AS HANSAPANK

ANNOUNCEMENT

28.07.1999

 

SEMIANNUAL FINANCIAL RESULTS

 

Hansabank’s consolidated result for the first half of 1999 was a 

net 

profit of EEK 390.0 million. As of June 30 the Group’s total assets 

amounted to EEK 30.88 billion. The Group’s results and activities 

in 

the first half were influenced by a continuously stagnant 

macroeconomic environment in all the three Baltic countries. 

 

Hansabank’s consolidated total assets grew by 11.5% in the first 

half 

of 1999 totalling EEK 30,883.0 million at the end of the period. 

The 

growth originated from the two main sources of funding – clients’ 

deposits and funds from other financial institutions. In one year 

the 

Group’s total assets have increased by 15.1% (pro-forma).

The growth of clients’ deposits remained relatively modest in the 

first quarter, reaching only 4.7%. The second quarter however 

witnessed a notable leap, both in Estonia and in Latvia, whereby 

total 

deposits increased by 14.6% during the first half of the year and 

amounted to EEK 16.90 billion at the end of June. The growth was 

driven by demand deposits while the volume of term deposits 

decreased. 

Although during the first two months of the year term deposits 

continued to grow being supported by high interest rates, the trend 

was reversed in March as interest rates were decreased 

significantly 

and for the first 6 months of the year the volume of term deposits 

decreased by 3.4% to EEK 4.51 billion. At the same time the volume 

of 

demand deposits increased by 23.0% to EEK 12.39 billion. In one 

year 

the group’s deposits have increased by 46.2% (pro-forma). As of 

June 

30 Hansabank’s market share by total deposits was 55.5% in Estonia 

(69.9% for retail deposits) and 13.2% in Latvia.

Total funds received from other financial institutions increased by 

26.8% in the first half of the year to EEK 5.15 billion. In January 

Hansabank received the second half (DEM 75 million) of a syndicated 

loan signed in December 1998, and in June Hansa Capital received 

the 

first tranche (EUR 30 mio) of the EUR 40 million syndicated loan.

The third largest source of funding – debt securities issued to the 

public – decreased by 17.9% in the first half to EEK 1.68 billion. 

Decrease over one year now stands at 29.9% (pro-forma).

The growth of total liabilities for the first six months came to 

12.1% 

and their volume stood at EEK 25.83 billion at the end of June. 12-

month growth was 7.5% (pro-forma).

During the first half of the year total shareholders’ equity 

increased 

mainly on the account of net profit and amounted to EEK 4.59 

billion 

as of June 30. At the end of the period the group’s total capital 

adequacy was 19.61% (Tier I 17.42%) and for the bank it stood at 

19.52% (Tier I 17.36%).

 

On the asset side the 1.6% reduction of the loan portfolio in the 

first quarter was, with the help of a significant reduction in 

interest levels and a stabilisation of the economic environment, 

replaced by a slight growth in the second quarter, whereby during 

the 

first half of the year the group’s loan portfolio increased by 0.2% 

amounting to EEK 16.83 billion at the end of June. Also the growth 

dynamics by different product types indicates a return of modest 

growth for the second half of the year. The 2.4% decrease of loans 

and 

overdraft in the first quarter was replaced by a 0.5% growth in the 

second quarter, and the leasing and factoring portfolio’s 0.2% 

decrease in the first quarter was replaced by a 4.5% growth in the 

second quarter. During the last 12 months total loans have grown by 

2.1% (pro-forma). As of June 30 Hansabank’s market share by total 

loans was 51.6% in Estonia and 8.2% in Latvia. At the end of June 

the 

loan loss reserve formed 4.57% of total loan portfolio (4.41% in 

the 

beginning of the year). Despite the relatively stable provisioning 

rate on the group level, there have been relevant changes in the 

internal structure. Hansabank’s loan loss reserve ratio to total 

loans 

decreased to 3.17% (3.79% in the beginning of the year), while 

Hansa 

Capital’s ratio increased from 3.69% to 4.42% and Hansabanka’s 

ratio 

from 6.32% to 7.12%.

As a result of a decrease in the loan portfolio and an increase in 

deposits, the loan to deposit ratio decreased from 113.9% in the 

beginning of the year to 99.5% at the end of June (119.6% one year 

ago). Through these trends the share of liquid assets has increased 

significantly. Deposits and loans to other banks increased by 59.7% 

to 

EEK 4.23 billion, treasury securities increased by 17.7% to EEK 

1.72 

billion, cash and dues from the central bank went up by 8.6% and 

the 

repo portfolio, which over the past year has been used more 

actively 

also for liquidity management purposes, grew by 5.7 times to EEK 

0.71 

billion. All-in-all the group’s liquid assets increased by more 

than 

EEK 2.7 billion in the first half of the year.

Group’s tangible assets totalled EEK 985.1 million as of June 30, 

which is 4.0% more than in the beginning of the year. The larger 

than 

usual decrease in goodwill resulted from the sale of Eesti 

Kindlustus, 

whereby goodwill associated with the company was also excluded from 

group’s accounts.

 

Hansabank’s consolidated profit for the first half of 1999 was EEK 

390.0 million. The results of the principal business lines were the 

following: banking in Estonia EEK 233.4 million, banking in Latvia 

EEK 

10.7 million, leasing and factoring EEK 95.5 million, insurance EEK 

1.0 million, banking in Lithuania EEK –2.6 million and other 

support 

functions EEK 1.6 million. In addition to the mentioned business 

lines, consolidated results also include eliminations and on the 

group 

level an extraordinary income of EEK 49.5 million from the sale of 

Eesti Kindlustus. Based on the principles of IAS, the profit/loss 

earned by the subsidiary (during the period it belonged to the 

group) 

has to be recorded in the income statement as an opposite 

transaction 

upon the sale of this subsidiary.

 

Interest income decreased by 0.5% (pro-forma) over 12 months 

totalling 

EEK 1,166.2 million for the first half of 1999. At the same time 

interest expense decreased by 14.4% (pro-forma) to EEK 449.9 

million. 

As a result net interest income increased by 10.8% to EEK 716.3 

million. On the interest income side, parallel to a flat loan 

volume 

the effect of decreasing interest levels became clearly visible as 

the 

average monthly loan interest revenue decreased from EEK 112.3 

million 

in the fourth quarter of 1998 to EEK 109.0 million in the first 

quarter 1999 and EEK 104.7 million in the second quarter. This 

decrease has been compensated for by interest revenues from 

leasing, 

which comparable figures for the three periods were EEK 45.2 

million, 

EEK 61.5 million and EEK 63.6 million. Although it is likely that 

the 

interest rates will decrease further in the second half of the 

year, 

the change will most probably be not as significant as in the first 

half (Hansabank lowered its EEK lending prime rate from 17.5% to 

11.0%). However, at the same time Hansabank is in the opinion that 

it 

takes approximately 6 months to realise the full effect of the 

interest rate cuts in the first half (mostly in March-April), 

wherefore in the third quarter the average monthly loan interest 

revenue may decrease even in the absence of changes in interest 

rates 

and a flat loan portfolio. For the interest expense the main cost 

driver is deposits – their volume and interest level. During the 

first 

half of the year term deposit rates were lowered parallel to loan 

interest rates (12-month EEK deposit rate was lowered from 13.0% to 

6.25%). This resulted in a decrease of term deposits and the whole 

deposit growth in the first half of the year came from demand 

deposits. These trends also reflect in the monthly average deposit 

interest expense, which for the fourth quarter of 1998 was EEK 49.2 

million, for the first quarter of 1999 EEK 45.8 million and the 

second 

quarter EEK 42.9 million. Starting from July 1 Hansabank lowered 

the 

interest rate for demand deposits and unified the different 

interest 

calculation methods used previously by Hansabank and Hoiupank. 

According to the new system a 1% interest rate will be paid on the 

average balance of demand deposits, which according to preliminary 

calculations should result in a decrease of 0.3-0.4% in the average 

interest rate paid on demand deposits (incl. overnight deposits).

Compared to 1998 the average yield of interest earning assets 

decreased by 95bp to 10.15% in the first half of 1999. At the same 

time the cost of interest bearing liabilities decreased by 55bp to 

4.00% whereby the spread narrowed by 40bp to 6.15%. When compared 

to 

the first half of 1998, the spread has decreased by 50bp 

(pro-forma). 

The Group’s net interest margin on the other hand increased in the 

first half by 3bp to 4.97%. Compared to the respective period of 

1998 

this ratio has decreased by 5bp (pro-forma).

 

Loan and guarantee provisions have increased by 1.8 times to EEK 

275.0 

million if compared to the pro-forma figure of the first half of 

1998. 

Actual loan losses amounted to EEK 256.1 million over the six month 

period. Of this amount EEK 76 million was already fully provisioned 

in 

December and written off only in January.

 

Trading income for the Group totalled EEK 291.4 million in the 

first 

half of the year. Trading income is dominated by two items: income 

from currency exchange, which during the period totalled EEK 119.2 

million and income from off-balance sheet items (swaps, forwards, 

options), which amounted to EEK 100.4 million. At the same time it 

is 

evident that the share of the latter item will decrease 

significantly 

in the second half of the year due to lower interest rates and 

portfolio levels.

 

Fees and commissions received in the first half amounted to EEK 

369.4 

million, exceeding previous year’s corresponding pro-forma figure 

by 

18.6%. Of the total fees 26.6% was earned from electronic services, 

19.5% from transfers and 10.6% from cash services. Due to the slow-

down in crediting activities the share of loan and leasing fees 

decreased to 16.3% in the first quarter. Together with a slight 

pickup 

in the second quarter, their share recovered at least partially to 

19.3% by the end of June (in 1998 their share was 24.4%).

The significant increase in other income resulted from Hansa 

Capital’s 

EEK 25.1 million income tax refund in Latvia for the financial year 

1998. Income from subsidiaries and affiliates also includes the 

revenue from the sale of subsidiaries during the first half of the 

year (incl. the previously mentioned extraordinary revenue 

associated 

with the sale of Eesti Kindlustus).

The Group’s total revenues amounted to EEK 1,367.6 million in the 

first half, exceeding the result of last year’s corresponding 

period 

by 46.3% (pro-forma). The revenue distribution for the first half 

of 

1999 was the following: 33.3% net interest income after provisions, 

27.0% fee income, 21.3% trading income, 7.2% income from 

subsidiaries 

and affiliates, 3.0% income from insurance and 8.2% other income.

 

Operating expenses (incl. depreciation and goodwill amortisation) 

totalled EEK 906.5 million in the first half, decreasing from 

previous 

year's corresponding figure (which includes Hoiupank’s loss from 

the 

Daiwa loan) by 11.2% (pro-forma). By excluding the extraordinary 

items 

(goodwill amortisation and Daiwa loss) operating expenses grew by 

1.2% 

over one year.

Service fees paid by the group amounted to EEK 101.0 million for 

the 

first half of the year, a decrease of 2.4% (pro-forma) if compared 

to 

last year’s same period. Compared to last year a significant 

decrease 

has taken place in fees paid for investment services, which is a 

result of fees paid to merger consultants in the first half of 

1998. 

This year the largest share is formed by payments to the Deposit 

Guarantee Fund, which over the six month period totalled EEK 29.2 

million.

Personnel expense, which forms one third of total expenses amounted 

to 

EEK 283.0 million in the first half of the year. If compared to the 

same period in 1998 personnel expense has decreased by 2.9% (pro-

forma). The average number of employees in the first half was 

3,533. 

The number of personnel decreased significantly in June as a result 

of 

the sale of Eesti Kindlustus and at the end of June Hansabank Group 

had 2,953 employees.

 

Administrative expenses decreased by 5.5% to EEK 191.0 million in 

the 

first half. To a large extent the decrease results from a decrease 

in 

rent cost as inefficient branches have been closed and rented space 

has decreased. IT expenses recorded the fastest growth rate among 

operating expenses in the first half – 24.8% to EEK 54.8 million. 

Behind the growth is primarily the merger of databases and the 

system 

upgrade. Other expenses, which totalled EEK 177.3 million in the 

first 

half also include goodwill amortisation in the amount of EEK 101.9 

million. At the same time last year’s first half result includes a 

EEK 

225 million loss for Hoiupank from the Daiwa loan. Excluding these 

extraordinary items, other expenses have increased by 12.9% (pro-

forma) over the year.

Depreciation expense amounted to EEK 99.4 million for the six month 

period, exceeding last year’s figure for the same period by 24.8% 

(pro-forma). The rapid increase is mainly caused by the additional 

IT 

investments.

 

During the post-merger period the number of branch offices has been 

cut by 20% to 153 and the number of employees has decreased by 20% 

to 

2,953. The cost-income ratio for the first half was 58.8% (66.3% 

with 

goodwill amortisation), compared with 109.5% (pro-forma) in the 

first 

half of 1998 and the cost to average asset ratio has decreased to 

5.6% 

(6.3% incl. goodwill amortisation).

 

 

Starting from 29.07.99 slide shows on the semi-annual financial 

results will be posted on Hansbank’s Internet homepage 

(www.hansa.ee).

 

 

 

HANSABANK

 

 

 

Mart Toevere

Analyst

Tel. +372 6131 569