

Bank.  Merger agreement was signed already in April, and finally 

accepted by the shareholders on May 25.  Respective entry into 

the Commercial Register was made on July 29.  The partnership 

between Union Bank, Latvian Unibank (Unibanka) and Lithuanian 

Vilniaus Bankas was also launched in March.

- On June 8, the supervisory board of Estonian Agricultural Bank 

(Maapank) decided to close the bank and start liquidation 

procedures.  Two weeks later, however, the Central Bank of 

Estonia started bankruptcy procedures, as the assets of the bank 

did not cover the liabilities to creditors. The various sources 

estimate the total losses of Estonian Agricultural Bank to be 

around 0.8-1 billion kroons.

- On September 1, Estonian Forexbank and Estonian Investment 

Bank published their merger proposal. However, on October 1, the 

Central Bank of Estonia put Forexbank under special supervision.  

The shareholders' meeting that followed agreed to make a targeted 

share issue to the Central Bank of Estonia. As the result of his 

issue the latter became the majority shareholder in Forexbank.  

The Central Bank of Estonia also became a shareholder in Estonian 

Investment Bank.  At the end of the aforementioned merger and 

these capital injections, the ownership share of the Central Bank 

of Estonia in the resulting bank stood at 50%.  In the words of 

the Central Bank, this investment has a nature of restructuring 

assistance loan and in the long perspective, the bank wants to 

sell its ownership to a strategic investor.

- On October 1, the Central Bank of Estonia annulled the 

operating license of EVEA Bank, as the result of which bankruptcy 

proceedings were started.  The bank had been looking for a 

strategic investor for almost half a year to recapitalise the 

bank.  A week later, ERA Bank asked the Central Bank to 

temporarily cancel the operating license due to foreseen payment 

difficulties.  ERA Bank, too, said that it was looking for a new 

strategic investor and according to the resources from the 

Central Bank, it is currently over the hill and restarting 

operations based on its new strategy. 

- On October 17, Hansabank held an extraordinary shareholders' 

meeting, where permission was received to go ahead with a rights 

offering of 1.47 billion kroons worth of shares to the current 

shareholders of Hansabank.  The whole issue was underwritten by 

FöreningsSparbanken AB (Swedbank) at the price of 100 kroons per 

share. At the end of the year Swedbank had 49.98% ownership in 

Hansabank.

- Another large Scandinavian bank that aggressively entered the 

Balticum banking market was Skandinaviska Enskilda Banken (SEB) 

that purchased correspondingly 32%, 44% and 36% of Union Bank, 

Unibankas and Vilniaus Bankas. The changes in ownership 

structures will most likely show up more Scandinavian influences 

in the ways the local banking sector will develop in the future.

 

Revenues and Expenses

Herewith we need to stress the fact that the revenues and 

expenses from the assets of Estonian Savings Bank throughout the 

first seven months are recorded in the results for Estonian 

Savings Bank. Since August, the cash flows from the united bank 

are included within Hansabank's results. Therefore, we advise to 

use caution when interpreting different growth ratios.

- The revenues for the Group grew by 6.0 million kroons, 

reaching 1,242.4 million kroons. 38.5% of total revenues were 

made up by net interest income after provisions, 41.1% by service 

fees, 10.3% by financial income, 4.8% by net income from 

insurance operations and 5.3% by other income.

- The total net interest income of Hansabank Group in 1998 was 

1,023.7 million kroons, which exceeded the result of 1997 of 

591.4 million kroons by 73.1%. The interest income growth was 

98.6% and interest expense growth 146.9%. The average interest 

earning assets grew from 8,775.5 million kroons to 16,173.4 

million kroons, or 84.3%. The average volume of interest bearing 

liabilities grew from 8,922.8 million kroons to 16,928.1 million 

kroons, or 89.7%. The yield of interest earning assets grew from 

10.30% to 11.14% and the cost of interest bearing assets grew 

from 3.50% to 4.55%.  The faster growth of the cost of 

liabilities when compared to the return on assets led to the 

decrease in spread from 6.81% to 6.59%.  The year 1998 is 

described by the significant rise in interest rates, which in the 

first half of the year was caused by the low liquidity of the 

financial system and in the second half of the year by the 

general depression of the economy. The spread decreased as the 

maturity of liabilities is shorter than that of assets whereby 

the increase in interest rates first influenced the liabilities' 

side.

- The amount of provisions for bad debt totalled 594.3 million 

kroons in 1998 that exceeded the level of the previous year by 

8.9 times. Actual loan losses in 1998 were 212.3 million kroons. 

During the year a total of 49.0 million kroons worth of loans 

previously written off were recovered. 

- Non-interest income rose from the level of 701.4 million 

kroons in 1997 to 774.7 million kroons, or 10.5%. The main 

sources of growth were in different commission and fee income 

that totalled 511.4 million kroons, that is 40.3% more than in 

1997. The financial income in 1998 was very modest, only 127.8 

million kroons that is substantially less than in 1997 (294.2 

million kroons) - that translates into the decline of 56.6%. 

Additional 59.4 million kroons, 69.1 million kroons and 7.0 

million kroons were earned respectively from insurance 

operations, other income and dividends. The losses from minority 

shareholding companies recorded by using equity participation 

method totalled at 10.7 million kroons in 1998.

- The operating expenses for the Group in 1998 were 1,301.7 

million kroons (incl. depreciation expense). The largest share of 

operating expenses comes from personnel expense that stood at 

422.3 million kroons. Administrative expenses, which include 

extraordinary costs from the launching of the Lithuanian banking 

project and the costs of implementing the merger increased with 

respect to last year by 133.3% or to 342.2 million kroons. The 

amortization of goodwill totalled 102.7 million kroons. 

Depreciation of other assets was 143.0 million kroons that is by 

76.1% higher than a year ago.

 

 

Assets and Liabilities

The assets of the Group grew in 1998 by 13.27 million kroons. A 

large portion of growth is due to the merger with Estonian 

Savings Bank in July1998. The value of assets passed over to 

Hansabank with the merger totalled about 9.8 billion kroons. (The 

sum of the year beginning assets of the two banks gives us a pro-

forma growth of Group's assets of 3.54 billion kroons.)

- The largest share of assets belongs to the loan portfolio that 

grew in 12 months by 9.21 billion kroons (or based on pro forma 

balance sheets by 4.1 billion kroons) reaching 16.79 billion 

kroons at the end of the year. (The loan portfolio of Hansabank 

Estonia was at the same time 12.18 billion kroons, forming 

98.5%.of total deposits) During the second half of the year the 

economic environment deteriorated significantly in the Baltics, 

which is reflected in a substantially larger reserve for loan 

losses. It was 740.1 million kroons, or 4.4% of the total loan 

portfolio. 

- The Group's securities portfolio increased to 2.36 billion 

kroons over the year that is by 1.53 billion kroons. The 

liquidity portfolio grew at the same time by 1.13 billion kroons, 

investment portfolio by 0.59 billion kroons and the trading 

portfolio shrunk by 0.9 billion kroons. 

- As the result of the merger 857.9 million kroons of goodwill 

was created in Hansabank Group's balance sheet, which will be 

amortised over the period of four years. At the end of 1998 the 

Group's goodwill amounted to 755.2 million kroons.

- The Group's liabilities increased last year by 9.95 billion 

kroons to 23.05 billion kroons. (pro forma growth of 1.78 billion 

kroons). The main sources of liabilities' growth were clients' 

deposits, dues to other financial institutions and issued 

securities. 

- The clients' deposits grew by 7.75 billion kroons over the 

year (pro forma growth of 2.82 billion kroons), reaching 14.75 

billion kroons at the end of the year. As of the end of December 

1998, the term deposits amounted to 4.67 billion kroons, forming 

31.7% of total deposits (at the beginning of the year the 

respective figure was 24.7%). The demand deposits at the same 

time stood at 10.08 billion kroons.

- The resources from other banks grew by 0.75 million kroons. In 

November the Group had to repay three loans in the total amount 

of 1.4 billion kroons. This coincided with receiving of a 

syndicate loan of two parts for 150 million German marks. 150 

million marks divide into a 5-year term loan from EBRD for 50 

million marks and a 3-year term loan from a syndicate of 

commercial banks for 100 million marks.

- The total volume of issued securities by the Group increased 

by 0.56 billion kroons to 2.05 billion kroons (pro forma growth 

of 0.15 billion kroons).

- The Group's subordinated liabilities stood at 460.7 million 

kroons at the end of the year. In December we converted three 

subordinated loans from EBRD to stock, as the result of which the 

volume of subordinated loans decreased by 35 million German 

marks. 

 

Shareholders' Equity

During 1998, the shareholders' equity of the Group grew by 3.04 

million kroons or to 4.19 billion kroons. The bank issued 40.5 

million new shares last year, which increased the bank's stock 

capital to 787.6 million kroons. As of December 31, 1998, 

Hansabank Group had capital adequacy of 18.8% and the bank's 

capital adequacy stood at 19.1%.

 

Analysis of Income Statement

Net interest income

Hansabank Group earned 1,023.7 million kroons as net interest 

income during 1998, exceeding the 591.4 million kroons earned in 

1997 by 432.3 million kroons or 73.1%. The volume of average 

assets in 1998 was 20.74 billion kroons, translating into a 89.6% 

annual growth. The Group's spread fell to 6.59% from its year ago 

level of 6.81%. Net interest margin for the Group declined by 47 

bp to 4.94%.

Interest income grew by 98.6% or 890.9 million kroons to 1,794.5 

million kroons (903.6 million kroons in 1997, respectively). The 

average interest earning assets increased by 84.3% during 1998, 

totalling to 16.17 billion kroons. The yield on interest earning 

assets rose by 84bp to 11.14%. Over half of total interest income 

(50.7%) was formed by interest income from loans (47.2% in 1997, 

respectively). The Group earned 910.4 million kroons in interest 

income from loans, which is 113.5% higher than in 1997. A 

similarly increase was also recorded in leasing interest income, 

which share in total interest income rose from 31.4% or 34.7%. 

Such interest collections grew by 119.5% to 622.4 million in 

1998. The decrease in average leasing and loan interest rates was 

reversed during 1998, which however does not reflect in the table 

Productivity of the Balance Sheet. This is due to the fact that 

despite the significant increase in general credit interest 

rates, the main borrowers were the best corporate clients of the 

Group for whom there was no noteworthy change in the interest 

level. The average productivity of the credit portfolio was 12.8% 

and 13.1% during 1998 and 1997, respectively. Interest income 

earned from different securities totalled to 87.1 million kroons 

in 1998, remaining on the same level with the previous year's 

result of 91.1 million kroons. This is due to the shift towards 

lower risk securities and the resulting increase in their share 

in total securities' portfolio.

The Group earned 62.8 million as interest income from bank 

deposits and loans, representing a decrease of 1.4 million kroons 

from the previous year's result. This is caused by the 

reclassification of overnight deposits under correspondent 

accounts. Additionally, this item suffered from the low liquidity 

on the Estonian inter-bank market throughout the year and the 

redirection of resources form other banks to high quality 

securities. The significant increase in interest earned on 

correspondent accounts, which during 1998 totalled 57.7 million 

kroons, resulted from the previously mentioned reclassification 

of overnight deposits.

 

Interest expenses totalled 770.8 million kroons during 1998, 

representing a growth of 458.6 million kroons from the previous 

year. The growth rate of interest expenses exceeded the one of 

interest income and stood at 146.9%. The average volume of 

interest bearing liabilities increased from 8,922.8 million 

kroons to 16,928.1 million kroons, i.e. by 89.7%. The cost of 

interest bearing liabilities increased by 105 bp to 4.55% in 

1998. The largest part of interest expense - 405.9 million 

kroons, or 52.7% was paid on deposits; 256.6 million kroons on 

term deposits and 149.3 million kroons on demand deposits. The 

share of interest expense on term deposits has increased from 

60.0% in 1997 to 63.2% in 1998. The change has been caused by a 

noteworthy increase in term deposit interest rates. While last 

year the average interest rate on demand deposits increased only 

by 30bp, for term deposits it leaped by 280 bp. While in 1997 the 

cost of international financing decreased substantially, then 

1998 witnessed a reverse in the trend. Interest expense on loans 

and deposits increased by 173.7%, totalling 240.5 million kroons 

in 1998. Of that amount 6.6 million kroons, or 2.7% was interest 

expense on correspondent accounts and overnight deposits, but the 

bulk of it is generated by loans received from other credit 

institutions. Their average cost reached 5.3% in 1998, i.e. 100bp 

higher than a year earlier. There are several factors that drove 

the growth. First, the general decrease in trust towards 

developing markets, which quickly reflected in interest rate 

levels; second, the higher cost of funding of the former Estonian 

Savings Bank when compared to that of Hansabank and third, the 

increasing share of subordinated debt in total financing. The 

last more significant item among interest expense is interest 

expense on securities, which share has risen from 13% in 1997 to 

15.2% in 1998. The particular item increased by 190.3% during one 

year to 117.5 million kroons. The growth is mainly due to the 

increased share of securities in Hansabank's foreign financing. 

Similarly to foreign loans, the interest rate level of securities 

has also risen, by 50bp to 5.8% in 1998.

 

Loan and guarantee provisions

The total amount of provisions for the Group in 1998 was 594.3 

million kroons, growth of 8.9 times. Of total provisions 3.9 

million kroons is formed by guarantee provisions. From the 

average outstanding loan portfolio, the provisions formed 4.8% 

(1% in 1997, respectively). An automated provisioning system was 

implemented in commercial banking in 1998, which classifies each 

loan into a quality category. In provisioning the bank assesses 

the client's credit worthiness, collateral as well as payment 

history.

In 1998 212.3 million kroons of loans were written off, which 

forms 1.73% of the average loan portfolio outstanding during the 

year. Loans recovered from write-offs last year amounted to 49.0 

million kroons.

 

Trading income

1998 was rather modest when it comes to trading income and their 

volume of 127.8 million kroons was significantly smaller (a 

decrease of 56.6%) than the 294.2 million kroons earned in 1997. 

Among the different items only two have recorded growth trends - 

foreign currency exchange and swap and forward contracts. The 

first of the two totalled 217.0 million kroons in 1998, a growth 

of 42.9 million kroons or 24.6%. Income from the swap portfolio 

totalled 151.2 million, a growth of 130.8 million kroons or 7.4 

times from 1997.

The bond portfolio created the most significant loss totalling 

170.7 million. This is directly related to the Russian and 

Ukrainian government debt securities. The second largest loss 

item was options, ending the year with a negative result of 42.9 

million kroons. The loss is due to one large transaction, where 

Hansabank was an intermediary between a western and a Russian 

bank for a USD/RUR option. However, the Russian bank failed on 

its obligations and Hansabank had to take the loss from the 

transaction. Provisions on financial instruments totalled 32.3 

million in 1998. From the equity trading and investment 

portfolios the group received a loss of 8.6 million kroons and 

11.5 million kroons, respectively.

 

Fees and Commissions

Fees and commissions were the main growth driver for non-interest 

income. Their volume increased by 147.0 million kroons or 40.3% 

to 511.4 million kroons in 1998. During the year fees from 

electronic services became the single largest source of fee 

income, forming 25.1% of the total (15.6% in 1997, respectively). 

Their volume grew by 71.3 million kroons or 2,25 times to 128.3 

million kroons in 1998.The rapid increase has resulted from 

Hansabank Group's continuous effort to direct the clients towards 

using electronic (remote) banking channels. A traditionally high 

share, 19.4% (17.5% in 1997, respectively) is formed by fees from 

regular payment orders, which totalled 99.2 million kroons in 

1998, exceeding the 1997 result by 35.4 million kroons or 55.5%. 

The share of fees from loan management and guarantees, cash 

services and custody fees has remained on a comparable level with 

1997, forming 14.6% (14.8% in 1997), 9.3% (9.2% in 1997) and 3.1% 

(3.1% in 1997), respectively. The volumes of the three respective 

items in 1998 were 74.6 million kroons, 47.4 million kroons and 

16.1 million kroons. The growth of fees from leasing operations 

(+28.2%) and other service fees (+31.6%) remained below the 

growth level of total fees (+40.3%). The volume of leasing and 

other fees totalled 50.4 million kroons and 70.0 million kroons, 

respectively in 1998. The only service fees decreasing in 1998 

were those from brokerage and investment services, which are 

directly connected with the decreasing trading volumes on the 

Baltic equity markets. Service fees from investment services 

totalled 25.4 million kroons in 1998, a decrease of 51.5%.

 

Income from insurance

In insurance activities Hansabank Group has classified life 

assurance as a strategic investment and non-life insurance as a 

financial investment. The difference of premiums, indemnities and 

appropriations to reserves in 1998 was a 59.4 million kroon 

profit (22.0 million kroons from life assurance and 37.4 million 

kroons from non-life insurance). The total operating result of 

the insurance group was a 51.1 million kroon loss, which also 

includes a 4.6 million profit on investments and operating 

expenses worth 138.3 million kroons. 5.5 million kroons of the 

loss originated from life assurance and 45.6 million kroons from 

non-life insurance.

 

Other income

The most significant part of other income is formed by penalties 

and fines collected by the Group, which total 23.7 million 

kroons. The other larger item is rent revenues, which in 1998 

amounted to 19.8 million kroons.

 

Operating expenses

Operating expenses (incl. depreciation) grew to 1,301.7 million 

kroons, an increase of 634.9 million kroons, or 95.2% in 1998. 

The cost-income ratio leaped from 53.9% in 1997 to 104.8% in 

1998, excl. depreciation and goodwill amortisation, the ratio 

would stand at 84.5% (47.7% in 1997, respectively). This increase 

is from the one hand caused by the insignificant increase in 

revenues and on the other hand by the growth of expenses. The 

latter in turn is due to the merger-related costs, which amount 

to approximately 100 million kroons, the additional 29.9 million 

kroon expense associated with the deposit guarantee fund and the 

general expansion of the organisation.

The largest item among operating expenses is personnel expenses 

that grew by 79.4% to 422.3 million kroons in 1998 (235.4 million 

in 1997). The merger-related lay-off charges amount to 32.8 

million kroons. As a result of the merger the number of employees 

increased to 4,500, which has been decreased to 3,800 to this 

date as a result of internal reorganisation. The average monthly 

personnel expense per employee (incl. all taxes) decreased from 

18,623 kroons in 1997 to 13,093 kroons in 1998. The decrease is 

even bigger if we exclude the lay-off charges. The large decrease 

is due to the fact that the salary level in the former Savings 

Bank was lower than in Hansabank.

Administrative expenses increased by 133.2% in 1998 to 342.2 

million kroons. The largest part of those (22.6%) is formed by 

fees for professional services, which totalled 77.4 million. This 

item includes fees for legal counselling, auditing services and 

other type of services. The second largest item, totalling 70.2 

million kroons or 20.5% of total administrative expenses, is 

other administrative fees which consists of taxes and duties, 

maintenance of loan collateral, books, etc. Maintenance, rent and 

supply expense totalled 37.8 million kroons, 37.9 million kroons 

and 34.7 million kroons respectively. For 1999 one may forecast a 

stabilisation or a small decrease in the administrative expenses.

Service fees paid by Hansabank Group in 1998 amounted to 156.9 

million kroons, a growth of 64.1% from 1997. The biggest share 

(22.9%) is formed by fees paid for card services, which totalled 

36.0 million kroons in 1998, a growth of 62.4%. A totally new 

item here is payments to the deposit guarantee fund, totalling 

29.9 million kroons in 1998. In 1999 the quarterly payments 

should amount to approximately 15 million kroons each. Consulting 

fees directly related to the merger amounted to 18.5 million 

kroons. The enclosed table gives an overview of all paid service 

fees.

IT expenses grew at a modest rate of 46.9% in 1998, amounting to 

42.0 million kroons for the full year. Of this 16.7 million is 

related to different projects (incl. the merger). A substantial 

part of merger-related IT costs will be incurred during 1999.

Other expenses grew by 146.3%, which is mainly due to the 

amortisation of goodwill, forming 52.6% or 102.7 million kroons 

of all other expenses. Excluding this amount, other expenses' 

growth would have come to 16.8%. The largest item among other 

expenses is advertising, which amounted to 30.9 million kroons in 

1998.

Depreciation totalled 143.0 million kroons in 1998, a growth of 

76.1% from 1997. The growth resulted from the increased level of 

tangible and intangible assets as a result of the merger.

 

Income tax

In 1998 the group's income tax liability was negative: -6.6 

million kroons. However, different subsidiaries did have a tax 

liability, e.g. 6.7 million kroons for Hansa Capital.

 

Analysis of the Balance Sheet

Hansabank Group's total assets grew by 13.27 billion kroons in 

1998 to 27.69 billion kroons at the end of the year. A 

significant part of the growth comes from the merger with 

Estonian Savings Bank in July 1998. The amount of assets 

transferred to Hansabank during the merger was close to 9.8 

billion kroons. (Based on Hansabank's and Savings bank's pro-

forma opening balance sheet, the annual growth comes to 3.54 

billion kroons, or 14.7%).

 

Assets

The structure of assets changes both in terms of types of 

instruments as well as maturity. In general the share of the loan 

portfolio and liquid assets was increased in the Group's balance 

sheet. The largest part of assets is the loan portfolio, which 

share has increased from 51.8% to 58.0% in 1998. The share of 

cash and funds in the Central Bank has increased from 8.8% to 

11.8%. These items have expanded their shares mainly on the 

account of funds kept in other banks, which share has decreased 

from 12.0% to 9.6%. The securities portfolio's share has 

decreased from 14.1% to 9.0%. There have also been internal 

structural changes in the securities portfolio, where the 

importance of the trading and repurchase portfolios has decreased 

on the account of the liquidity and investment portfolios. 

Tangible and intangible assets have maintained their level of 

3.4% of total assets, while the share of other assets has 

decreased from 9.9% to 5.6%. Another more significant change in 

the asset structure is the creation of goodwill, forming 2.7% of 

total assets. In the maturity structure the trend has been 

towards longer maturities. The share of assets maturing after 1 

year has increased from 32.3% at the end of 1997 to 40.5% in 

1998. At the same time the share of assets maturing under 3-

months has decreased from 47.3% to 35.3%. The shortest period (up 

to 1 month) forms 26% of total assets).

 

Cash and dues to the Central Bank

Cash and Central Bank deposits increased by 2.6 times in 1998; 

cash by 1.9 times and Central Bank deposits by 3 times. Their 

volumes stood at 875.6 million kroons and 2,390.1 million kroons. 

While the doubling of cash as a result of the merger may be 

considered normal, the tripling of Central Bank deposits is due 

to the additional liquidity requirements imposed by the Central 

Bank.

 

Interest earning deposits with Credit Institutions

Interest earning deposits with credit institutions totalled 

2,648.7 million kroons in 1998, an increase of 52.9%. The growth 

is fairly modest, because of transfer of funds to the Central 

Bank's required reserve. Interest earning deposits with credit 

institutions formed 12.7% of the average interest earning assets 

in 1998 and their average productivity was 5.9%, up by 100 bp 

from 1997. The increase is due to the higher interest level on 

the Estonian inter-bank market as well as to a general rise in 

interest rates on international financial markets. The majority 

of deposits placed in other banks mature in less than a month, 

i.e. this is an important liquidity buffer for the group.

 

Investments in securities

In 1998 Hansabank Group started to classify its investments in 

securities somewhat differently than during the earlier periods. 

The securities are now distributed into three major categories: 

the liquidity portfolio, the trading portfolio and the investment 

portfolio. The first comprises low risk government bonds, the 

second marketable bonds and shares, which may be purchased for 

trading as well as short-term holding purposes and third 

comprises the Group's strategic investments into various sc. 

support companies, long-term investments into various government 

and other bonds and equity.

The Group's liquidity portfolio stood at 1,460.8 million kroons 

at the end of 1998, a growth of 4.4 times during the year. 

Majority of the portfolio (1,013.2 million kroons) is maturing in 

less than one year.

Trading portfolio amounted to 151.1 million kroons at the end of 

1998, a decrease of 899.6 million kroons or 7 times. Securities 

purchased for trading amounted to 95.2 million kroons while 

short-term investments amounted to 55.9 million kroons. The fall 

is mainly due to a substantial decrease in the position of 

marketable bonds, part of which was liquidated and part of which 

reclassified into investment portfolio. 5.5 million kroons of the 

equity trading portfolio was formed by shares purchased as an 

option hedge.

The investment portfolio totalled 743.9 million at the end of 

1998. Of this 442.6 million is formed by various bonds, 155.2 

million by Estonian government bonds and 146.1 million by various 

equity investments. In the bank's case the investment portfolio 

also includes equity investments into the subsidiaries and 

affiliated companies and bonds issued by Hansa Capital, which 

during consolidation are eliminated.

 

Securities purchased under resale agreement

The volume of reverse repurchase (repo) agreements decreased over 

4 times during 1998, totalling 125.4 million kroons at the end of 

December. While during the previous years a significant part of 

the reverse repos was used for financial gearing, then currently 

companies use it to acquire additional operating funds by selling 

existing securities to the bank with the obligation to repurchase 

at a later date.

The productivity of the securities portfolio (incl. reverse 

repos) increased by 40bp to 7.0%, which is due to the general 

rise in several debt securities as well as reverse repos. 

However, because of the shift towards lower risk securities, it 

is most likely that the productivity of the portfolio will 

decrease in 1999.

 

Loan portfolio

The total loan portfolio for the Group amounted to 16.79 billion 

kroons at the end of 1998, an increase of 9.21 billion kroons 

during the year (pro-forma growth was 4.1 billion kroons). 

Hansabank Estonia's loan portfolio amounted to 12.18 billion 

kroons at the end of the year, forming 98.5% of clients' 

deposits. During the second half of the year the Baltic economic 

environment deteriorated because of the financial crisis in 

Russia. This caused Hansabank to significantly increase the loan 

loss reserve, which increased to 740.1 million kroons, or 4.4% of 

the loan portfolio. At the end of 1998 the loan portfolio could 

be distributed among the different credit products as follows: 

58.6% regular loan activities, 31.9% leasing financing, 7.7% 

overdraft, and 1.8% factoring. The largest sectors in the 

portfolio were industry (20.7%), retail customers (19.2%), retail 

and wholesale (17.4%), real-estate management (12.6%) and 

transport and communications (11.2%). One may conclude that as a 

result of the merger, the loan portfolio has become more 

diversified between various segments.

There were no major changes in the geographic distribution of the 

loan portfolio. Estonia's share decreased by 1% to 78.3%, while 

Lithuania's and other regions' shares increased both by half a 

per cent to 4.5% and 2.3%, respectively. Latvia's share remained 

unchanged at 14.9%.

By remaining maturity the bulk of the portfolio falls in the 1-5 

year category (39.1%); followed by 3-12 month category (26.1%); 

over 5 year