Steve Roman in Tallinn -

"Predict less, but be prepared." That's the tack being taken by the Baltics' largest commercial bank, Hansabank, for grappling with the region's current economic downturn. As loan defaults grow and GDP numbers plummet, the institution continues to expand beyond its traditional borders and is looking to operate in a mature Baltic market over the next decade. In an exclusive interview with bne, Hansabank CEO Erkki Raasuke gave his views on the slowdown and spoke about the bank's development plans for the Baltics and Russia.

With the scale of the Baltics' slump still uncertain, the question of just how far the economies of Estonia, Latvia and Lithuania will fall before hitting bottom is the topic of the day. Raasuke maintains that adding to the speculation would be pointless, since the answer is impossible to predict. However, he would venture that whatever scenario is going to happen, it will likely play out within the next year.

"We are in a process of very quick change in the economic cycle which is currently leveling downwards. How deep it's going to be we don't know, and what exactly all the consequences are going to be we also don't know. But... based on our past, the kind of reasonable expectation is that the true shape of this downturn is probably going to be very clear within less than 12 months or so," he said.

For observers looking for clues as to what will happen before then, Raasuke could only point out that most expectations so far about how the downturn would play out have been "positively biased."

"What I mean by that is that the reality is more negative than has been expected. So that's an important thing to recognize. When this trend is going to change we don't know, but the general expectation, I would say at all levels, has been more positive."

Hansabank's general strategy for coping with the crisis, according to Raasuke, is to be ready for any outcome. "What we are trying to do is predict less, but be prepared," he said. "Being prepared means thinking through and if there are other ways things are going to take place, to have the capacity in place to absorb that, to have the organization standing strong to live through it."

The area in which Hansabank and other Baltic banks are most exposed is the loan market, which Raasuke said has by far the largest impact on their bottom line. In the first quarter of this year, Hansabank lost over €21m in bad loans in the Baltics, Estonia's Eesti Ekspress weekly reported. "Overdues are increasing we know, so we are putting money aside for that - we are doing so-called provisions - and eventually we know we are facing larger loan losses going forward than we have had over the last couple of years. Exactly how severe that is going to be we will be able to discuss once we have seen the bottom of the cycle," Raasuke said.

He also pointed out that despite the overdues and defaults, the Baltic loan market itself is continuing to grow at the rate of about 10% per year, which he claims is a positive sign, showing there is still liquidity in the market.

Times they are a changin'

Founded by nine private individuals in Estonia in 1991, back when the country was still using Soviet roubles, Hansabank set itself apart from competitors by being the fresh, Western-practices bank. Hansabank mushroomed throughout the decade, quickly expanding into Latvia and Lithuania, and setting up separate legal entities for its leasing and financial markets services.

In explaining the bank's success, Raasuke said the same fundamentals that fuelled growth in the early days were also behind the bank's continued expansion.

"There has always been an appetite for growth, and the bank has always had a very strong set of values among the people who have been working here. Part of them is high transparency, openness and also seeking innovation. [There is] also a very performance-seeking culture as well.

"I think the will to get things done has here always been bigger than it has been with other companies, and this will and working environment has also attracted a number of very good people. Many of them have changed and moved on and new good people have come in, but the concentration of the good, capable people with a very strong will has always been higher here than in other places."

Raasuke said that these principles didn't change when Sweden's Swedbank, which had held a majority of Hansabank stock since 1998, became sole owner in 2005.

A more visible change will happen this autumn, however, when the entire organization will drop the "Hansabank" name in favour of using "Swedbank," a move Raasuke believes won't cost it its Baltic identity as some commentators have speculated. "[International financial groups] want to present themselves under one name and act as one company, and we are no different from that," he said. "I think identity stays with the people, not in the name, so it is entirely in the hands of the Baltic people ...what type of organization it's going to be."

Russian growing pains

Lately, the Hansabank group has been turning toward the high-potential Russian market as its next source of growth. Activity begun more than a decade ago was brought up a level with the 2005 purchase of Kvest Bank and the opening of the first Hansabank branch in Moscow the same year. Now Hansa also operates branches in St Petersburg and Kaliningrad, and employs over 300 people in the country. The expansion has not been without growing pains, however. "We had a difficult last year, 2007, as we had some regulatory issues we had to bite through and this was actually holding us back with our development," Raasuke admitted. "But in general we have now been growing quite well. We have established quite a good platform in corporate banking, which we're now developing further as a retail bank. But we'll do it organically and not through acquisition."

"You can't just bluntly copy the experience that we have had in the Baltics. We have been paying for that mistake. You have to recognize the environment ... of the local market, and you definitely need to adjust. You need to be a local player to succeed."

Back in the Baltics, Hansabank's immediate concern is still dealing with the economic slowdown. "It's not going to be easy and that will keep us extremely busy for the next 18 to 24 months," Raasuke said.

Immediately after that, however, the plan is to change with the maturing Baltic market, to make the shift away from credit products and more towards investment and savings products. "The same things that were built in Old Europe in 10 years we want to do in maybe five or three years. It's going to be a very kind of pushed learning experience," he said. "There's no doubt that over the next five to seven years the Baltic banking market is going to be a very exciting place to be, and going through the slowdown and healing the wounds out of that the market here still has a very good potential for going forward."

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