annual report 1998

Transkripts

1 annual report 1998

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3 ob Jacob Arnita Rota ÉappleË ÓappleËÈ ZigmÇrs JuliÇns DigmÇrs Gatis gnes Harijs Årijs Åris Ben Anthony Aira Roberts Dutt Elizabeth Esther Hugh O Æerts Orests Fanny ãâ Gabriel ÄÌÌ A Æirts A Æis zolde Alise KÇrlis Spodris ÇÎ ËÒÎ Aivars Donald Valïrijs T na Ú Cynthia Sondora A da Christian Cornelia Ida ùappleëí Vida Daila Contents ldona Larry Bertram Simona çâîîë Apolonija Paul na Alexander ljeta ãâóìë Ö ÂÌËÈ Donats Konstance éîâ Kora Nick ûappleëè drians í Ú flì Haralds Almants DiÇna Dina Dins àì Alma e Lu ze Bridget èâúapple Caroline Cecil Laila TÇlis TÇlavs ë ÂÚÎ Ì aimrota LiliÇna Konstant ns ÄÎÎ Agita Aija ëâapple ÂÈ Ben Anthony Juliet Phil Guntris ertrapplede Gerda Ilona Adel na áófl Nick Ralf za êëïï Îanete ÄÌ ÒÚ ÒËfl Îanna Philip Pearl Kazimirs Izidors anija IlgmÇrs Teresa ÅÂappleÚ Arthur Gvido Atvars Dagnis Dagne da Helmuts ÄÌ appleâè Edgars Danute Dana Dans Valïrija î ËÌ s Mintauts Alfs Bernadeta Rappledolfs Daisy ÄappleÚÛapple Andrew ViviÇna line Cecil Juris Georgs Visvaldis Bob Jacob Nameda Ritvaldis t ne Gundega Terïze Larry Bertram Vilnis Raimonds Viola Sidney ederts Gaidis Didzis Henriete Henrijs JeteSta islavs Roger Yvette Ira da Kri jçnis Elfa ÇËÍÚÓappleËfl Aivita Elvita Sofija Charles Taiga ibilla Cynthia Keith Teika Robin Sam Venta Salvis Velga Zelma  åakòëï Liena MelÇnija Imanta Everts VitÇlijs Ralfs Ç ÎÂÌÚËÌ vs Bro islava Îanis Jorens ÅÓ Ì Alens ÑÂÌËÒ Auguste Guste rtram Tracy Violet El za Lizete Zete Berta Bella Dzintra Dzintara Jausma Albert ne Signe Signija Erna Evita Eva Iza Izabella Sanita ss Mat ss Mariss MÇrcis MÇrica Maigurs Vanda Veneranda Venija t ne LeokÇdija àìì Lonija Fanny Gabriel Ligija Ilvija Marlïna ÏËÎ Maksis Patrick William Raivis Raivo Vitolds Wren Mike ors Ö Óapple Margots Ingvars äóìòú ÌÚËÌ Ingr da Ardis Gaida Arnis nçrs Uva Tija Saiva Sentis ÉÂÓapple ËÈ Santis ã appleëò Saivis Ba uta ila Laimdots Laimi L ga JÇnis Milija Tony Sam Maiga Ausma il Reinholds ä ÔËÚÓÎËÌ RenÇts Eve Agnes ç ÂÊ Harijs Årijs ldis Sandis AndÏs AndÏejs Ed te ÄÎËÒ Esmeralda Anrijs ArkÇdijs eta Margarita Oskars ã Ritvars Anvars Egons çëíëú Egmonts sa Marija MarikaBridget Abigail Marina Magda Magone Mïrija Î È Edmunds EdÏus Vidmants Valters RenÇrs Rappleta ç Ú Î fl Ruta s El na Drosma Drosmis Leon ds Leon da Urzula Sever ns Kalvis Message from the Chairman of the Council Report of the Chairwoman of the Board Review of operations Operating results of the Bank Members of the Management Board of the Bank Financial statements Members of the Bank s Supervisory Council Management Hansabank - Latvia Branch Network

4 Message from the Chairman of the Council HANSABANK-LATVIJA Annual report was certainly a year of challenges for financial institutions in the Baltic region as turbulence on global financial markets together with natural trend for consolidation led to significant changes in the operating environment of Baltic banks. For Hansabank-Latvia it was also a year of internal changes as the merger with Latvijas Zemes Banka was successfully carried through. I am proud to witness that Hansabank-Latvia was able to strengthen its position on the market during 1998 by increasing its market share, thus building a strong foundation for its future development. I strongly believe that Hansabank-Latvia, with its constant striving for higher quality and customer satisfaction, together with its principal attitude and conservative banking practices, will give a significant contribution to the growth of Hansabank Group. Ago Lauri Chairman of the Council 2

5 At a time when total banking assets and deposits decreased by about 3%, total assets of Hansabank - Latvia grew by 63% and its deposits grew by 85%. Hansabank - Latvia finished 1998 as the third largest commercial bank in Latvia.

6 Report of the Chairperson of the Board HANSABANK-LATVIJA Annual report 1998 Last year has undoubtedly been a challenging year for the Latvian economy in general and for Latvian commercial banks in particular. The Russian crisis caused a slow-down of GDP growth from 6.4% in the first half of 1998 to 4.9% in the last 9 months of It also contributed to increasing unemployment, which reached its highest level since 1992 at 9.2% of the economically active population. Many Latvian companies with close ties to the Russian market were forced to downsize significantly, while looking for new opportunities in other countries. However, despite the economic developments in Russia and elsewhere in the world, the economic growth in Latvia did not stop; indeed, the volume of direct investment continued to grow, encouraged by consistent monetary and fiscal policy. The country maintains a low rate of inflation, which is amongst the lowest in Central Europe, at 2.8% in Since the inception, Latvian banks have been very active in the Russian market, consequently the Russian crisis has been, and continues to be, a serious challenge to almost every Latvian bank. The total loss to the banking sector is expected to amount to several tens of millions of Lats. According to unaudited data, in 1998 there has been an overall decrease in aggregate assets of the Latvian banking sector, by LVL 47.5 million over the year. Aggregate deposits have decreased by LVL 40.7 million and aggregate equity has decreased by LVL 23.8 million. In addition to these direct losses, Latvian banks have lost one of their major sources of income and in the future will have to focus more on the domestic market. These developments have led to a final push towards the consolidation process in the banking sector which was expected to take place in

7 Despite this difficult economic environment, Hansabank-Latvia has succeeded not only to maintain, but also to considerably improve its position in the market. At a time when total bank assets and deposits decreased by an average of 3%, Hansabank-Latvia experienced total asset growth by 63% and growth in deposits by 85%. As a result Hansabank Latvia finished the year as the third largest commercial bank in Latvia by its deposit and loan portfolio size, indicators that best describe our positions in the principal banking areas. What were the contributing factors to this result? First of all I would like to mention the choice of the right strategy since integration of the bank into the largest Baltic financial group - Hansabank. This strategy is to become a universal Latvian commercial bank which tailors and offers its services to Latvian companies and individuals. We have also been successful in adopting an appropriate policy for the development of banking services. Our customers can now make most of the transfers electronically, we have set up internet banking, transfer services have been improved by an extended ATM network, and a special deposit programme has been designed. Improvement of banking services, as well as the bank's active lending policy to both private and corporate sectors, has secured a continuous increase in the number of customers throughout the year. Due to an active lending policy and conservative risk management practices, the bank had comparatively low investments in Russia, less than 3% of its total assets in comparison with the total investment of the Latvian banking sector amounting to 8% of total assets. The second and the most important factor was a successfully implemented merger with one of the oldest Latvian commercial banks, Latvijas Zemes Banka. The merger of the two largest Estonian banks, Hansabank and Hoiupank, became a catalyst for the need to consolidate operations in Latvia, and I believe we could not have wished for a more suitable partner which would contribute greatly to the possibilities of Hansabank-Latvia. Hansabank-Latvia has always been a market leader for implementation of technologically advanced banking services. We can also be proud for having well structured procedures and an appropriate personnel management system. Latvijas Zemes Banka, in turn, possessed one of the best branch networks in Latvia and had a stable customer base with a great potential. In order to ensure similar business growth in the future, on the 29 December 1998 an extraordinary general meeting of shareholders resolved to increase the share capital of the bank by LVL 4 million by a directed share issue to Hansabank. The merger of Hansabank- Latvia and Latvijas Zemes Banka was implemented by an additional share issue of Hansabank-Latvia, in which the shareholders of Latvijas Zemes Banka received shares according to the ratio of new shares for each share of Latvijas Zemes Banka. As a result, the largest shareholders of the bank are now Hansabank with 92.5% of capital, the European Bank for Reconstruction and Development with 4.5%, and AveLat Group with 2.7%. Changes in the shareholder structure of our holding company Hansabank are also of great importance to the future development of the bank. In 1998 the Swedish Swedbank became one of the largest shareholders of Hansabank with % of the share capital. Investor interest in Hansabank not only provides evidence of the further development potential of the group, but also demonstrates long term investment business strategy in the Baltics. Swedbank's presence in the group ensures stability of operations of Hansabank-Latvia, as well as offers greater possibilities for improvement of the range and quality of banking services. Throughout our existence, the customers of the bank have been our greatest value. On behalf of the shareholders and staff of the bank, I would like to express my gratitude to our customers for their trust in the bank, their co-operation and, in particular, for their understanding and support during a very challenging merger process for our bank. I would like to thank the staff of the bank for their endurance and initiative throughout this period. Ingr da Blapplema, The Chairwoman of the Board

8 Review of operations The economic situation in Latvia in was a significant year for the economy of Latvia the growth continued, although the overall situation was affected by the serious economic crisis in Russia. HANSABANK-LATVIJA Annual report 1998 For Latvia, 1998 started as a success: gross domestic product in the first half of the year continued to grow at a high rate (by 6.4% compared to 1997), the unemployment level was decreasing, and the real income of the population was increasing. However, in the second half of the year the Russian crisis as well as economic crises in several other regions slowed down the rapid growth rate shown by economic indicators. As industrial production levels and trade volumes declined, Latvian GDP the last 9 months of the year decreased to 4.9%. The total GDP growth in comparative prices for 1998 was 3.6%. Despite the impact of the Russian crisis on the economy of Latvia, the basic government budget plan for 1998 was met and the total government debt did not increase. Even though the standard of living in Latvia is significantly lower than the European average, the level of consumption is steadily growing. The retail trade volume in 1998 reached 1,389 million lats, which represents a 21.9% increase compared to According to the forecasts of the Ministry of Economy of Latvia, the level of consumption is expected to rise by 3.5% in If the growth in consumption were satisfied by local goods and services, it could become a significant factor for the development of the economy of Latvia. As a result of the consistent monetary and fiscal policy of the Bank of Latvia, a low level of inflation has been preserved in the country. At 2.8%, inflation is the lowest of all countries of Central and Eastern Europe and is only slightly behind the average level of inflation in the European Union countries. It is expected that Latvian banking assets in the next three years will increase by 30% to 35%, reaching 2,400 million lats, provided that a sufficiently stable and low level of inflation is maintained, and the government succeeds in implementing the policy for the development of the economic environment. This envisages growth in investment volumes by 7% to 10 % per annum by providing stimulus for companies to modernise and expand their operations. In general terms, the Russian economic crisis had also a positive impact on the economy of Latvia - it forced many Latvian companies and banks to review their market strategies, and place a greater emphasis on the competitiveness of services they provide. For companies, the crisis clearly showed that goods and services have to be marketed in several directions, and the strategy of concentrating on one specific region cannot be sustained. The Russian crisis has also worked as a catalyst to accelerate a number of trends in the development of the Latvian commercial banking system. With opportunities for profit outside Latvia shrinking, the competition between banks for the Latvian financial market has become more fierce. As a result, a significant reduction in the number of commercial banks in Latvia can be expected. The Russian crisis affected the Latvian banking sector both by reducing the profits of the banks, and altering their development plans. Due to the crisis, the total loss of Latvian commercial banks in 1998 was in excess of 100 million lats. According to the 6

9 Ivars PUKSTS, Vice President a/s DATI O ur company is in the business of software design. In our industry we are the largest private company in Eastern Europe. A number of international awards and ISO 9001 quality certificate serve as evidence of the success of A/S Dati. A very important factor for smooth operations in our business is the credit line provided by the bank, especially taking into account the significantly fluctuating flow of revenues. At the same time, the electronic payment system provided by the bank ensures high speed in completion of financial operations, which is essential for any company in modern business environment.

10 information provided by the banks, in August 1998 the direct investment in Russia amounted to 170 million lats, representing 8.3% of total Latvian banking assets. In addition, the crisis affected Latvian banks indirectly by causing deterioration of the quality of loan portfolios. As a result, even the largest Latvian banks face the need for additional equity investments. At the end of 1998 two commercial banks, Latvian Capital Bank and Bank Viktorija, terminated their operations. This period has clearly marked a new phase of development for the Latvian banking market. An increasing number of Western banks see the need for presence in the Baltic states. Investments in Latvian banks by large foreign banks have improved their future potential. The largest foreign investors in the banking sector so far have been Swedbank, with 49.98% of Hansabank Group, which also includes Hansabank-Latvia, Skandinaviska Enskilda Banken with 44% of Latvian Unibank, and Merita Nordbanken which owns 100% of Latvian Investment Bank. HANSABANK-LATVIJA Annual report 1998 It is expected that the coming year will mark the beginning of the period of bank mergers and consolidation. The banking sector will be dominated by 3 to 5 large universal banks, which will offer a wide range of services both to corporate and retail customers through their branch and ATM networks. There will certainly be a place in the market for banks with narrow specialisation, which are principally focussed on mortgage lending or investments. The Latvian banking sector will face a greater concentration on the local market, as the Russian crisis has resulted in a significant decrease in bank income generated outside Latvia. In the coming year universal banks are expected to pay more attention to small and medium size companies, as this category is the most likely to make the greatest contribution to the growth of the Latvian economy and ensure stability after the Russian crisis. To meet the needs of this group of customers, banks will increase their lending activietes as well as provide other services, payments, cash transactions and consultancy services. Therefore bank customers will be the greatest beneficiaries of the increasing competition and consolidation of banks, as progressively a higher quality and wider range of services will become available. The strategy of Hansabank-Latvia and principal events in 1998 The development strategy of Hansabank Group and of Hansabank-Latvia is to create a universal bank with an easily accessible service network and high-quality services. Each of the group s companies is operating in its own local market, making maximum use of their awarness of the needs of their customers. The role of the Group is to ensure sharing of knowledge, the best solutions and experience amongst the companies of the Group. The objective of Hansabank-Latvia for 1998 was to increase its market share up to 7% of the total Latvian banking market in terms of assets by expanding the branch and ATM network, introducing new banking services, as well as by increasing the customer base. By ensuring a significant increase in the volume of operations, the bank has managed to achieve the principal objective. In 1998, Hansabank-Latvia has captured 10% of the Latvian banking market and became the third largest of Latvian commercial 8

11 Andrejs îµis, LNT (Latvian Independent Television) Director General O ver the five years of our co-operation with the bank, I have understood, that the bank is a friend, who helps to resolve your problems. I treat the relationship between the company and the bank like relationship between friends. When I need support, I go to the bank and it provides the help I need. It is very important to have mutual trust in such situations. I can truly claim that Hansabank- Latvia and Latvian Independent Television are friends.

12 banks according to key banking indicators. The level of customer deposits with the bank has increased by 85% reaching million lats at the end of the year. This serves as evidence of the trust placed by customers in the bank, and also shows that the terms offered by the bank are generally perceived as favourable. The volume of loans issued to customers has increased by two times reaching 58.1 million lats at the end of the year. During the period total assets of the Latvian commercial banks decreased by 3% according to unaudited data, while Hansabank-Latvia assets increased by 63%, which is a significant achievement. HANSABANK-LATVIJA Annual report 1998 In 1998, Hansabank-Latvia built a stable basis for providing universal services to its customers. The range of services was improved and an extensive sales network was set up. The number of cards issued by Hansabank-Latvia in 1998 increased, while the quality of certain card services was improved. The Bank now offers a new service whereby customers are able to pay their bills through the bank's ATMs. In addition to the most popular settlement services, cash transactions and electronic payments, the bank has introduced Internet banking services which are available to both corporates and individuals. In 1998 Hansabank-Latvia continued to increase its lending volumes using the experience acquired in corporate lending as well as by expanding its own lending area. Taking into account the financial crisis in Asia and Russia, and the impact has it made on the economy of Latvia, the last year can be described as particularly inactive for financial markets. In 1998 the Financial Markets department of Hansabank-Latvia stabilised its existing position in the market, servicing approximately one quarter of the total market volume and continuously improving the quality of financial market services. The Bank continues to provide services related to equity markets, foreign currency markets and equity financing for companies. The Bank was the first to offer its customers options, including foreign currency options, interest rate options and share options, as well as continued to offer various other financial instruments, including swap and forward contracts, to safeguard against foreign currency risks. In the field of equity financing for corporates, the most successful example in 1998 was an international public offering of shares of the joint-stock company Olainfarm, which was arranged in the form of Global Depository Receipts (GDRs) and enabled the client to obtain an additional 2 million lats of capital. This was the first GDR issue for a Latvian manufacturing company. The Bank expects the financial markets to become more active in 1999 and it is committed to provide high quality financial markets services, setting as its principal objective the further growth in its market share and introduction of new services. In 1998 the development and performance indicators of Hansabank-Latvia were affected by three significant factors. First, the merger of Hansabank-Latvia and Latvijas Zemes Banka has become a significant foundation-stone for future development of the Bank, as this merger allowed to combine the best customer service traditions and to set up a branch network covering all Latvia. Second, a new investor has become involved in the Hansabank Group which includes Hansabank-Latvia. Swedbank brings both western experience in banking services and provides long term financial resources. Third, the macroeconomic processes related to the Russian crisis made a significant impact on the future development of the Latvian banking sector as a whole, including Hansabank-Latvia as well. The crisis started a serious restructuring process in the Latvian economy, 10

13 Benita SADAUSKA, SIA Domenikss, Director Official Representative of Daimler Benz AG in Latvia O ur trade volumes continued to grow rapidly last year, and Hansabank-Latvia is a highly professional bank, which responds to our needs. We know that the client is not just another legal entity for the bank. A personal relationship with the client is the feature which characterises the bank best.

14 including the banking sector, which will continue in In response to the changes in the market, Hansabank-Latvia has directed its efforts towards both increasing the quality of its services and reviewing risk management issues. The merger of Hansabank-Latvia and Latvijas Zemes Banka The most important and the most complicated task for Hansabank-Latvia in 1998 was the merger with Latvijas Zemes Banka. This merger between two successfully operating banks entered the history of Latvian commercial banking as the fist merger of this type. The possibilities for the merger were considered as early as 1997, however, the real opportunity presented itself only when the merger of the two parent banks in Estonia, Hansabank and Hoiupank, took place. HANSABANK-LATVIJA Annual report 1998 The success of the merger of Hansabank-Latvia and Latvijas Zemes Banka was to great extent determined by similar strategies followed by both banks, both pursuing the vision of a universal bank focussed on the local market with an extensive local customer base. Meanwhile there were differences in implementation of this strategy in both banks. Hansabank-Latvia, well known as a bank principally focussing on corporate customers in the Riga area, and placing a great emphasis on development and implementation of technologically advanced banking services. The tendency to target private individuals began only in late 1997, when modern payment card services were introduced and the bank's ATM network was extended. Latvijas Zemes Banka, in turn was mainly servicing small and medium size customers outside Riga, using its extensive branch network. As a result of the merger of the two banks, customers gained access to varied and modern banking services, such as electronic payments, Internet banking, the largest ATM network in Latvia, as well as the possibility to receive these services through 21 branches and 8 sub-branches (including branches operating in all regional centres of Latvia). Selection of staff and implementation of a uniform IT system and range of services in all the branches were the most important tasks in the merger process after legal matters were completed and the new structure was set up. To complete these and other tasks, special project teams involving specialists from both banks were formed. In order to ensure objectivity, transparency and efficiency in formation of the team for the newly merged bank, a special Personnel Selection Committee was set up. Competencies and professionalism were the principal criteria on which the selection was based. The Committee approved job descriptions, based on recommendations of department heads. These job descriptions were published in newsletters of both banks, thus giving an opportunity for every employee to apply for any position in which they would be interested in the merged bank. A 589-strong organisation was created, as a result of the merger, of which 289 employees are working in the branches throughout Latvia. The merger process involved standardisation of services, following the implementation of a uniform IT system. 12

15 Leif MUTÉN, professor, dr. jur. Rector of the Stockholm School of Economics of Riga J ust as the Hansabank Group extends its activities over all the Baltic countries, the SSE Riga has been established to train students from Estonia, Latvia and Lithuania, and from all ethnic groups residing there. We have seen with particular pleasure that Hansabank has employed several of our students, both in internships during their studies and in regular employment after their graduation. We know that, again like ourselves, Hansabank regards quality as an overriding objective, and we see with great satisfaction our contacts with the Bank developing in this spirit.

16 Swedbank's investment in Hansabank Group The strategy adopted by Hansabank Group, aimed at development of an icreasing number of competitive banking services in all the Baltic states, became more relevant than ever due to the developments in the overall financial situation, and the fact that in 1998 a significant foreign investor, the Swedish Swedbank, made an investment in Hansabank Group. With 49.98%, it became the largest investor of the Group. HANSABANK-LATVIJA Annual report 1998 Investment by a stable, influential and experienced partner in Hansabank financial group is an evidence of the international profile of Hansabank Group. It also marks inclusion of the Group, and Hansabank-Latvia as its part, in the so-called Nordic/Baltic financial alliance. Both Hansabank and Swedbank perceive the Baltic Sea and the Nordic region as one single financial market. This supports implementation of the concept that customers in each respective country should be serviced by a local bank, which has the advantage of knowing the local situation. At the same time, by combining the resources, experience and knowledge of banks in several countries, it is possible to improve significantly the quality and range of banking services. The Nordicum Alliance consists of banks in Sweden, Norway, Finland, Poland and now also in the Baltic countries. The future plans of the Alliance include attracting new member banks in Denmark and possibly Germany as well. The co-operation between Hansabank-Latvia and Swedbank involves specialists from both banks already working on joint projects, with the objective to provide long-term financing to customers from resources provided by Swedbank, and short-term financing in local currencies, as well as daily services provided by Hansabank-Latvia. Small and medium size companies are gaining an increasing importance in the economy of Latvia, and Swedbank has considerable experience in servicing this category of customers. Co-operation between banks in various countries is becoming even more important as an increasing number of Latvian companies decide to expand their operations internationally. The volume of import and export by Latvian companies has been growing. There is a significant proportion of foreign ownership in Latvian companies. With the gradual improvement of the Latvian economy, the standard of living of local residents also improves, determining the need for additional financial services. As a response to this, Hansabank-Latvia believes that, in addition to various payment and deposit products, one of the priorities in the nearest future will be development of mortgage lending services, an area which so far was unexplored in the Latvian banking sector. In this particular area, Swedbank is one of the most experienced banks in Scandinavia. The Bank completed a significant task in 1998, by commencing and carrying out the merger of Hansabank-Latvia and Latvijas Zemes Banka. Both the merger and the investment by Swedish Swedbank into Hansabank Group are factors that will provide an adequate basis for the Bank's performance in future. The results of the Bank have been affected by the Russian crisis, and the subsequent slow-down of economic development has triggered restructuring in the Latvian banking sector. These macroeconomic factors have made Hansabank-Latvia and other organisations reassess the market orientation policies, at the same time creating a dynamic situation where market resources are reallocated. By reviewing the Bank's risk management policies and offering high-quality customer service in 1998, Hansabank-Latvia has already demonstrated some positive developments, which confirm the appropriateness of the chosen strategy. 14

17 Ivars KALVI µis Chairman of the Board A/s LAIMA Laima is a stable company, which has recently completed a merger with another confectionery producer Uzvara. We have now become more competitive and we are ensuring the highest quality. Our cooperation with Hansabank-Latvia so far has been a success. We have great plans for the future, and we believe that co-operation with Hansabank-Latvia as a financier will ensure that our long term objectives are achieved.

18 The principal objectives of Hansabank-Latvia in 1999 The strong position in the Latvian banking market achieved in 1998, as well as other achievements - the merger with Latvijas Zemes Banka and attracting of Swedbank as an investor into Hansabank Group, set the stage for tasks to be completed in In 1999 Hansabank-Latvia plans to increase its market share to 13% and to achieve a return on capital ratio of 16%. Completion of the merger with Latvijas Zemes Banka, the efforts invested in the development of new banking services as well as a stable customer base, will allow the Bank to achieve the above objectives. In 1999 Hansabank-Latvia plans to increase the total amount of deposits by 30% compared to the end of The volume of lending is also planned to be increased, and a 60% growth is to be achieved in comparison with The increase in total assets is planned to be 33% compared to HANSABANK-LATVIJA Annual report 1998 In order to achieve these performance ratios, Hansabank-Latvia plans to continue close co-operation with its customers in Corporate customers will be provided with specialised services, while small and medium sized companies will be offered more advantageous terms in the lending and payment areas. For private customers, the Bank intends to improve payment and card services. VISA cards will be offered in addition to the existing cards. The increasing importance of mortgage lending to private individuals should also be mentioned. In 1999 the Bank plans to continue improving its Internet banking services, electronic payment services, the branch network, ATM network, as well as to introduce a new service - telephone banking. Additional capital of 4 million lats obtained by the Bank in 1998 is also a factor of great significance for the future development of the Bank, ensuring additional stability during a period where operational volumes of the Bank are growing rapidly. Hansabank-Latvia will continue to make the best use of its advantages: the ability to work with corporate customers by offering them specially tailored services, which have traditionally been among the best services provided by Hansabank-Latvia, as well as its ability to work with individuals by using the branch network and offering special deposit products, which have been amongst the best services previously provided by Latvijas Zemes Banka. By combining this experience in customer services, as well as new lending, payment and consultancy services principally targeted at small and medium size companies, Hansabank-Latvia will be able to strengthen its position amongst the three largest Latvian banks. Taking into consideration the overall situation in Latvian commercial banking and the Bank's principal strategy guidelines, the shareholders of Hansabank-Latvia have decided to change the name of Hansabank-Latvia in By its new name "Hansabanka" the Bank wishes to emphasise its focus on the Latvian market. At the same time, the new name of the Bank will retain the connection with the international Hansabank group, which provides financial services in all the Baltic countries. Risk management The loss suffered by Hansabank-Latvia in 1998 as a result of the Russian crisis is comparatively smaller than that of other leading Latvian commercial banks. Nevertheless, it should be acknowledged that losses of the banking sector arising both from direct investments and deterioration of quality of the loan portfolios clearly demonstrate the fact that risk monitoring and management experience in Latvian commercial banks is still 16

19 inadequate. In response to the last year s events, Hansabank-Latvia has identified improvement of the risk management function as one of the priorities for This process will cover all areas of the Bank's operations, with a particular focus on improvement of the lending policy, especially in respect of the quality of problem loans, improvement of risk monitoring procedures in financial market transactions, and development and implementation of risk insurance concepts. A risk management policy was developed and implemented in According to this policy, risks are identified and monitored in all areas of operations of the Bank by delegating the responsibility to the appropriate departments. Risk management at Hansabank-Latvia is a component of the risk management process of Hansabank Group, which enables a uniform and comprehensive risk management function at group level. The Year 2000 project The next year in our calendar will be year This is a unique opportunity to experience the beginning of a new millennium, however, at the same time it will be a serious challenge for information technologies. The computer problem will affect all areas where modern information technologies are being used, and banking is not an exception. In response to this, the management of Hansabank-Latvia prioritised another task for 1999 to minimise the effect of the year 2000 problem on the operations of the Bank. The effect of the potential year 2000 related computer problems may not be limited to computers and banking software, but also the customers of the Bank other banks, companies, individuals, as well as its suppliers telecommunications, electricity, heating, water supply companies, testing the readiness of their systems for the year The top management level project team to deal with the year 2000 problem was set up in the Bank as early as The objective of the team is to ensure that use of a specific date in a certain way, or inability of computer software to recognise a year, does not affect daily operations of the Bank. It also aims to ensure that technological processes do not affect the operations of all systems of the Bank and do not cause unpredictable interference with the computer system of the Bank. The project team has developed a plan, approved by the Board of the Bank, which comprises three principal areas: testing of the Bank's computers and software, testing of the other Bank's systems (e.g., security, supplies, etc.), and assessment of the readiness of suppliers, customers and partners to meet the year The Year 2000 project is expected to be completed in September The implementation process in Hansabank-Latvia gives us confidence that everything possible is done to achieve maximum assurance of continuing banking operations at the turn on the millennium. The results for the year, as well as the objectives set for 1999, provide a basis for realistic expectation of positive development of the Bank in the future, capturing of the planned market share and achievement of the target financial indicators. The management of the Bank believes that by completing the bank merger process, utilising the experience and long-term financial resources provided by Swedbank, the strategic investor in Hansabank Group, as well as by improving the quality of services and their distribution and improving the risk management function, Hansabank-Latvia will continue to show better performance indicators. 17

20 Operating results of the Bank HANSABANK-LATVIJA Annual report % 10.0% 8.0% 6.0% 4.0% 2.0% Market share in terms of total assets % 88,645 Total assets Market share % 144,597 LVL , , , ,000 80,000 60,000 40,000 20,000 Due to the global financial crisis and the Russian crisis in particular, 1998 was not a successful year for Latvian commercial banks. The total assets in the Latvian banking system decreased by almost 3% during the year and banks finished the year with a total loss of several tens of millions of lats. The principal cause for reported losses was the unclear situation in Russia, when banks had to revalue not only the investments in Russian securities, but also open foreign currency positions. Despite the effect of the global financial crisis, in 1998 several strategic investors from Scandinavia made significant investments in Latvia. Swedbank became the strategic investor of Hansabank Group, of which Hansabank-Latvia is a member, Skandinaviska Enskilda Banken made an investment in Unibank of Latvia, and Merita Nordbanken Group invested in Latvian Investment Bank. Last year marked the beginning of a consolidation process of Latvian banks, with the merger between Hansabank-Latvia and Latvijas Zemes Banka. On 11 September 1998, Hansabank-Latvia and Latvijas Zemes Banka signed an agreement, according to which Hansabank-Latvia acquired Latvijas Zemes Banka by issuing an additional 3.9 million lats of equity specifically for this purpose. The merger between the two banks took place due to a similar merger in Estonia, between Estonian Hansapank and Hoiupank the principal shareholders of Hansabank-Latvia and Latvijas Zemes Banka. The merger resulted in an amalgamated bank with one of the most extensive branch networks in Latvia, comprising 21 branches. At the end of 1998 the merged bank was the third largest commercial bank in Latvia in terms of deposits and loans, covering 10% and 9% of the total market respectively. Investment by the strategic investor Swedbank into Hansabank Group enabled the shareholders of Hansabank-Latvia to make an additional 4 million lat contribution into the equity capital of the Bank in December of As a result, the paid in share capital of the Bank as at the end of 1998 was 14.5 million lats. The capital adequacy of the Bank was maintained above 10% during 1998, in accordance with Bank of Latvia requirements. Profit/(loss) for the year 915 (3,241) LVL During the year, the total assets of Hansabank-Latvia increased to million lats, representing a 63% increase compared to As a result of the successful development of the Bank, the percentage of income earning assets increased reaching 89% of the total assets (78% in 1997). In 1998 the Bank continued to be active in the area of lending. During the year the loan portfolio of the Bank increased by more than twice, or by 137%, and amounted to 58.2 million lats as at the end of the year, positioning the Bank as the third largest lender in Latvia at the end of During 1998 the number of customers increased from 14.8 thousand at the end of 1997 to more than 50 thousand customers at the end of 1998, of which 22% are legal entities and 78% are individuals. The volume of deposits also increased, reaching million lats at the end of the year, which represents an 85% increase compared to the previous year end. By the end of 1998 the Bank had the most extensive ATM network in Latvia consisting of 54 ATMs The Bank finished the year with a loss of 3.2 million lats, caused by closing of the Russian securities position, creation of additional provisions for bad and doubtful loans, and costs of the merger process. Net interest income 18 In the first half of 1998 interest rates in the Latvian financial markets continued to decrease. However, a rapid increase in interest rates was observed in the third quarter. The rise in the interest rates was caused by the crisis in Russia and devaluation of the

21 rouble, which pushed foreign investors to insure themselves against foreign currency risk in Latvia, thus creating pressure on the national currency. Due to this pressure the Bank of Latvia was forced to follow a strict monetary policy and to limit the amount of lats in circulation. This action in return caused worsening of the short-term liquidity amongst Latvian banks, and an increase in interest rates. At the end of the year, the Bank of Latvia increased the lat supply through REPO and SWAP auctions, improving short-term liquidity. Consequently short-term interest rates in the interbank market decreased, stopping the rise in interest rates on short-term lat loans issued by banks. However, interest rates on long-term lat denominated loans continued to grow (to 16.4% in December). The rates for term and demand deposits remained at the same level as in the previous year. A decrease in interest rates is not expected in An opportunity for investment in high yield Latvian government securities may arise in Interest income ,929 1,801 1,058 LVL 000 8,000 7,000 6,000 5,000 4,000 3,000 Due to restructuring in banking resources, the structure of interest income changed. In 1998 the principal source of interest income was loans to customers, accounting for 4.9 million lats or 73% of the total interest income (1.8 million lats or 38% in 1997). The average return on the loan portfolio increased to 10.3% during 1998 (9.2% in 1997). The percentage of interest income from securities decreased to 14% of total interest income in 1998 compared to 39% in The average return on the securities portfolio decreased to 7.7% in 1998 (10.1% in 1997). 1,750 2,000 1, Interest income from loans to customers Other interest income Interest income from other credit institutions Interest income from securities An increase in the volume of liabilities of the Bank caused the increase in interest expense. In 1998 the Bank paid 2.71 million lats in interest expense (1.85 million lats in 1997). The increase in customer deposits resulted in an additional 1.56 million lats in interest costs an increase by 24% more than in the previous year. The average interest rate paid on demand deposits in 1998 decreased from 2.1% to 1.2%, which had a positive effect on the overall cost of customer deposits, reducing it from 2.6% to 2.3% compared to The average borrowing rate on the interbank market was 5.4% ( 3.9% in 1997). The increase in the average interest rate for resources borrowed on interbank market and payments for subordinated debt have increased the cost of funds employed by 0.1%, from 2.7% to 2.8%, compared to Income structure LVL 000 9, ,000 Operating income Operating income in 1998 was lower than in 1997, due to the loss of 1.1 million lats 26 2,809 4,016 7,000 6,000 from securities trading, a direct consequence of the Russian financial crisis, resulting in a 5,000 29% reduction in total operating income. The level of income from foreign exchange 4,000 transactions has decreased in 1998, caused principally by adverse movements in Russian 1,890 2,828 3,000 rouble and US dollar exchange rates. 2,000 The principal portion of the operating income of 72% is represented by fees and commissions, which has increased by 53% in 1998 and amounted to 2.8 million lats. An increase in the amount of fees and commissions received as well as an increasing proportion of this source of income demonstrates the ability of the Bank to generate income which is not dependent on interest rate fluctuations. The increase in the level of fees and commissions has been achieved both due to the bigger number of customers and increasing asset and transaction volumes. The largest increase can be observed in fees and commissions received from money transfers and electronic payments. The percentage of fee and commission income from cash transactions continued to decrease, as non-cash settlements take an increasingly significant portion of all transactions undertaken by the Bank's customers. 1, (1,134) Other income Net interest income Fees and commissions received Foreign exchange gain/(loss) Gain/(loss) from securities 1,000 0 (1,000) (2,000) 19

22 Fee and commission income LVL 000 3,000 Operating expense In 1998, the total operating expenses of Hansabank-Latvia amounted to 7.2 million lats, ,500 which represents a 28% increase compared to 1997, caused by the increasing volume of transactions and the merger between the banks. The most significant item in the total operating expense structure is staff costs at 2.2 million lats, representing 31% of the total ,000 1,500 operating expenses. However, there has been only a 0.1 million lats increase compared to Other administrative costs account for 30% of the total operating expenses, depreciation of fixed assets account for 21%, fees and commission paid constitute 10.4%. Increase in the operating expenses of the Bank in 1998 compared to 1997 is caused by ,008 1, the merger between the two banks, as well as by the cost of creating the largest ATM network in Latvia and introduction of technologically advanced banking services such as Internet banking. One of the principal tasks of the Bank in 1999 is to continue strict cost control policy and HANSABANK-LATVIJA Annual report Other Investment banking services Electronic services Loan servicing and guarantees Cash transactions Transfers to achieve an income expense ratio of 60% by the end of the year. Assets In 1998 the total assets of Latvian commercial banks decreased by 3% according to unaudited data, which can be explained by outflow of non-resident deposits from the banking sector as a result of the Russian crisis. The total assets of the Bank as at the end of the year amounted to million lats, which is by 63% more than at the end of the previous year. As a result of the successful development of the Bank, the proportion of income earning assets increased to 89% of the total assets (78% as at the end of 1997). The Bank's asset structure changed during the year, responding to expansion of the branch and ATM network. More funds were maintained in form of cash, which represented 6.7% of the total assets (5% as at the end of 1997). Throughout 1998 the Bank complied with Bank of Latvia regulations in respect of correspondent account balances, which accounted for 10% of the total assets at the Assets LVL ,000 end of the year. As the Bank had sufficient liquidity, it reduced the amount of resources placed with other banks, which accounted for 19.5% of total assets (35% as at the end of 29, , ). As a result of active lending, the proportion of loans to customers in the structure of total assets increased, reaching 40% of total assets as at the end of 1998 (27.6% as at 120,000 the end of At the same time, the proportion of the securities portfolio decreased 28, ,000 to 8.7% of the total assets compared to 15.7% as at the end of As a result of the merger between the two banks, the sizable portion of fixed assets in the asset structure 10,572 12,518 80,000 increased from 7.9% at the end of 1997 to 9.8% at the end of ,145 13,918 24,489 8,522 58,168 16,458 60,000 40,000 20, Cash and amounts due from the Bank of Latvia Amounts due from credit institutions Securities Net loans Other assets Due from credit institutions At the end of 1998, the Bank had placed 28.2 million lats with other credit institutions. This includes 13 million lats placed on correspondent accounts in other banks. The remaining 15.2 million lats have been placed in form of interbank loans or deposits in other banks, ensuring appropriate liquidity, return and risk profile of the Bank's assets. 99% of interbank loans and deposits were placed with banks in OECD countries with ratings above A. As at 31 December 1998, the Bank had placed 19.5 million lats with the Bank of Latvia, of which 14.5 million lats comprised the balance on the correspondent account, and 5 million lats were placed as a term deposit. 20

23 Securities portfolio and trading assets Latvian commercial banks regarded Russian government securities to be one of the principal sources of income, taking into account the high yields of these securities. As a result of the financial crisis, Latvian banks lost one of their principal sources of income, and the proportion of securities in the structure of total assets decreased. As at the end of 1998, Hansabank-Latvia had invested 12.5 million lats in securities, representing 8.7% of total assets. Of this, 7.2 million lats were invested in liquid securities, including Canadian, Italian and Lithuanian government Eurobonds, and 2.7 million lats were invested in Latvian government treasury bills. At the end of the year the Bank did not have investments in Russian or other CIS country securities, however, during the year the Bank placed 2 million lats in Russian short term government bonds and Eurobonds, which caused a loss in excess of 1.7 million lats for the Bank. A portion of the securities portfolio of 0.3 million lats are invested in equities. The Bank is one of the most active members of Riga Stock Exchange and one of the largest players in the Latvian securities market. Hansabank-Latvia was among the three largest market participants according to turnover volumes generated on Riga Stock Exchange. Loan portfolio by industries Communications1% Transport 4% Wood processing10% Employees 1% Other 12% Manufacturing26% Trade 34% Financial services 3% Real estate 9% The average return on the securities portfolio decreased from 10.1% to 7.7% in 1998, however, the present securities portfolio ensures sufficient return for the Bank with minimum risk. Loan portfolio Positive changes in the maturity structure of loans took place in 1998 throughout the Latvian commercial banking sector. At the end of 1997, 45% of the total banking loan portfolio consisted of loans with maturity of more than one year, in 1998 the proportion of such loans reached 55%. The amount of medium and long-term loans grew by 80%, whereas short term loans grew by 22%. Changes in the maturity structure of the loan portfolios indicate changes in borrower structure, gradually shifting from trading companies to manufacturing companies. In 1998 Hansabank-Latvia continued an active lending, doubling the size of its loan portfolio in the first quarter of the year to 44.8 million lats. After the bank merger, the loan portfolio increased to 58.2 million lats and the Bank became the third largest lender (with 8.5% market share) by the end of % of the total lending portfolio are loans with maturity of one year and over one year (68% according to the original maturity). During the year the Bank became more active in lending to private individuals, making loans principally for purchase or reconstruction of real estate, as well as granting overdraft loans. During the year the amount of loans to private individuals was increased four-fold, from 0.82 million lats to 3.5 million lats at the end of the year. 2.9 million lats of these comprise long-term loans. During 1998 the percentage of loans granted to trading and manufacturing companies increased reaching 72% of the overall loan portfolio structure (64% in 1997). Loan portfolio by borrowers Employees 1% Financial companies 6% Individuals 6% Latvian registered private companies 72% Foreign registered private companies 10% State and municipal institutions 5% In the last quarter of 1998, the quality of the Bank's loan portfolio declined. Provisions for bad and doubtful debts increased to 6.3% of the total loan portfolio (2.5% at the end of 1997), and loans in arrears accounted for 4.5% of the loan portfolio (0.2% as at the end of 1997). Deterioration of the quality of the loan portfolio was caused by two factors. One of them was the indirect impact of the Russian crisis as the financial position of the borrowers closely connected with Russia deteriorated, leading to additional provisions of 1 million lats. The quality of the lending portfolio was also affected by the loans taken over from Latvijas Zemes Banka, as there were significant 21

24 Provisions for bad and doubtful debt 3,269 3,023 LVL differences in quality compared to the quality of loans originally issued by Hansabank - Latvia. This led to additional provisions for bad and doubtful loans of 0.15 million lats, and a write-off of 1.8 million lats. The economic developments in the country have also affected the interest rates on loans, which had the tendency to increase in the last quarter of The average interest rate on loans issued by the Bank during the year increased to 10.3% (9.2% in 1997). HANSABANK-LATVIJA Annual report Loans repaid and release of provisions Provisions made during the year Loans written off 1500 Provisions for bad and doubtful debts Provisioning for bad and doubtful debt is performed in accordance with the Bank's lending policy and the requirements of the Bank of Latvia. The Bank maintains a general provision of 1% of the total loans not specifically provided for. Changes in the amount of provisions for bad and doubtful debt in 1998 were driven principally by economic developments and the merger with Latvijas Zemes Banka. Until 1998, the quality of the loan portfolio of Hansabank-Latvia has been above average for the Latvian commercial banks. Before the Russian crisis as at the end of the second quarter of 1998 the ratio of provisions to total loans was 1.9%. After the crisis the quality of the loan portfolio gradually deteriorated with provisions reaching 2.5% of the loan portfolio at the end of October. The merger with Latvijas Zemes Banka contributed to even further worsening of the quality of the loan portfolio changing the provisioning ratio to 6.3% of the total loans. Total additional provisions of 2.8 million lats were set up in 1998, of which special provisions account for 2.5 million lats and general provisions account for 0.25 million lats. During the year bad loans amounting to 3 million lats have been written off. An improvement in the quality of the loan portfolio cannot be expected in 1999, but the provisions will remain on the same level as in Liabilities and customer deposits Average deposits ,165 37,063 Term deposits Demand deposits ,496 47,395 LVL ,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 The greatest portion of liabilities of Latvian commercial banks, 58%, is constituted by customer deposits. Of these, a significant portion historically has been non-resident deposits, causing dependence on non-resident resources and fluctuations in these resources. Positive changes could be observed in the structure of customer deposits as some non-resident funds flowed out of the commercial banking system as a result of the Russian crisis. The respective proportion of such funds in the overall structure of deposits decreased from 43% at the end of 1997 to 38 at the end of This tendency also reduced the total volume of deposits. At the same time, resident deposits have grown both in absolute terms, by 35.5 million lats, and in relative terms, as their percentage in total deposits increased from 57% to 62% during the year. Gradual positive changes can be observed also in the maturity profile of deposits. The proportion of demand deposits has shrunk from 83% at the end of 1997 to 75% at the end of These developments indicate that stabilisation of the deposit base is taking place. Total liabilities of Hansabank-Latvia at the end of 1998 were million lats, which represents a 62% increase compared to the end of During the year, the Bank's share capital was increased by 2.2 times, whereas the proportion of equity increased to 7.6% of the total assets, and shareholders equity to 7% compared to the end of Even though the total deposits in Latvian commercial banks decreased by 37.7 million lats, the Bank increased its deposit portfolio by 85%. The increase in the amount of customer deposits was determined by two principal factors: the growth of the customer

25 base and as the merger with Latvijas Zemes Banka (the contribution of Latvijas Zemes Banka to the growth of the deposit base was 28 million lats at the time of the merger). Changes in the structure of the deposit portfolio were governed by trends that started in The proportion of term deposits in the overall deposit structure continued to increase from 19.4% at the end of 1997 to 29.5% at the end of Liabilities LVL , ,000 7,650 32, ,000 Due to the Central Bank, the government and other credit institutions Amounts due to the Central Bank and the government are represented by 2.5 million lats due to the Bank of Latvia, and long-term financing of 0.92 million lats for G-24 loans. Hansabank-Latvia repaid the funds received under the G-24 loan programme in 1997, however, as a result of the merger with Latvijas Zemes Banka, certain further G-24 transit funds were taken over. As G-24 long-term financing is expensive, the Bank plans to make a partial repayment in the first quarter of At the end of 1998 the Bank owed 11.6 million lats in short-term resources to other credit institutions. 8,596 11,626 48,324 78, ,000 80,000 60,000 40,000 20,000 12,811 11,637 1,000 3, Accrued income expense and other liabilities Term deposits Demand deposits Due to other credit institutions Due to the Bank of Latvia and the government Off-balance sheet liabilities and commitments As a result of increasing transaction volumes undertaken by the Bank, and the growth of the number of customers in 1998, off-balance sheet liabilities and commitments grew by 36% compared to The total amount of off-balance sheet liabilities reached 9.5 million lats by the end of The greatest portion of those was constituted by commitments to issue loans, amounting to 5.5 million lats, and guarantees amounting to 2.7 million lats. In order to minimise foreign currency risk arising from a short convertible currency position at the end of the year, as well as in order to expand the range of services offered to customers, Hansabank-Latvia uses off-balance sheet financial instruments such as forwards and swaps. The total amount of such financial instruments at the end of 1998 was 75.9 million lats. 20% Shareholders' equity and capital adequacy LVL ,000 10,000 Shareholders' equity and capital adequacy 15% In order to ensure that the rate of development of the newly merged bank matches the business volumes, in 1998 the shareholders increased the share capital of Hansabank- Latvia twice. The fist increase took place in October 1998 to support the merger between Hansabank-Latvia and Latvijas Zemes Banka. The share capital of the Bank was increased by 3.9 million lats to 10.5 million lats. The second increase was in December 1998 an additional contribution of 4 million lats into the equity was made, increasing the share capital to 14.5 million lats. Total shareholders' equity as at the end of 1998 was 10.9 million lats, which is by 1.7 times bigger than the shareholders equity as at the end of % 5% ,000 6,000 4,000 2,000 The capital adequacy ratio has been maintained above the 10% level throughout 1998 and was in compliance with the requirements of the Bank of Latvia. Shareholders' equity Capital adequacy (Basle standards) If calculated in accordance with international standards for the capital adequacy calculation, capital adequacy at the end of 1998 was 14.99%, which is well above the minimum 8% level specified in the Basle Accord. The capital adequacy ratio as at the end of the year calculated in accordance with the Bank of Latvia regulations was 13.84%. 23

26 Members of the Management Board of the Bank Ingr da Blapplema, Chairwoman of the Board Valdis Purvinskis, Deputy Chairman of the Board Irïna Krapplemane, Member of the Management Board HANSABANK-LATVIJA Annual report 1998 Druvis Mapplermanis, Member of the Management Board since Viesturs Ku ikovskis, Member of the Management Board UÆis Zemturis, Member of the Management Board 24