THE FINNISH BANKERS’ ASSOCIATION 31.12.2003

BANKS 31.12.2003 1 CONTENTS

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„ Banks operating in Finland 1 „ Number of staff decreased 1 „ Branch offices and other banking service points 2 „ Housing loans increased bank lending 2 „ Deposits on the increase 3 „ Interest rate margin decreasing 4 „ Amount of problem credit is minor 4 „ Banks’ life insurance companies increased their share 4 „ Mutual fund savings are popular 5 „ Car sales boosted lending by finance companies 5 „ Banks’ performance unchanged 6

The report is written by Tarja Kallonen and the diagrams are designed by Ritva Myllylä. The sources used are the banks’ annual reports and the statistics of the Bank of Finland, the Financial Supervision and the Statistics Finland. The result summary is available at the web site of the Finnish Bankers’ Association: www.fba.fi, page Banking Industry. 2 BANKS 31.12.20032 BANKS 31.12.2003

Banks operating in Finland

At the end of 2003 the banks active in Fin- Banking groups operating in Finland on 31 December 2003 land included 11 commercial banks, 242 co- operative banks belonging to the OKO Bank Total assets Staff Branches Banks Group, 42 local co-operatives, 40 savings million euro (groups) (deposit banks) (deposit bank) banks and eight branch offices of foreign credit institutions that may receive deposits. Domestic banks 25 927 1 527 335 This represents a total of 343 banks. The num- Group 262 190 9 874 *) 300 *) 1 *) ber of banks declined in 2003 by just one OP Bank Group 35 002 9 048 682 244 through the merger of two co-operative Sampo 25 250 banks belonging to the OKO Bank Group. - of which credit institution and investment The number of banks in Finland is high by services 18 140 3 432 108 1 international comparison. However, the three Savings banks (excl. Aktia) 4 447 1 171 199 39 largest banking groups, Nordea Bank Fin- Aktia Savings bank 3 512 810 60 1 land, the OKO Bank Group and Sampo, rep- Local co-operative 2 744 738 143 42 resent more than 80 per cent of the deposit Bank of Åland 1 851 415 27 1 and credit markets. In addition to deposit Gyllenberg Private Bank **) 36 1 1 banks, the banking groups include finance EvliE Bank 417 251 4 1 companies, mutual fund companies, life 90 assurance companies and other companies eQ Bank 247 1 1 engaged in the finance sector. Tapiola Bank 35 32 1 1 The commercial banks are, in alphabetical AsuntoHypoPankki 10 30 1 1 order: Bank of Åland Plc, eQ Bank, Evli Branches of foreign banks 853 37 8 Bank Plc, Gyllenberg Private Bank Ltd, Nor- 559 30 1 dea Bank Finland Plc, OKO Bank, Okopank- Skandinaviska Enskilda Banken 130 1 1 ki Plc, OP-Kotipankki Oyj, Sampo Bank Plc, 56 1 1 Suomen AsuntoHypoPankki Oy and Tapiola 21 1 1 Bank Ltd. Credit Acricole Indosuez ****) 15 1 1 Number of bank staff decreased 17 1 1 Carnegie AB 49 1 1 The number of personnel in the banking Norddeutsche Landesbank 6 1 1 Total groups decreased by almost 7 per cent dur- 26 780 1 564 343 ing 2003. Banking groups employed a total *)Operations in Finland of 26,780 people at the end of the year. De- **) SEB's subsidiary posit banks employed a total of 23,372 peo- ***) New banks: EFG Investment Bank (from March 2004) ple, which is 1,107 less than the previous year. DnB NOR Bank ASA (from April 2004) The reduction in personnel has been af- ****) Calyon (new name from June 2004) Source: Banks' Annual Reports, banks fected by increased efficiency of banking

BANKS 31.12.2003 1 3 operations and outsourcing of operations. In The availability of banking services is also addition, customer use of Web banking servi- improved by the fact that the banks have sig- ces has continued to increase. The increased ned an agreement with 3,500 retail outlets, al- popularity of electronic banking is indicated lowing customers to withdraw cash at points by, among other things, the fact that the num- of sale. In addition, bankcards are accepted as ber of data connections between customers a means of payment in most shops, hotels and banks increased to 2.9 million by the end and restaurants. of 2003. The Finnish banks have jointly developed fast and efficient payment systems. The Deposit banks' staff amount of cash in circulation is low; giro 1 000 60 persons transfers are the most common method of transferring money between accounts and 50 cheques have all but disappeared from use. Finland remains a forerunner in the world 40 when it comes to the per capita number of Internet clients, the frequency of service usage 30 and the number of transactions of this kind.

20 Housing loans increased bank lending

10 Euro-denominated lending by financial insti- 0 tutions in Finland grew by 12 per cent in 2003. 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 The growth in total loans mainly resulted from Sources: Banks' annual reports, Banks an increase in housing loans. The total amount of loans from financial institutions to the euro area was 92 billion euro at the end of the year, Branches and other banking service of which the share of euro loans granted by points deposit banks amounted to 80 billion euro. The number of banks and their branches has remained fairly stable in recent years. At the Banks' euro-dominated lending to the public end of 2003 the 343 banks operating in Fin- 40 € Bill. land had a total of 1,564 branches and 163 35

service points. The number of branches was 30

just eight less than a year earlier. There were 25 2,001 cash dispensers and 1,954 giro transfer 20 machines. Furthermore, there were a total of 1,220 self-service computer terminals at bank 15 branches and service points. 10 5

Branch offices and telebanking agreements 0 Corporate Households' Households' Other branches 1 000 agr. 4 000 3 500 housing loans other loans loans 2001 2002 2003 3 500 3 000 Source: Bank of Finland 3 000 2 500 2 500 The strongest growth was seen in loans to 2 000 2 000 households. A stable and low level of interest 1 500 rates has supported the popularity of loans to 1 500 1 000 households. In addition, consumer confidence 1 000 in the persistence of their own income, as well 500 500 as migration to Greater Helsinki and regional 0 0 centres of growth, has increased the demand 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 for housing loans. Extended loan periods are Branch offices (left-hand scale) Telebanking agreements (right-hand scale) also reflected as an increase in total housing Source: Statistical data on banks' payment systems 2003 loans in particular.

42 BANKS 31.12.20034 The total housing loan portfolio at the end of tistics indicate housing loans in accordance 2003 was almost 16 per cent greater than the with new business. In addition to new loans, previous year. The demand for consumer credit the definition of the latter includes renegotia- increased during 2003 as well; in particular, tions of old contracts, such as adjustments to the amount of consumer credit granted by the interest rate. banks clearly increased, only the amount of Both review methods indicate that monthly student loans continued to decline. withdrawals of new housing loans in 2003 The banks have a substantial position in exceeded the corresponding figures for earlier corporate financing, even though businesses years. Intensified competition between the also use other financing partners and sources banks with regard to housing loans has af- of financing for their investments. Corporate fected the renegotiations of the terms and loans granted by financial institutions increased conditons of housing loans; it is estimated by a total of 8 per cent in 2003. Loans gran- that a lower interest rate was agreed for ted to businesses by financial institutions 30% of the housing loans. amounted to a total of 34 billion euro, 28 bil- lion of which were granted by deposit banks. Deposits on the increase Most loans granted by deposit banks are tied to either the 12-month Euribor rate or to By the end of 2003 total deposits at banks bank-specific reference rates. Euribor-linked stood at 72 billion euro. In addition to con- loans in particular became more common du- ventional deposits, the amount includes all other ring 2003, with their share of the entire credit debts owed financial institutions except secu- portfolio increasing to 60 per cent. The num- ber of fixed-rate loans increased towards the end of the year. Only 16 per cent of loans Banks' deposits from the public granted by deposit banks are tied to interest € Bill. rates other than the Euribor rates or bank- 60 specific reference rates. The mean interest rate of loans granted by financial institutions was 50 3.77% at the end of 2003, and the correspon- ding mean interest rate of loans granted by 40 deposit banks was 3.59%. 30 The accompanying diagram illustrates new housing loans, the definition of which differs 20 from the similar term used by the Bank of Finland. This diagram indicates new housing 10 loans withdrawn, while Bank of Finland’s sta- 0 Households Companies Others 2001 2002 2003 New housing loans granted to Source: Bank of Finland domestic households by banks

€ Mill. % 1 400 7.0 rities-based debts. The amount of deposits in- 1 200 *) 6.0 creased almost 6 per cent on the previous year. 1 000 Households represented 70 per cent of the 800 5.0 deposits, 20 per cent was coming from busi- 600 nesses and the remaining 10 per cent from 4.0 public sector entities, as well as financial and 400 insurance institutions. 3.0 200 Growth was strongest in deposits in 0 2.0 savings accounts, whereas funds in fixed-term 1999 2000 2001 2002 2003 2004 *) accounts decreased in 2003, mostly due to low New housing loans %, average interest rate interest rates on deposits. The average interest (right-hand scale) rate for deposits at the end of 2003 was 1.06 *) incls. also mortgage institutions (as of 12/2003) Source: Bank of Finland, Banks per cent.

BANKS 31.12.2003 35 Over 57 per cent of all deposits were fi- loans, as well as the housing loan interest being xed interest, with 27 per cent tied to bank-spe- tied to short-term market interest rates, have cific reference rates and 9 per cent to Euribor played their part in making Finnish housing rates. A 29 per cent tax-at-source is collected loans among the most affordable in the euro area. on interest paid on deposits. Amount of problem credit is minor

Interest rate margin decreasing The amount of the banking groups’ non-per- forming receivables and credit losses was at a The most essential source of income for banks record-setting low level in 2003. Non-perfor- is net income from financial operations – that ming receivables refer to credits where the is, the difference between interest income and principal and/or interest have been unpaid interest expenses. Net income from financial for three months. According to the Financial operations is affected, among other things, by Supervision Authority, the amount of non-perfor- the general level of interest rates and the pric- ming receivables was 416 million eurio, which ing of the banks’ credit and deposit products. is almost 20 per cent less than a yaer earlier. The share of non-performing recevables decreased to 0.4 per cent of the credit portfolio by the end of Average interest rate on deposits and lending 2003. % 7

6 Bank groups non-performing receivables 5 and credit losses € Bill. 1 600 4 1 400 3 1 200 2 1 000 1 800 0 600 2000 2001 2002 2003 400 Average interest rate on domestic euro lending Average interest rate on domestic euro deposits 200 0 Source: Statistics Finland - 200 1997 1998 1999 2000 2001 2002 2003 2004 The banks’ net income from financial ope- Non-performing receivables rations declined during 2003. The decline was Credit losses Source: Financial Supervision due to the reduced interest rate margin. Thus the favourable development in lending volumes was not enough to compensate for the redu- Gross credit losses, excluding refunds or ced interest rate margin. The interest rate mar- reversals of credit losses, amounted to 142 gin – that is, the difference between the banks’ million euro. The amount of refunds and credit interest and deposit interest rates – has compensations of earlier credit losses, as well been decreasing for several years and stood at as reversals of credit loss provisions, was 30 2.5 percentage points at the end of 2003. million euro higher than credit losses and cre- A major part of banks’ lending is tied to dit loss provisions booked. This means that, as market rates – that is, either Euribor rates or an exception to the rule, credit losses had a bank-specific reference rates – and, correspon- positive effect on earnings in 2003. dingly, a major part of the deposits are fixed- interest deposits. Therefore, changes in market Banks’ life assurance companies rates have a fairly quick impact on the banks’ increased their share interest margins and thereby also on net income from financial operations. Life insurance savings amounted to a total of Increased efficiency of banking operations 22 billion euro at the end of 2003, or 10 per and competition between banks for housing cent more than a year earlier. On the other hand,

4 6 BANKS 31.12.20036 premium income in the insurance sector de- as well; 35 per cent of all mutual fund capital creased in 2003. Life assurance premium in- is invested in interest-bearing securities with a come decreased by 11 per cent, mostly due to maturity period shorter than one year, and 33 a decrease in premium income on savings life per cent is in equity funds. The total market insurance. Premium income on individual pen- value of mutual funds registered in Finland sion insurance continued to increase. was over 23 billion euro at the end of the The number of insurance policies sold inc- year, or 40 per cent more than a year ear- reased until November, when the Govern- lier. ment made a decision in principle that indivi- Almost eight per cent of all domestic dual pension insurance shall be subject to capi- household wealth and non-profit institutional tal income taxation as of the beginning of wealth is placed in mutual funds. In internatio- 2005. nal comparison, investments in mutual funds are The majority of life insurance savings con- still fairly modest in Finland. At the end of 2003 sists of traditional guaranteed interest life in- there were 26 mutual fund companies opera- surance policies, which became even more ting in Finland. The number of mutual funds popular during 2003. In the case of a guaran- managed by these companies increased by 50 teed interest insurance policy, the life insurance to a total of 362. The banks’ mutual fund company pays the guaranteed interest rate companies account for more than 90 per cent plus a customer bonus based on the com- of all fund capital managed by mutual fund pany’s earnings. companies.

Market shares of life insurance companies Market shares of mutual fund companies in insurance savings 31 Dec 2003 in accordance with amount of managed assets 31 Dec 2003

Nordea Others 7.1% Others 6.7% 25.8% Nordea Investment Other banks' fund Kaleva 4.0% Fund Co. 26.7% companies 29.7% Tapiola Mutual Life and Tapiola Corporate Life 9.0% Sampo Life 22.5% OP Fund Management Suomi Group 21.9% 14.2% OP Life Assurance Co. 10.0% Sampo Fund Management 22.3%

Source: Federation of Finnish Insurance Companies Source: Financial Supervision

Co-operation between banks and insuran- Car sales boosted lending by finance ce companies has increased, and the consoli- companies dated financial groups include companies ope- rating in both banking and insurance. The sha- The credit portfolio of member companies re of the banks’ life insurance companies in the Finnish Finance Houses Association grew compared to total insurance savings has by almost 9 per cent during the year and was grown and was approximately 70 per cent in 7.4 billion euro at the end of the year. Mem- 2003. bers of the Association in 2003 included Han- delsbanken Finance Ltd, Nordea Finance Fin- Mutual fund savings are popular land Ltd, OKO Osuuspankkien Keskuspank- ki Oyj/Finance Company Services, Sampo The downward trend in stock market prices, Finance Ltd and Sampo Card Ltd. which lasted for approximately three years, Finance companies focus on object-colla- turned in the summer of 2003. Increased mar- teral financing (financing of hire purchase, lea- ket values of shares were reflected in the mar- sing, factoring) and unsecured consumer credit ket value of equity funds in particular. Invest- (credit cards, account credit and one-time cre- ments in short-term interest rate funds increased dit).

BANKS 31.12.2003 5 7 Classification of outstanding credit stock decreased during 2003. In addition to reduced 31 Dec 2003 and %-change from 31 Dec 2002 market rates, smaller customer margins also of Finnish Finance House Association members affected the net income from financial opera- Hire purchase tions. Consumer credits 18.5% (+0.4%) 22% (-0.3%) Increased lending from financial institu- Loans 7% (-0.5%) tions uphold profitability. The demand for Leasing 22% (-0.4%) housing loans in particular continued to be Factoring 8% (+2.2%) good. Deposits also increased. Real Estate Leasing Investment financing 21% (-0.2%) 4% (-0.4%) The mutual fund business, income from securities brokerage and commission income increased other income. Source: Finnish Finance Houses Association Expenses decreased slightly during 2003. Finance companies finance the acquisition The efficiency of the banks, measured by the of a certain object, either based on an agree- cost/income ratio, remained almost at the pre- ment with the vendor company or based on a vious year’s level. direct agreement with the buyer. The pro- ducts of finance companies complement the The amount of credit losses remained financing services of the banking group, chan- low. nelling a major part of consumer and card credit to households. The banks’ capital adequacy remained New lending by finance companies inc- good. Capital adequacy ratios varied from 9.3 reased in 2003, particularly with regard to hire to 21 per cent. According to calculations by purchase financing and consumer credit. Hire the Financial Supervision Authority, the over- purchase financing increased by 25 per cent, all capital adequacy of the banking sector im- mostly due to the fact that a reduction in car proved and stood at 18.9 per cent at the end tax boosted the sales of new cars. In 2003 of December. new lending only decreased in the field of lea- sing, due to businesses reducing investments in IT and other office equipment. Financial income Other income Expenses Credit losses Operating profit 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 Banks’ performance unchanged 1.1 - 31.12. € Mill. Nordea 1) 3 366 3 451 2 273 2 219 -3 673 -3 745 -363 -261 1 812 1 547 The 2003 earnings of finance and banking OP Group 798 857 458 412 -766 -758 -9 -13 515 459 groups operating in Finland remained at the Sampo 2) 464 542 previous year’s level. A country-specific break- of which credit institution down of the performance of multinational and investment services 404 448 239 235 -414 -437 0 1 233 252 banking groups is not feasible, so the financial Savings banks (excl. Aktia) 114 128 36 32 -109 -100 -1 0 41 59 results of the banking groups have been pre- Aktia Savings Bank 74 75 41 37 -83 -90 -2 -3 30 20 sented in the following table, which covers all Local co-operative banks 76 83 23 17 -68 -67 -1 0 30 33 group activities. Bank of Åland 30 32 19 15 -33 -32 0 -1 15 14 The general earnings development of the finance sector in Finland in 2003 can be cha- Svenska Handelsbanken 3) 1 993 1 856 396 476 -1 065 -1 128 - 56 -43 1 266 1 112 racterised as follows: SEB 3) 1 510 1 497 1 456 1 491 -2 060 -2 172 -108 -89 873 809 Danske Bank 3) 2 727 2 560 1 265 1 237 -1 977 -2 104 -224 -191 1 754 1 502 In the middle of 2003 market interest DnB NOR 3) 1 723 1 849 1 037 754 - 1676 -1 722 -236 -136 876 702 rates fell to a record-setting low level, and, on 1) Income statement based on business areas average, the 12-month Euribor was one per- 2) Internal dividents and sales gains between the sectors have been eliminated from consolidated operating profit. centage point lower than a year earlier. This Profit/loss corresponding to the share of If Group added/deducted from operating profit. had a direct effect on the development of the 3) Exchange rates: Sweden 2003 = 9,1250 ja 2002 = 9,1627 financial institutions’ interest income, and the Denmark 2003 = 7,4305 ja 2002 = 7,4307 banks’ net income from financial operations Norway 2003 = 8,0033 ja 2002 = 7,5086

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YEARS in 2004

THE FINNISH BANKERS' ASSOCIATION Museokatu 8 A P.O. BOX 1009, FI-00101 HELSINKI, Finland Phone +358 9 405 6120 Fax +358 9 4056 1291 [email protected] first [email protected] www.fba.fi

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