AS EESTI ÜHISPANK

ANNOUNCEMENT

16.08.1999

 

EESTI ÜHISPANK GROUP INTERIM RESULTS 1999

 

The half-year  net profit  of the  Eesti Ühispank  Group was  EEK 

44.9

million and total  assets of the  Group amounted to  EEK 17.1 

billion.

Total assets  since the  beginning of  the year  have increased by 

EEK

0.6 billion, i.e. 3.4%.

 

Results of the business areas (EEK Mio):

Eesti Ühispank:                                   53.3

Saules Banka:                                      3.3

Leasing:                                          -7.6

Brokerage:                                        -0.8

Asset Management:                                 -1.5

Real estate management:                          -13.0

Other:                                             2.1

Additional revaluation of investments in subsidiaries EEK 9 

million.

 

The  profit  of  the  Group  was  strongly  influenced  by the 

overall

economic situation in Estonia.  Demand for loans decreased due to  

the

slump,  and  to  the  purchase  by  foreign  investors  of  

successful

Estonian companies.  This has  made it  possible for  the companies 

to

borrow more cheaply direct  from western banks. These  factors 

account

for  the  11%  decrease  in   the  Group's  loan  portfolio  and   

for

consolidated interest earnings  on loans and  bonds falling far  

below

the estimated performance.

 

The Group's banks (Ühispank and Saules Banka) earned EEK 56.6  

million

profit due to the stable growth  in the volume of settlements. At  

the

same time their  loan portfolio has  not grown, and  the large 

general

provisions  made  at  the  end  of  1998  have  fully covered any 

loan

portfolio loss.

 

The EEK 7.6 million loss incurred by the leasing arm is mainly due  

to

the increase of  leasing provisions from  3.5% at the  end of 1998  

to

5.3%  of  its  total  assets.  The  principal  reason  for this is 

the

decreased liquidity  in the  vehicles leasing  market. In  the 

current

economic  situation  we  consider  the  level  of  provisioning  to 

be

sufficient.

 

The restructuring and consolidation  of the Group's leasing  

companies

continued in  the first  half of  the year,  increasing expense 

costs.

The resulting  positive effects  are expected  to show  through in 

the

second half.

 

The EEK  2.3 million  loss in  client investment  and asset 

management

undertakings is due to the low  volume seen in all Baltic markets.  

At

the same time operating  costs have steadily decreased  and 

additional

restructuring remains to be carried out.

 

The EEK 13 million loss  from real estate management was  budgeted 

for

and was incurred during the  completion and moving-in period of  

Eesti

Ühispank's  new  head  office.  The  subsequent operating results 

have

been positive and break even is expected at the end of 1999.

 

In  addition,   the  results  of  the  Group   were  impacted  by  

the

acquisition of a 100 per cent stake in the Latvian Saules Banka  

where

the  bank  previously  owned  79.5  per  cent. These results were 

also

affected by   a revaluation  of the   previous year's  results at  

the

time of the merger of the leasing companies.

 

At the end  of the first  half the ROE  for the whole  Group was 

4.7%,

and ROA 0.55%.

 

Income

 

The total income  of Ühispank Group  amounted to EEK  502 million. 

The

total pro forma  income (Tallinna Pank  and Ühispank Group)  

increased

by 0.4%,  i.e. by  EEK 2.2  million as  compared with  the same 

period

last year. When  comparing the P/L  statement of the  first six 

months

of 1999 with pro forma  1998, it becomes evident that  interest 

income

has decreased by 9.1%,  i.e. by EEK 68  million. At the same  time 

the

interest expense on liabilities has not changed.

 

The  interest  income  of  the  Group  has decreased for the 

following

reasons:

The ratio  of assets  that bear  higher interest  (loans, bonds,  

sale

and repurchase transactions) in total assets has fallen from 68.5%  

at

the end of last year to 57.8%;

The decrease of interest rates in Estonia has been very rapid: at  

the

end of 1998  the weighted average  interest on EEK  loans was 16%;  

by

the end  of June  1999 it  had fallen  to 9.4%.  As a result, 

interest

rates on new loans were considerably lower than expected.

 

Factors influencing interest expenses:

At  the  beginning  of  1999  money  market  interest  and interest 

on

deposits were extremely high,  consequently interest expense was  

also

high;

The beginning of  the year saw  a considerable increase  in the 

volume

of time deposits;

An increase  in demand  deposits was  only seen  in the second 

quarter

when interest rates on time deposits were reduced.

 

Due to the refinancing of bonds in May, the Bank had higher  

liquidity

than  is  customary  and  thus  the  interest  cost on liabilities 

was

higher during the period.   For the reasons given above,  the 

decrease

in the  profitability of  interest bearing  assets has  been much 

more

rapid  than  the  cost  reduction  of  interest  bearing  

liabilities.

Therefore net interest margin (net interest income divided by  

average

assets)  has  fallen  from  4.3%  (at  the  end  of 1998) to 3.3%. 

The

interest cost  on liabilities  has also  decreased considerably  

since

the  beginning  of  June  and  this  is  expected  to turn the 

falling

interest margin trend into a positive one.

 

The decrease of interest income is mainly due to the fall in  

interest

income  on  bonds.   In  1998  all  bonds  of  the  CIS countries 

were

divested and bonds purchased from  clients have matured. The sale  

and

repurchase transactions of securities have practically stopped and  

no

interest is being earned on such business.

 

Income  from  consolidated  commissions  remained virtually level 

with

the second half of 1998. At  the same time, income on settlements  

via

branch offices and  electronic channels has  increased due to  

growing

volume.  The  Bank  actively  promotes  this profitable product to 

its

clients.  Pro  forma  consolidated  commissions  earned  and paid 

have

sustained a  considerable fall  (over 22%)  as compared  to the  

first

half  of  1998.   Securities  market  turnover  has  been  

negligible;

brokerage  commissions  have  declined  about  four-fold together 

with

earnings  on  concluding  loan  contracts.  Their number has 

decreased

owing to a shortage of good investment projects.

 

The Bank's financial profit  has increased considerably. The  

majority

was  earned  on  currency  exchange  deals  transacted  on  behalf  

of

clients.  Trading  in  securities  has  lost  its  attractiveness  

for

clients and  therefore commissions  have been  low. The  Bank has  

not

taken any open currency or securities position risks.

 

Operating expenses and loan provisions

 

Due to  the merger  of Ühispank  and Tallinna  Pank Group, expenses 

on

human resources have decreased in  comparison with the same period  

in

1998 (from 37% to 34%) and also in comparison with operating  

expenses

(from 33.5% to 29.0%). Other administrative expenses have fallen  

from

31.7% to 23.7% as compared to operating cost.

 

Total  operating  expenses  (excluding  the  depreciation of 

goodwill)

have risen marginally -  by 1.3%, i.e. by  EEK 5 million. The  

largest

increase in operating  expenses is due  to depreciation cost  

incurred

by the construction of the new head office and numerous properties  

in

the Group's possession.  Staff and other administrative expenses  

have

decreased  by  EEK  44.2  million.  The  increase  in  other 

operating

expenses  is  due  to  payments  to  the Deposit Insurance Fund, 

which

started in the second half  year of 1998. The percentage  of 

operating

expenses (excluding the depreciation of goodwill) in the total  

income

has fallen from 86.1% at end June 1998 to 79.2%.

 

As compared to  the first half  of 1998, provisions  have not 

changed.

Provisions have increased in the leasing arm of the Group. Due to  

the

high general provision level of the Group's banks in 1998 and  

minimal

loan loss, the cost of additional provisioning has been low.

 

Assets

 

The Group's total  assets increased by  3.4% or from  EEK 16.5 

billion

to EEK 17 billion during the first half of the year. The market  

share

of Eesti Ühispank (bank only) was 32.2% of the total Estonian  

banking

market and Saules Banka's market share in Latvia was 3.9%.

 

The  Group's  liquidity  has  increased  strongly,  at  some 2.7 

times

growth (EEK 1,4  billion) of advances  to other banks.  Eesti 

Ühispank

continues to maintain high liquidity to ensure smooth operation   

over

the millenium period.

 

The total loan and leasing  protfolio decreased by EEK 1.2  billion 

in

the  first  half  of  1999.  The  percentage of the portfolio in 

total

assets has decreased  from 62.4% in  the end of  1998 to 53.5%  at 

the

end  of  June  1999.  The  ratio  of  doubtful loans to the total 

loan

portfolio  has  decreased  from  4%  in  December  to  3.6% due to 

the

write-offs from the balance sheet.

 

Investment  in  subsidiaries  has  increased  in  connection  with 

the

acquisition of the stake in Saules Banka from FMO, the merger  

between

Leks Life Assurance  and Ühispank Life  Assurance and the  increase 

in

equity   of   Ühisinvesteeringute   AS.   Eesti   Ühispank   sold  

its

shareholding in the cash center, AS Sularahakeskus.

 

Liabilities

 

At the beginning of the  year, money supply was significantly  

boosted

by the succesful  privatisation of Estonian  Telekom which earned  

the

state EEK  3 billion.  The increase  in state  deposits had a 

positive

effect on   other clients' deposits.  In the first  half, total 

client

deposits   increased  by  13.3%,  i.e.  EEK  1.1  billion. Increase 

in

demand deposits totalled 15.5% and  that of term deposits 11%.  

Faster

growth in  demand deposits  occurred in  the second  quarter while 

the

increase in deposits in the first quarter was primarily driven by  

the

increase in term deposits.

 

In  the  first  half  of  this  year  the Bank refinanced bonds in 

the

amount of  EUR 82.5  million (EEK  1.34 billion)  as part  of the 

EMTN

programme. Amounts owed  to credit institutions  decreased due to  

the

refinancing of  subordinated debt  of EEK  360 million  to Fuji  

Bank.

When  refinancing  the  loan  there  was  no  need  to lend short 

term

facilities  from  the  interbank  money  market  as  Eesti  

Uhispank's

liquidity was sufficient.

 

The share capital of the Bank increased due to a private placement  

by

the Netherland Financial Institution FMO, which has a shareholding  

in

Saules  Bank.  Following  the  increase  of  EEK  4,11 million,  

Eesti

Ühispank's share capital  stood at EEK  665,624 million at  the end 

of

July.

 

During  the  first  half  of  1999  the  share price of Eesti 

Ühispank

increased by EEK  6.4 i.e. 32%  from EEK19.8 to  EEK 26.2. The  

shares

have moved in correlation with  upward market trends. The TALSE  

index

rose by  20.8 per  cent during  the same  period.   The Bank's  

market

capitalisation at the end of June was EEK 1.744 billion.

 

Y2K compliance

 

As  at  August  1st,  1999,  Eesti  Ühispank's  IT  systems  are   

Y2K

compliant.  The  Bank  has  completed  the  major  steps  of  its  

Y2K

programme, launched in spring  1998. The client, partner  and 

business

sustainability projects will continue, as well as systems  

monitoring.

For  additional  information  on  Eesti  Ühispank's  Y2K  project   

in

English,    please     visit    Eesti     Ühispank's    website     

at

<a href='http://www.eyp.ee/eng/text/aasta2000.html' target='_blank'>http://www.eyp.ee/eng/text/aasta2000.html</a>

 

Eesti  Ühispank's  interim  results  are  available  in  English   

and

Estonian on the Bank's website: <a href='http://www.eyp.ee.' target='_blank'>http://www.eyp.ee.</a>

 

Ülo Suurkask

vice president

Tel. +372 6656 350