OREANDA-NEWS. On 22 July 2009 was announced, that as expected, the economy continued to shrink during the 2nd quarter in all the Baltic countries. Although an extremely fast contraction at the start of the year was followed by a period of relative stabilization in the Latvian economy in the 2nd quarter, unfortunately there is no doubt that a further slowdown in economic activity can be expected in the second half of the year. Economic growth cannot be expected to resume any time sooner than mid-2010. Nevertheless, some positive signs of economic balancing have been seen in past months. It is largely related to the fact that the private sector in Latvia has been surprisingly fast in adjusting itself to a changed economic landscape, balancing costs and restructuring operations.

While improving operational efficiency, in the 2nd quarter Swedbank Latvia had an operating profit (profit from core business operations before provisions) of LVL 33 m, which represents a 25% increase over the result in Q1. However, Latvia’s macroeconomic picture continued to worsen in Q2, which impacted the whole result and consequently Swedbank Latvia closed Q2 with a loss of LVL 169m. Collective provisions of LVL 78.5 m, which, in preparation of further economic recession, were formed in Q1 at Swedbank Group level, have been transferred to Latvia to buffer future loan losses. Revenue increased by 8% to LVL 48 m, while operating expenses have been cut by 17% to LVL 15m as a proof of successful cost management.

“Improving efficiency, optimising expenses and finding opportunities to increase revenue at a time of recession presents a challenge to each and every player of the economy, and that is our primary task”, says Maris Mancinskis, the CEO of Swedbank Latvia, adding that “In the second quarter, we continued with preparations for a further economic downturn. Swedbank Latvia increased the subordinated capital and the process of increasing equity capital is now in the final stage, reaching the capital adequacy ratio of 12.55%, which considerably exceeds the 8% required by law. This way we have made extremely cautious preparations for even the most bleak economic outlook. Our goal during these times is to work efficiently and, being at the forefront of the financial market, to set an example of improving productivity of work, as well as supporting and finding most suitable solutions for our clients to help them weather the recession.”

Deleveraging

In the 2nd quarter, the credit portfolio shrank by 8%, while deposits dipped by 2%. Trends in deposits are in line with overall market development, considering the rapid fall in incomes experienced by households. However, at the same time people are becoming increasingly aware of the importance of savings, and a growing desire to save is being observed – according to Swedbank’s data, 60% of customers extend their deposits after they mature, keeping the money in savings and ensuring a greater financial stability in future for themselves.

Like in Q1, the demand for new lending continued to sink in Q2, and we expect low demand to continue in coming quarters. New financing continues for viable projects, subject to more conservative lending conditions due to the increased risks related to the current economic situation, while demand in retail lending is subdued in connection with greater uncertainty surrounding the labour market.  As Baltic economies are considered a region with higher risk, the cost of funding is considerably higher than a few years ago. Swedbank continues to review pricing principles for all lending products and puts a strong focus on strengthening the balance sheet structure and increasing the share of local funding.

Swedbank has been educating clients about reasonable borrowing and about smart planning of income already since 2007. This year a new on-line tool, called Money Planner, was launched on Swedbank’s Internet Bank helping customers manage their daily finances. Swedbank is constantly working to support each its customer through providing most suitable solutions, best products on the market and professional advice on economic processes and developing new restructuring solutions for clients, whose solvency has changed due to economic recession. Swedbank has successfully initiated projects where residential property financed by Swedbank is sold to private individuals on particularly favourable terms of financing.

Credit portfolio protection measures

In today’s economic situation, provisioning for impaired loans is the key factor, which affects the profit. At Swedbank Latvia, provisions for impaired loans amounted to LVL 239m in Q2, including collective provisions of LVL 78.5 m, which, in preparation of further economic recession, were formed in Q1 at Swedbank Group level and have been transferred to Latvia to buffer future loan losses. The development of impaired loans during Q2 was in line with expectations in the Baltic countries, and we believe that the rate of increase in impaired loans will tail off during the second half of 2009.

We have stepped up focus on overdue management competences and processes. The Financial Restructuring and Recovery organisation has been strengthened in the Baltic countries with the aim to review all customer relationships. It is our intention to discuss and find solutions with our customers as early as possible in order to mitigate the adverse consequences of distressed debts.

Cost optimisation

We have taken steps to improve productivity and cost efficiency levels. During Q2 reductions on the cost side have been larger than on revenues. We were able to better organise HR costs with a 13% reduction on the 1st quarter.  During the first half of the year the number of employees has decreased by 8,3%.  The ability to reduce administrative costs was comparatively smaller as changes in this area require a longer period of time. The bank is optimising the branch network (six less branches in 6 months) and renegotiating 3rd party contracts (rent, maintenance, supplies, etc).

Reducing excess capacity and maintaining cost efficiency remains a key objective for the coming quarters. Activities for productivity improvement include FTE reduction, decrease in total compensation, branch network optimization as well as cost reduction in other administrative items.

Achievements in Q2

The result of improving operational efficiency is also seen as a success by Swedbank – the operating profit before provisions has been upped by 25% in the 2nd quarter, while cost/income ratio was 32% in Q2.

Swedbank has also been determined in working on improved customer service in the new macroeconomic conditions taking into account the current needs of the customers, as well as on development of most relevant solutions and new products. Consequently, in Q2 the number of Swedbank’s customers in Latvia has rapidly come close to one million – according to current indicators, Swedbank expects to see its millionth clients during Q3.

Swedbank also continued to work with determination on shaping modern financial habits through steering customers towards more efficient and lower-priced electronic channels. The share of electronic settlements in Swedbank has reached 97.42%. Also payments with Swedbank cards have increased – in the first six months of the year as much as 70% of all card transactions were purchases, not cash withdrawal.

Today, clients appreciate being together with a strong partner. During Q2 we have performed modelling of several macroeconomic development scenarios on Swedbank Group level and these have repeatedly assured that even in the case of very negative developments in the Baltic countries the bank has a solid standing and is adequately capitalized. Swedbank is fully committed to the operations in our home markets in the Baltic countries. The Baltic countries are still less developed than other EU countries both in terms of financial markets and personal wealth, nevertheless Swedbank Group is convinced that the convergence process for the Baltic countries towards other EU countries will continue, which creates strong development potential in the long run.