EESTI ÜHISPANK

REPORT



PUBLIC 1999 YEAR 12 MONTH INTERIM REPORT (II)



1.2.Eesti Ühispank: Highlights of 1999



On 28 January  1999 the International  Finance Corporation (IFC)  made

the  decision  to  lend  Eesti  Ühispank  EEK  259 million (DEM 32.375

million). The Bank  channelled this funding  into the growing  housing

loan market. On 26  May  IFC decided  not  to  exercise  its  right to

convert the loan into the share capital of Eesti Ühispank.



Eesti  Ühispank,  alongside  with  ABN  AMRO  Rothschild  and   Nomura

International, acted as  a financial advisor  in largest the  Estonian

privatization deal  of 1999  - the  initial public  offering of  Eesti

Telekom shares. The IPO amounted to EEK3.1bn.



In February Eesti Ühispank launched a public bond issue of 50  million

euros (EEK783m), structured as three-year bonds at six-month  interest

of 3.5  percentage points  over Euribor.  The bonds  are rated Baa3 by

Moody s and  triple-B-minus by  Fitch IBCA.   The lead  manager of the

transaction was Lehman Brothers. It was the first capital market  deal

in  Eastern   Europe  since   the  Russian   crisis,  and   the  first

euro-denominated bonds issue in the Baltic countries. The Wall  Street

Journal has commented on its success.



In April  Eesti Ühispank  and Leks  Kindlustus, at  that time 44.7 per

cent  owned  by  EÜP,  made  the decision to merge  Leks Elukindlustus

AS, the life insurance arm  of Leks, and Ühispanga Elukindlustuse  AS,

a   subsidiary   of    EÜP.  At  the  end  of  1999  the  restructured

life-insurance company  had 11.84  per cent  market share  and was the

runner- up on the domestic market.



On  10  April  the  Annual  General  Meeting  of Shareholders made the

decision to increase the share capital of Eesti Ühispank by EEK 4  109

390.  The  410  939  registered  ordinary  shares  were  for   private

placement   with   Nederlandse   Financierings-   Maatcschappij   voor

Ontwikkelingslanden (FMO), for free transfer on the secondary  market.

Thanks to this issue the share capital of  EÜP    increased   to   EEK

735 623 810.  New EÜP Supervisory  Board members were  elected at  the

same meeting.



In June the new head office  of Eesti Ühispank, at 2 Tornimäe  Street,

opened it's doors with a number  of promotional events. With the

launch of a new  branch on  the ground  floor the  Bank started

implementing its new client services  policy. For the  first time  EÜP

has all  its head office  functions under  one roof,  which has

created additional opportunities for the increase of efficiency and

internal communications.



In July  Mr. Johan  Lindh, a  senior manager  of the  SEB, joined  the

Management Board of  Eesti Ühispank. As  the Chief  Financial  Officer

Mr. Lindh is also responsible for the risk management policy.



In August Moody s International  Rating Agency upgraded the  long-term

deposit rating of Eesti Ühispank from stable to positive. At the  same

time it confirmed the  Bank s general deposit rating  at Baa3/Prime-3,

and the financial strength rating (FSR) at D.



On 12  October Skandinaviska  Enskilda Banken  (SEB) announced  of the

decision to increase  its stake in  Eesti Ühispank to  50.15 per cent,

i.e. to  33 379  000 shares.  SEB  purchased   3 372 000   shares   of

Eesti Ühispank  (about 5.15  of  the  Bank s share  capital)  and  now

has a majority holding.



In November  Mart Altvee  took over  the management  of Ühisliising as

the chairman of its Management Board. Ühisliising, the leasing arm  of

Eesti  Ühispank,  is  fully  owned  by  the  Bank.  Mr  Altvee and his

reshuffled team have set the  goal of regaining the market  share lost

in 1999.



In December Eesti  Ühispank, Dell and  Eesti Telefon launched  jointly

U3,  a  new  package  of  services.  It  is  an  installment  plan, on

favorable  terms,  for  the  purchase  of  Dell PCs. In addition Eesti

Telefon  presents  the  customers  with  its  Atlas  Starter  internet

dial-up software and  Eesti Ühispank adds  connectivity to U-Net,  its

internet  banking  service.  It  is  the  first  attempt  to create an

internet-based supply chain that will  pretty soon enable the  clients

not to leave the virtual environment during the whole service cycle.



On 10 December Eesti Ühispank  and the European Investment Bank  (EIB)

signed  an  agreement  on  funding,  under  which  Eesti  Ühispank  is

entitled to take a loan of up  to EUR20m. This loan is to be  used for

financing small and medium-sized projects in environmental  protection

and energy  saving, in  the development  of infrastructure,  industry,

service sector and tourism.



On 18 December  Eesti Ühispank signed agreement to sell its subsidiary

in Latvia, Saules Banka, in order to  focus  on  the  development   of

operations in the  Estonian market.



The lengthy and thoroughly prepared  Year 2000 Project was

sucsessfully finalized at  the turn  of  1999/2000. Eesti  Ühispank

managed  to avoid Y2K roll-over problems and all its systems operated

without problems after the turn of the new millennium.





1.3. Risk management and maintenance policy in Eesti Ühispank



Requirements set by the Bank  of Estonia and other regulatory  bodies,

observance  of  general  accounting  standards, including good banking

principles and guidelines confirmed  by the Council of  Eesti Ühispank

form the risk management basis.



Risk  management  policy  specifies  general  principles  in  assuming

risks. This is  set by product,  customer group and  geographical area

and is based on setting  limits (maximum positions) and on  continuous

control of different positions.



Risk management units in AS Eesti Ühispank:



I level:  formation of  principles and  aims and  control function The

Board  and  Asset  Liabilities  Management  Committee  form  the  risk

management units of the I level.



The Board is responsible for  creating surplus value and for  rational

use of the bank's shareholders' property, the Board also approves  the

strategies and general principles of risk management.



AS Eesti Ühispank's Asset and Liabilities Management Committee  (ALCO)

is engaged in forming  risk management policy and  general principles.

The  aim  of  the  ALCO  is  to  have  the  structure  of  assets  and

liabilities, which  will maximise  profit and  ensure solvency  at the

required risk level and profit basis.



II level - management at the operative level

The Risk Management Department and relevant structural units form  the

management units of the II level.



The   tasks   of   the   Risk   Management   Department   include  the

implementation of risk measurement  and control methods, reporting  to

the ALCO on risks and analysis.



Each  structural  unit  is  responsible  for  keeping risks within the

allowed limit in the unit.



The main risks  managed by Eesti  Ühispank are credit  risk, liquidity

risk, market risks, operation risk and legal risk.



Credit risk



Credit risk is  derived of the  potential loss that  may be caused  by

incorrect fulfilment  of or  non-compliance with  the terms  of credit

agreement because of client's  unsuccessful business or other  factors

(incl.   insufficiency  of  collateral).   Taking  risks  is   decided

collectively by credit committees and by authorised persons  according

to authorisation limits set by the Management Board.



The bank has the following principles of risk taking:

a) Risk has to be evaluated

b) All the risks have to be secured and insured appropriately

c)  Developing   industry   sectors   and   viable  representatives of

such sectors are preferred in financing.

d) Professionalism  in  credit  analysis, standardised  procedures and

credit  agreements, punctuality  in  preparing  contracts  has  to  be

ensured.

e) By  strong  monitoring  system  to  ensure  discovering    possible

problems in early stage in order to avoid and decrease loan losses.



Measuring credit risk involves  different actions like evaluating  the

risks  in  current  activities,  owners  and  management of the credit

clients; evaluating  collateral; analyses  and evaluation  of business

plan  and   prepared  cash   flows;  familiarity   to  the   bank  and

trustworthiness, positive credit history.



The  primary  responsibility  of  observing  the  quality  of the loan

portfolio lies on loan  officers. Periodically the loan  portfolio and

related risks are reviewed at  the head of credit department  and risk

committee levels.  Also the loan supervision unit thoroughly  controls

the quality of the loan portfolio periodically. Review and  evaluation

of the loan portfolio is  carried out also by Internal  Audit, Banking

Supervision and Auditors.



In the course  of the control  compliance with applicable  procedures,

existence  of   necessary  information   and  documentation,   precise

servicing of the loan, sufficiency of collateral, carrying out of  the

business plan  by the  client and  other aspects  influencing the risk

are evaluated.



Liquidity risk



Liquidity risk may arise from  the Bank's inability to meet  its daily

obligations.  Eesti  Ühispank's  Risk  Management Department and Money

Market Department is dealing  with the liquidity management  and daily

maintenance of  risks arising  therefrom. The  long-term liquidity  of

the bank  is planned  and control  over liquidity  risk management  is

executed by the ALCO.



The bank's liquidity risk is  regulated on the basis of  the mandatory

reserve  of  the  Bank  of  Estonia  and  of  the ratio of minimal and

maximal required  liquidity established  by the  Board of  the Bank at

the proposal of the ALCO. On  the basis of this limit the  maximum and

minimum volume of the liquidity portfolio is established.



To measure liquidity risk,  different risk measurement techniques  are

used: asset- liability terms  and special models reflecting  liquidity

positions and assessment of the assets' marketability.



Mainly balance sheet  instruments are used  to manage liquidity  risk:

Short-term   instruments   include   overdrafts,   inter-bank   loans,

repurchase transactions, customer deposits, long-term instruments  are

loans from other financial institutions, bonds and equity.



Market risk



Market  risk  may  arise  from  adverse  movements  of interest rates,

currency rates, stocks, or prices  of immovable and movable assets  in

the  market.  Market  risk  has  its  impact  on  the majority of bank

products:  on  loans,  deposits,  securities,  derivatives,  long-term

credit lines, subordinated debts.



Ühispank  is  assessing  the  risks  daily  by  using  different  risk

measurement techniques and modes  of management depending on  a market

risk type.



Maximal open  currency positions  approved by  the ALCO,  which are in

compliance with the limits of open net foreign currency positions  set

by the Bank of Estonia, form the basis for controlling/monitoring  the

currency risk.



Position related to fluctuations of share prices (trading  portfolios,

options  and  other  balance  sheet  instruments)  are  also  strictly

limited.



Interest rate risks  are managed by  limits set on  different interest

types  (fixed  or  floating),  by  correlation  of asset and liability

structure  (maturity  difference)   and  by  interest-sensitive   open

position.



To  manage  and  measure  market  risks,  in addition to usual balance

sheet and off-  balance sheet instruments  also simulations of  market

parametres or different scenario models are used.



Country risk



Country risks  are regulated  by setting  country limits  on different

financial  products.   Risk  limits  on  A-zone  countries  have  been

co-ordinated with  the requirements  set by  the Bank  of Estonia (for

example  capital  adequacy  requirement).  Regarding  other countries,

especially with  the countries  of the  former Soviet  Union, strictly

conservative principle is followed  and assumed positions are  minimal

to ensure the daily banking performance.



Operational risk



Operational  risk  is  the  risk  where  internal factors (inefficient

procedures,  incomplete   information  systems,   competence  of   the

personnel, loyalty etc) or  external factors (decrease of  reputation,

criminal  deeds,  catastrophes)  may   disturb  the  bank's   business

performance or lead to unexpected losses.



To manage the  risks arising from  inefficient procedures the  bank is

using  standard  procedure,  which  ensures  that  a  product is fully

covered by contracts, control  procedures and is truthfully  presented

in  the  bank's  accounts.  After  introduction  of  the  product, the

internal  audit  department  controls  the  fulfilment  of established

procedures on a  regular basis. To  specify the volume  of operational

risks  in  the  future,  the  risk  management  department is studying

different methods in order to adjust them in local environment.





Internal audit systems



Internal  audit  systems  include  the  whole performance of the bank,

being an inseparable part of  the activities taking place in  the bank

and  in  the  group.  Internal  audit  systems  is  part of the bank's

management  and  the  managers  are  responsible  for  existence   and

implementation  of  the  systems.  In  addition  to the internal audit

systems,  the  Council,  the  Board  and the internal audit department

have the control functions in the  bank and in the group. The  Council

has a supervisory role over the bank's and the group's performance  by

hearing the managers of the bank and the group on a regular basis,  by

approving  the  bank's  and  the  group's  risk  management principles

(general  business  risk,  market  risk, counterpart risk, operational

risk)  and  by  specifying  the  need  of risk capital respectively by

approving  a  maximum  limit  for  a  customer or a customer group, by

deciding risk  diversification principles  according to  customers and

customer groups.



For  the  effective  daily  management  the  Board sets competence and

responsibility  limits  for  the   heads  of  the  structural   units,

establishes job descriptions of the employees, and the internal  rules

and  procedures,  regulating   the  performance  of   the  heads   and

employees, and by analysing  performance results, makes amendments  to

the internal audit systems  if necessary. Performance of  the internal

audit is targeted  at maintenance of  the assets of  the bank and  its

subsidiaries  and  of  the  business  associations  of  the bank's and

subsidiaries'  consolidation  group,  at  monitoring the protection of

the bank's shareholders', depositors' and other creditors'  interests,

at controlling whether  the bank's employees  perform their duties  in

accordance  with   the  set   requirements  and   with  good   banking

principles.  Internal audit department systemises agreed standards  by

following  information  on  the  risk  management and on efficiency of

internal  audit  systems  and  therefore  supports  the whole group at

achieving its aim.  The task  of the internal audit also includes,  in

co-operation with the  responsible managers, to  analyse shortcomings,

to make the  organisation to create  effective internal audit  systems

and to improve the  risk management. In 1999,  the bank and the  group

started more  thorough risk  management improvement  on a  qualitative

level and the main criteria is to ensure that risk management  systems

are continuously in compliance with the economic situation.



In the bank and group, information systems are centrally maintained,

which ensures safe handling and preservation of data. The bank's

information systems as the bank's financial performance have been

audited by an independent auditor.





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