Last week, we had the opportunity to meet with NLB Group in Belgrade where we discussed several topics.
Potential Acquisition of Komercijalna Banka
Firstly, we discussed the expansion of the Group to the Serbian market through a potential acquisition of the Komercijalna Banka, the third largest bank in Serbia by total assets. As a reminder, 83.2% of the total shares of Komercijalna Banka, which are owned by the Republic of Serbia, are up for sale and NLB Group has already given a non-binding bid.
The management of the NLB Group has once again stressed that their position in Serbia is sub-scale and would like to grow there, but in any potential M&A they would consider following conditions: that they consider the pricing to be fair, that the acquisition would be of the benefit to the shareholders and that it does not affect the company’s dividend policy, and management strives to pay a substantial dividend even in a transition year.
If we were to see the acquisition to go through, we can expect it to be financed mostly through Tier 2 and not through equity raising. The management stated that they have already filled the Tier 2 regulatory buffer of 2% of RWA by three Tier 2 instruments in 2019. First EUR 45 million domestic bond issuance in May, followed by EUR 45 million bilateral transaction in September, and in the meantime, the company issued EUR 120m of Tier 2 notes at interest rate of 3.65% p.a. To read more about it, click here. This was done in order to maintain a comfortable capital adequacy ratio and optimize the capital structure and by this ensure basis for either organic growth or growth via acquisitions, which would allow the company to pay the lucrative dividend.
Furthermore, if the potential acquisition goes through, there is a possibility of a one lower dividend payment compared to the management target (70% payout ratio from 2019 – 2023), however the management notes that the company would still pay a substantial dividend. Besides that, in the following years, the potential acquisition would not hinder the managements dividend policy.
It is important to note that the company does have an acquisition ban until 2019, however, the ban does not exempt them from giving a binding bid in this year.
Potential Impact on the Consumer and Housing Loan Restriction
Secondly, we discussed the potential impact on the consumer and housing loan restriction imposed by the Bank of Slovenia. As a reminder, starting of November 2019, the Bank of Slovenia is changing the recommendation into a binding one in the area of consumer lending, placing caps on the maturity of consumer loans, and the ratio of the annual debt servicing costs to the borrower’s net income. To read about the mentioned restrictions in detail, click here. The Group deems that these restrictions are an overshoot, as they believe that restricting access to credit for retail clients is not healthy. The Group will continue to argue against the mentioned restrictions and has reopened dialogue with the Bank of Slovenia, so they hope that current terms under which consumer loans can be placed will be calibrated. Until then, the restrictions will create a temporary dip, while the Group will adjust to it as soon as possible. In order to avoid the possible negative effect, the Group would pursue other product line as well.
Medium-term strategic and financial targets
The Group currently has a Mid-term outlook (2019 – 2023) which can be observed in the table below:
| wdt_ID | Performance Indicators | H1 2019 | Mid-term target |
|---|---|---|---|
| 1 | Net interest margin | 2,54% | >2,7% |
| 2 | L/D ratio | 67,7% | less than 95% |
| 3 | CAR | 16,45% | ~16,25% |
| 4 | CIR | 54,94% | ~50% |
| 5 | Cost of risk (bps) | 0 | less than 90 |
| 6 | NPE ratio | 4,10% | less than 4% |
| 7 | ROE | 11,4% | >12% |
The management stated that the NIM is under pressure as a result of the environment they operate in, however that they see a potential in achieving the target through loan placement to the SEE region, where the margins are higher compared to the Group level. In Serbia, NLB expects solid growth, where they see solid prospects for the bank, as they have intensified cross-border lending. As a reminder, due to the EC commitments, NLB was not allowed to provide cross-border lending until the Slovenian State reduced their share in the company down to 25% + 1 share.
On a Group level, NLB has been observing a solid growth of deposits, which does come at a certain burden.
A further reduction of NPLs is expected, which the company has been successfully doing year after year.
Turning our attention to cost of risk, in the beginning of the year, the Group expected it to be at low single digits. However, it is important to note that cost of risk is driven by single events, so there is a possibility that cost of risk will be close to zero or even negative, which means that there is a possibility of observing a release of Impairments and provisions for credit risk which could further boost the P&L. It is important to note that it is not plausible to observe negative cost of going forward, so we expect the normalization to occur in the future periods.
When it comes to costs, the head-count is decreasing as the bank is replacing some processes with digital responsibilities which they see as a positive trend that will continue in the next years. This is in line with the company’s plan and we should expect the number of employees to further decrease. Besides that, this year we should expect to see an increase in the compensations of the management, which should not impact the CIR. As a reminder, the remuneration of the management was limited by the Act Governing the Remuneration of Managers of Companies with Majority Ownership held by the Republic of Slovenia. The gross monthly salary was caped to 5 average gross monthly salaries. Since Slovenian State reduced their stake to 25% + 1 share, this does not apply anymore.
