HANSAPANK

COMMENTARY TO FINANCIAL RESULTS



AUDITED FINANCIAL RESULTS 1999



Result of Operations

In 1999 Hansabank Group (hereafter also Hansapank) earned a net profit

of  815.0  million kroons. The largest ever profit resulted  from  the

successful  completion of the post merger restructuring in  the  first

half  of the year and thriving operations throughout the year  in  our

home  market – the three Baltic countries. However, the past year  was

also a difficult one – for the first time in its history, the Bank had

to  operate in a deteriorating operating environment – the preliminary

data  for  1999  show an economic decrease for all  the  three  Baltic

countries.  The  1998 Russian financial crisis significantly  weakened

the  banks’ clients credit worthiness. In the first half of  the  year

the  group’s loan portfolio increased by a mere 0.2% and in the middle

of  the year total overdue loans formed 11.4% and non-performing loans

1.9%  of  the  loan  portfolio.  At the  same  time  Hansapank’s  risk

management has been successful and as a result of effective work  with

problem loans the respective ratios had decreased to 6.5% and 1.0%  by

the  end of 1999. In the second half of 1999 one could see the gradual

stabilisation in the economic situation and a consequent  increase  in

operating  volumes. For the full year of 1999 Hansapank’s consolidated

deposits increased by 34.2%, assets by 23.7% and loans by 15.9%.

The  following  section describes the events of the year  that  either

directly  or  indirectly  affected the operating  environment  or  the

operations of Hansapank.

§     In  May  Hansapank  sold  AS Eesti  Kindlustus  to  the  Finnish

insurance group Sampo, thereby fully exiting from non-life insurance.

§     In July Hansapank’s Lithuanian subsidiary – Hansabankas – opened

its doors to the clients.

§    In July the international rating agency Moody’s Investors Service

upgraded Hansapank’s long-term deposit rating to Baa2.

§     In  September Hansapank sold its holding in its affiliate  –  AS

Hansa Investments.

§    In December Hansapank and a Latvian commercial bank Ventspils UBB

signed a letter of intent for the purchase of the latter.

§     In  December  Hansapank’s strategic partner  ForeningsSparbanken

(Swedbank) increased its holding in Hansapank by 2.66% to 52.64%.



Revenues and Expenses

Herewith we need to stress the fact that during the first seven months

of  1998 the revenues and expenses of Eesti Hoiupank were recorded  in

the results for Eesti Hoiupank. Since August 1998, the cash flows from

the united bank are included within Hansapank’s results. Therefore, we

advise to use caution when interpreting different growth ratios.

·     The revenues for the Group grew by 1.22 billion kroons, reaching

2.86  billion  kroons. 53.6% of total revenues were  made  up  by  net

interest income, 21.0% by financial income, 19.4% by net service fees,

1.9% by net income from insurance operations and 4.1% by other income.

·     The  total  net interest income of Hansapank in  1999  was  1.54

billion  kroons,  which exceeded the result of 1998  of  1.02  billion

kroons  by  50.1%. The interest income growth was 37.0%  and  interest

expense  growth 19.7%. The average interest earning assets  grew  from

15.97  billion kroons to 26.24 billion kroons, or 64.3%.  The  average

volume  of  interest bearing liabilities increased from 15.97  billion

kroons  to  26.24  billion kroons, or 64.3%. In  1999  interest  rates

started their gradual decline from the peak levels reached at the  end

of  1998. During the year Hansapank lowered its EEK prime lending rate

from  17.5% to 11% and the 1-year EEK deposit rate from 13% to  5.25%.

Another important change was made on July 1 when Hansapank started  to

pay  a  1% interest on the average balance of demand deposits (earlier

separate  interest  rates  and  calculation  methods  were  used   for

Hansapank’s  and  Hoiupank’s clients), whereby  the  average  cost  of

demand  deposits (incl. overnight deposits) decreased by approximately

30bp.

·     Loan,  leasing  and guarantee losses amounted  to  0.49  billion

kroons  in  1999, which is 17.5% less than during the  previous  year.

Actual  write-offs in 1999 were 0.57 billion kroons, which in turn  is

2.7 times higher than in 1998. During the year a total of 89.9 million

kroons worth of loans previously written off were recovered.

·    Non-interest income rose from the level of 0.62 billion kroons in

1998  to  1.33  billion kroons in 1999, or 114.5%.  One  of  the  main

sources  of  growth was the net result from financial operations  that

recovered  from  the  setback in 1998 due  to  the  Russian  financial

crisis.  The  result,  which also includes income  from  the  sale  of

subsidiaries and affiliated companies, increased by 4.7 times to  0.60

billion  kroons in 1999. Net fee and commission income  totalled  0.56

billion kroons in 1999, that is 56.8% more than in 1998.

·     The  operating expenses for the Group in 1999 were 1.62  billion

kroons.  The largest share of operating expenses comes from  personnel

expense  that  amounted to 0.58 billion kroons in  1999.  The  fastest

growth  rate was recorded by IT expense, which increased by 159.8%  to

109.1 million kroons. The surge resulted from two larger projects: the

unification  of  Hansapank’s  and Hoiupank’s  IT  systems  and  client

databases and the Y2K project. Administrative expenses, which  include

one-off  costs  from the launching of the Lithuanian  banking  project

increased  with  respect  to last year by 15.5%  or  to  0.40  billion

kroons.  Other  expenses, which also include  a  0.20  billion  kroons

goodwill  amortisation  charge, amounted  to  0.34  billion  in  1999.

Depreciation of other assets was 0.21 billion kroons that is by  44.7%

higher than a year ago.



Assets and Liabilities

In  1999 Hansapank’s assets grew by 6.56 billion kroons, or 23.7%.  As

of  December  31  the Group’s total assets amounted to  34.25  billion

kroons.

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

grew by 2.67 billion kroons in 12 months reaching 19.46 billion kroons

at  the end of the year. (The loan portfolio of Hansapank Estonia  was

at  the  same  time  13.96  billion kroons,  forming  90.8%  of  total

deposits.) In 1999 Hansapank’s loan growth fell short of asset  growth

as well as deposit growth. As a result the share of net loans in total

assets decreased from 58.0% at the end of 1998 to 54.9% at the end  of

1999  and  the loans to deposits ratio decreased from 113.9% to  98.4%

respectively.  At the end of the year the allowance for credit  losses

amounted to 0.65 billion kroons, or 3.3% of the total loan portfolio.

·    The Group’s securities portfolio increased to 4.73 billion kroons

over  the  year that is by 2.37 billion kroons. During  the  year  the

liquidity  portfolio grew by 1.56 billion kroons, investment portfolio

by  0.74  billion  kroons  and the trading portfolio  by  0.1  billion

kroons.  At  the  end  of  the  year  the  securities  portfolio   was

distributed as follows: the liquidity portfolio 63.8%, the  investment

portfolio 31.3% and the trading portfolio 4.9%.

·     As the result of the merger 0.86 billion kroons of goodwill  was

created in Hansabank Group’s balance sheet, which will be amortised on

a  straight line basis over four years. At the end of 1999 Hansapank’s

goodwill amounted to 0.52 billion kroons.

·     The  Group’s  liabilities increased last year  by  5.80  billion

kroons  to  28.83  billion  kroons. The main sources  of  liabilities’

growth  were clients’ deposits and funds borrowed from other financial

institutions.

·     The clients’ deposits grew by 5.04 billion kroons over the year,

reaching  19.78 billion kroons at the end of December. At the  end  of

the  year  the term deposits amounted to 6.29 billion kroons,  forming

31.8%  (31.7%  at  the  end  of 1998) of total  deposits.  The  demand

deposits at the same time stood at 13.49 billion kroons.

·     The  resources from other banks grew by 1.09 million  kroons  in

1999.  In  January Hansapank drew down the second tranche (38  million

Euro)  of  the  syndicated loans signed in December 1998  and  in  the

middle of the year Hansa Capital received (with Hansapank’s guarantee)

a 40 million Euro syndicated loan.

·    The total volume of debt securities issued by the Group decreased

by 0.78 billion kroons to 1.27 billion kroons.

·    The amount of Hansapank’s subordinated liabilities did not change

during  the  year,  increasing only by  the  change  in  the  currency

exchange rates – 9.1 million kroons to 0.47 billion kroons at the  end

of the year.



Shareholders’ Equity

During  1999,  Hansapank’s shareholders’ equity grew by  0.76  billion

kroons  to  4.95 billion kroons. As of December 31, 1999, the  Group’s

capital  adequacy  was  20.8%  and  the  Hansapank  Estonia’s  capital

adequacy stood at 20.6%.





Mart Tõevere

Investor relations

+372 6131 569