Coronavirus & Slovenian Financials – Has Anything Fundamentally Changed?

The selloff which started in late February, causing stocks in the regional markets to plummet, raises an important question – has anything fundamentally changed with the Croatian and Slovenian blue chips? If yes, what has changed? For this week’s blog, we decided to take a closer look at Slovenian Financials.

For this week’s blog, we decided to look at Slovenian financials (Triglav, Sava Re and NLB) which have, like most regional stocks, observed a high share price decrease in the past two weeks.  Since the peak in late February, NLB, Triglav and Sava Re have observed a decrease of 12.3%, 10,3% and 8.3% respectively.

Share Price Performance of Slovenian Financials (Since 20 Feb 2020)

Source: Bloomberg, InterCapital Research

To answer the question of what has fundamentally changed with Slovenian financials, we looked at the following:

  • The effect of the coronavirus on future earnings growth projections
  • The effect on the dividend payout/policy
  • The effect on risk free rate
  • The effect on the equity risk premium

Future earnings projections

When looking at the short-term earnings projections we consider two layers on which we can see the impact caused by the coronavirus. The first one would be a direct one, which in case of financial sector does not seem to be highly correlated with the outbreak, especially if we were to compare it with other industries – such as tourism. The second one would be an indirect one, which could to a certain extent impact the financial sector as a result of the supply chain effect and worsening of the macro environment. For example certain businesses or individuals who have increased either operating or financial leverage might observe a decline in earnings / personal income causing them not to be able to repay the mentioned loans. Furthermore, an example of an impact on insurance companies would be that they might observe an increase in insurance claims as a result of trip cancellations caused by the fear of coronavirus. Besides that, a continuation of the negative sentiment in the market could have a negative impact on the portfolios of the insurance companies, which would lead to a lower net investment income.

It is still too early to estimate weather the sector will even have an indirect effect on earnings and if it will to which extent. As of now, no significant indirect effect is visible, which can be supported by the fact that all Slovenian financials have recently published their outlooks for 2020, maintaining their earnings projections.

The potential effect on the dividend payout/ policy

Company’s dividend policy to a certain extent reflects the confidence to generate projected earnings and cash flows. Therefore, if companies lack or reduced their confidence of generating their projected earnings, they might revisit their dividend policy or reduce the dividend payment. However, note that we as of now do not see this happening for financials, as we believe that the companies are well capitalized. Industry-wise financials are the highest paying dividend stocks in the region. All companies covered by our today’s blog maintained their attractive dividend policy for the following years, indicating that there is still a high degree of confidence to deliver their projected outlooks.

As a reminder, Triglav has set the minimum dividend payout of 50% of consolidated net profit for the previous year, with the note that the company will not strive to reduce its dividend payment below the level of the previous year. Since 2015 (for net profit of the previous year), Triglav has been paying out a constant dividend of EUR 2.5 per share, which implied a high single digit dividend yield each year ranging from 7.3% to 9.5%. To see Triglav’s historic dividend payments click here. Besides that, Triglav targets a capital adequacy of 200 – 250% (in 2018 amounted to 216% – representing a solid level of capitalization).

Sava Re’s strategic plan for 2020 – 2022 states that the company will ensure its shareholders stable growth in dividends (on average by 10% annually) therefore distributing between 35% and 45% of Sava Insurance Group’s profits. Last year, Sava Re paid out a dividend of EUR 0.95 per share which, translated into a yield of 5.6%. To see Sava Re’s historic dividend payments, click here.

For this period the company notes that Group’s solvency will be maintained in the 180% to 220% range in the strategy period, which represents the optimal level of capitalization based on the Group’s risk appetite.

For the years 2019–2023, NLB Group is targeting a high payout ratio of 70%. Since the public offering, the company has already paid a dividend of EUR 7.13 which translates into a dividend yield of 11%. However, note that this year, NLB’s dividend policy might be hindered by the acquisition of Komercijalna Banka. To read more about it, click here.

To sum up, all of the mentioned companies are well capitalized while their managements have had a solid track record of fulfilling their targets. Therefore they should, short of a significant indirect impact or macro impact, be able to fulfil their attractive dividend policies in the coming period.

The effect on the risk-free rate and equity risk premium

When valuing Slovenian companies, one way to estimate a risk-free rate would be by using the German Bund instead of Slovenian 10 year bond as Bund is perceived to be default free. In a sense, analysts are trying to find a riskless investment based on the currency in which they are investing, while the risk of operating in that country should be reflected in the country risk premium, which is a part of the equity risk premium. Currently the return on a German Bund is at its historic low, amounting to -72 bps, compared to -43 bps in the beginning of February. The reason for such a move has its grounds in investors changed risk appetite which in turn moved funds away from risky assets to a European safe haven.

Return on the German Bund (since 1 Jan 2019)

Source: Bloomberg, InterCapital Research

Meanwhile, one could argue that the equity risk premium (ERP) for Slovenia, and for most markets, has increased. The ERP could be defined as the excess return an investor would demand to invest in the average equity over the risk-free rate. The outbreak of coronavirus has undoubtably made investing into equities riskier and therefore the ERP has risen. In a sense, if investors become more risk averse, they will demand a higher ERP. According to Damodaran, the ERP for a mature market (such as the USA) observed an increase of 0.44 p.p. since the beginning of the year and stands at 5.69%, which is quite close to the 5.62 average ERP since 2010.  This has consequently led to an increase in the ERP for Slovenia, which according to Damodaran, currently stands at 6.81%.

Taking into consideration the both the change in risk-free rate and ERP, fundamentally there should currently not be a significant change in the discount rate (cost of equity). We believe this might significantly change over the next few weeks if both global and regional economic growth shows further signs of fragility.  

Historical ERP for Developed Markets (1961 – March 2020)

Source: Aswath Damodaran, InterCapital Research


Given the current development regarding Coronavirus, it seems that the financials have not observed a significant impact on the above observed fundamentals. The question that remains unanswered is how long we will continue to see the spread of the virus and a negative sentiment revolving around it. If the impact remains short-term, we might observe a slightly lower net investment income with insurers. However, a long-term negative sentiment might lead to a lower economic growth, which could be of quite a negative impact for financials.

Dino Durrigl
Category : Blog

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