HANSAPANK

COMMENTARY TO FINANCIAL RESULTS



CONSOLIDATED UNAUDITED FINANCIAL RESULTS 1999



Hansabank’s  consolidated unaudited result for the financial  year  of

1999  was  a  net profit of EEK 818.1 million. As of December  31  the

Group’s total assets amounted to EEK 34.26 billion.



Hansabank’s  consolidated assets grew by 23.7% in 1999  totalling  EEK

34,258.1 million at the end of the year. During the first half of  the

year  asset growth amounted to EEK 3.2 million, increasing to EEK  3.4

million in the second half of the year. The growth originated from the

two  main sources of funding – clients’ deposits and funds from  other

financial  institutions. Under the Y2K project at the end of  December

the  bank  repod part of its treasury securities, whereby the  group’s

balance  sheet and the volume of liquid assets increased for  a  three

week period by an additional EEK 0.5 billion.

Clients’  deposits increased by 34.2% in 1999, amounting to EEK  19.78

billion  at  the  end  of  December. Last  year  deposit  growth  rate

outstripped the growth rate of both, loans as well as assets. Compared

to  a  flat loan portfolio, deposits grew by EEK 2.16 billion  in  the

first half of the year. In the second half, supported by resumed  loan

growth,  deposits  increased by a further  EEK  2.88  billion.  As  of

December  31 Hansabank’s market share by total deposits was  58.3%  in

Estonia  (70.3% for retail deposits) and 13.0% in Latvia. In one  year

Hansabank’s market shares in Estonia and Latvia increased by 0.6%  and

3%, respectively.

Total  funds  received from other financial institutions increased  by

26.8%  to EEK 5.14 billion in 1999. In January Hansabank received  the

second  half (DEM 75 million) of a syndicated loan signed in  December

1998,  and in the middle of the year Hansa Capital received a  EUR  40

million syndicated loan (with Hansabank’s guarantee).

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

public  –  decreased  by 38.2% during the year to  EEK  1.27  billion.

Although  Hansbank  has a Eurobond programme in  place,  due  to  more

favourable conditions the group used syndicated loans and deposits  as

its  main  funding sources in 1999. As a result the share of bonds  in

total  liabilities decreased from 8.9% at the end of 1998 to  4.4%  at

the end of 1999.

Total liabilities increased by 25.2% during the year amounting to  EEK

28.84 billion at the end of December.

During  1999  the total shareholders’ equity increased mainly  on  the

account  of net profit and amounted to EEK 4.95 billion as of December

31.  At  the  end of the year the group’s total capital  adequacy  was

20.70%  (Tier  I 18.80%) and for the bank it stood at 20.47%  (Tier  I

18.48%).



For the credit market 1999 was a turbulent year. In the first half  of

the year loan growth amounted only to 0.2%. Supported by a decrease in

interest  rates and a stabilisation in the economic environment,  loan

growth  picked up and in the second half reached already 15.7%. During

the whole year loan portfolio increased by 15.9% to EEK 19.46 billion.



As of December 31 Hansabank’s market share by total loans was 52.8% in

Estonia and 10.4% in Latvia. The market share has increased by 1.8% in

Estonia and by 1.9% in Latvia. As a result of a stabilisation  in  the

economic  outlook and an improvement in asset quality the provisioning

rate  in the group has decreased. At the end of December the loan loss

reserve  formed 3.30% of total loan portfolio (4.41% in the  beginning

of  the year). In the internal structure Hansabank’s loan loss reserve

ratio to total loans decreased to 2.16% (3.79% in the beginning of the

year)  and  Hansabanka’s ratio decreased from 6.32%  to  3.05%,  while

Hansa Capital’s ratio increased from 3.69% to 3.84%. As a result of  a

strong deposit growth, the loan to deposit ratio decreased from 113.9%

in the beginning of the year to 98.4% at the end of December.

Through  these  trends  the  share of liquid  assets  (cash  and  cash

reserve,  dues from other banks and treasury securities) increased  by

2.7%  during 1999 to 29.3% of the group’s total assets at the  end  of

December. At the same time the net loan portfolio’s share decreased by

3.8% to 56.8%.

Group’s  tangible assets totalled EEK 1.18 billion as of December  31,

which  is  24.4% more than in the beginning of the year. A significant

part  of  the increase comes from the renovation of Liivalaia 12  head

office.  Goodwill  created through the merger amounted  to  EEK  522.8

million at the end of December.



Hansabank’s  consolidated unaudited profit  for  1999  was  EEK  818.1

million.  The  results  of  the  principal  business  lines  were  the

following: banking in Estonia EEK 552.0 million, banking in Latvia EEK

29.8  million, leasing and factoring EEK 217.6 million, insurance  EEK

1.9 million and banking in Lithuania EEK –14.8 million. In addition to

the  mentioned business lines, consolidated results also include other

support functions’ results and eliminations.

At  the  end  of  1999  Hansabank  significantly  changed  its  income

statement  structure. Net provisions and income from subsidiaries  and

affiliated companies are excluded from revenues. Fees are recorded  as

net  under revenues and income from derivatives has been split in two.

Trading portfolio’s income is still recorded under trading income, but

income  and expense from derivatives carried for hedging purposes  are

recorded  under  interest income and expense, respectively.  Operating

expenses now also include depreciation.



Interest  income  increased  by 37.0% in 1999  totalling  EEK  2,459.3

million. At the same time interest expense increased by 19.7%  to  EEK

922.7  million. As a result net interest income increased by 50.1%  to

EEK  1,536.6  million. On the interest income side,  interest  revenue

from  loans  underwent significant fluctuations.  As  a  result  of  a

decrease in interest rates and a 0-growth in loan balance in the first

half  of  the  year, the monthly average interest revenue  from  loans

decreased from EEK 112.3 million in the fourth quarter of 1998 to  EEK

99.8 million in the third quarter of 1999. The resumed loan growth  in

the  second  half of the year boosted also revenues,  whereby  in  the

fourth  quarter  of 1999 the respective figure was already  EEK  113.4

million.

                                                                      

For  the  interest  expense the main cost driver is deposits  –  their

volume  and  interest level. During last year term deposit rates  were

lowered parallel to loan interest rates (12-month EEK deposit rate was

lowered from 13.0% to 5.25%). These trends are also reflected  in  the

monthly average deposit interest expense, which had decreased from EEK

49.2 million in the fourth quarter of 1998 to EEK 42.9 million in  the

second  quarter  of 1999. 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, whereby

the monthly average interest expense on deposits decreased to EEK 39.9

million in the third quarter. In the fourth quarter, when term deposit

growth picked up and rate decrease was insignificant, interest expense

started  to  grow  again,  amounting to EEK 42.7  million  per  month.

Compared  to  1998  the  average  yield  of  interest  earning  assets

decreased  by  136bp to 9.78% in 1999. At the same time  the  cost  of

interest  bearing liabilities decreased by 66bp to 3,89%  whereby  the

spread  narrowed by 70bp to 5.89%. The Group’s net interest margin  on

the other hand increased by 15bp to 5.09% during the year.



Trading income for the Group totalled EEK 491.8 million in 1999.  More

than  half  of  the trading income is formed by income  from  currency

exchange,  which  grew  by 29.7% in 1999 and  amounted  to  EEK  281.4

million  for  the full year. The other larger item is net income  from

off-balance sheet items (swaps, forwards, options), which amounted  to

EEK  133.5  million.  Income from securities’ trading  and  investment

portfolios amounted to EEK 97.1 million in 1999, compared to a loss of

EEK 190.8 million in 1998.

Fees  and  commissions received during the year amounted to EEK  777.8

million, exceeding previous year’s result by 52.1%. Of the total  fees

27.4%  (25.1%  in  1998)  was earned from electronic  services,  23.0%

(24.4)  from  loan  and  leasing  services,  and  18.7%  (19.4%)  from

transfers.  At  the same time fees and commissions paid  increased  by

41.6%  to EEK 222.2 million, falling short of the growth rate  of  fee

income.  The  largest  growth  on the expense  side  was  recorded  by

payments  to  the Deposit Guarantee Fund, which amounted to  EEK  68.9

million  in 1999. Another rapidly growing item is fees paid  for  card

services,  which increased by 48.6% to EEK 53.5 million.  Net  service

fees increased by 56.8% in 1999 to EEK 555.7 million.

The significant increase in other income resulted from Hansa Capital’s

EEK 25.1 million income tax refund in Latvia for 1998.

In  1999  the Group’s total revenues amounted to EEK 2,759.3  million,

exceeding  the  last year’s result by 68.1%. The revenue  distribution

for  1999 was the following: 55.7% net interest income, 20.1% net  fee

income,  17.8%  trading income, 2.1% income from insurance,  and  4.3%

dividends and other income.



Operating  expenses totalled EEK 1,627.9 million in  1999,  increasing

from previous year's result by 42.2%.

The  fastest growth rate was recorded by IT expenses, which  increased

by  159.8% to EEK 109.1 million in 1999. The growth was brought  about

by  two  factors:  firstly, the unification of the merging  banks’  IT

platforms and secondly, Y2K project.



Personnel expense, which forms one third of total expenses amounted to

EEK  577.0  million  in 1999. Compared to 1998 personnel  expense  has

increased by 36.6%. The average number of employees was 3,252 in 1999.

The number of personnel decreased significantly in June as a result of

the  sale of Eesti Kindlustus. At the end of the year Hansabank  Group

employed  3,059  persons.  The  group’s  average  personnel  cost  per

employee was EEK 14,784 per month in 1999.

Administrative  expenses increased by 15.5% to EEK  395.2  million  in

1999.  Other expenses increased by 74.5% to EEK 340.8 million in 1999.

This  item also includes the costs associated with the launch  of  the

new corporate identity in the amount of EEK 12 million. Other expenses

also include goodwill amortisation in the amount of EEK 203.0 million.

Depreciation expense amounted to EEK 205.8 million in 1999,  exceeding

last year’s figure by 43.9%. The rapid increase is mainly caused by IT

investments, which have a higher than average depreciation rate.



Loan  and  guarantee  provisions have decreased by  18.8%  from  1998,

amounting to EEK 482.5 million last year. Actual loan losses  amounted

to EEK 562.0 million and actual recoveries were EEK 86.5 million.



The  cost-income ratio for 1999 was 51.6% (excl. goodwill amortisation

and  net provisions), compared to 63.5% in 1998. The operating expense

to average asset ratio decreased to 4.72% (5.02% in 1998).





Mart Tõevere

Analyst

+372 6131 569