According to the management of NLB, we should expect to see a solid, strong quarter in Q3 2022.
Yesterday, NLB’s Management Board held a pre-publication call in which the Company discussed the current macroeconomic situation and expectations, as well as the 9M 2022 results in broad terms. According to the management, we should expect to see a strong quarter of growth in Q3 2022.
Starting off with the current macroeconomic situation, they reflected on inflation, energy prices, and unemployment rates, among other economic indicators. Firstly, in terms of energy prices, gas and electricity prices have come down significantly in the last couple of weeks, and Slovenia as well as the region is well positioned in terms of its ability to procure new gas supplies. In fact, the Slovenian government reserved EUR 1.6bn for the purchase of gas, and this was under the presumption that the prices would be much higher than they are today. Because of this normalization of prices, pressures on businesses are also being alleviated. Furthermore, there are government guarantee schemes that are designed to support businesses in case of a downturn, during which 80% of the amount will be guaranteed by the government, while 20% will be supported by the banks, including NLB. In fact, in the current environment, many production companies in Slovenia have recorded a 20% increase in production compared to 2019.
In terms of the labor market, the demand for labor is still strong and the unemployment rate in September is at historical lows. There are some indications of a downturn, like the fact that order books from Germany have been declining, but Slovenia is well-positioned, both in terms of its geographical position as well as its place in the supply chain. In terms of households, their saving rates are still high, spending continues, and restaurants and other entertainment are being more utilized, especially as no COVID-19 restrictions are in place. In terms of the housing market, there has been an increase in housing prices, both due to the strong demand as housing as an asset type is the largest category for individuals in Slovenia, but also because of the lower amount of supply available. However, even so, the housing loans to GDP ratio stands at 14% in Slovenia, which is well below 40% in developed countries. This would mean that on average, Slovenes are way less leveraged when it comes to the payments for their real estate, and as such, an increase in interest rates should not have that strong of an impact.
Inflation is of course the name of the game here, both for NLB’s operations as well as for the households. This is where the real threat of a rise in energy prices comes, as higher prices of energy and inflation, in general, will lead to a reduction in disposable income, which would increase the risk for the banking sector. Generally, the sentiment is concerned, but people are proving their resilience. As such, even if there is a hike in prices of gas in the winter, which is by far the largest uncertainty right now, there are many mechanisms both in place and being discussed which will cushion this blow.
Moving on to NLB itself, Q3 2022 is expected to be a strong quarter for the bank, they have strong production of retail loans, and of this, the largest growth was recorded in the housing loan increase in Slovenia. There was a slight cool down by the end of the quarter, but still healthy growth. Retail deposits have also increased significantly, but there was also a slowdown in the last 2 months. They expect that they can sustain single-digit retail growth. In terms of corporate loans, there was growth recorded in both Slovenia and Serbia, with encouraging business development. Corporate clients have started to rethink certain investments, but they are still pretty strong in terms of capital. In terms of NLB’s capital, they are currently trying to increase it with various instruments, they have significant buffers and they are continuing normal loan production.
Furthermore, they are cautious and prudent about their capital allocation, but they are supporting the regional companies. They have started increasing the prices of their services, but at the same time, the costs, especially from higher staff and energy costs, are having their impact. They noted however that revenue grew a lot faster than costs, and as such, better margins should be recorded in this period. Revenue is also benefitting from ECB interest rate hikes and will continue due to higher interest rates for NLB. However, revenue is also benefitting from a higher volume of loans issued. They have been able to increase their market share, without compromising risk. In terms of risk overall, they do not expect it to change significantly in the coming period, well within their guidance. Retail loans are seeing an increase in provisions, but this is due to higher volume rather than risk. They do expect a little higher risk during the winter, but they do not expect it to be significant. On the corporate side, they are seeing a surprisingly good resolution of NPLs.
They also commented on the N banka, whose consolidation was delayed until autumn, but this is mostly due to IT reasons, and this takes time. Overall, their outlook is good. They expect costs to remain elevated, especially due to inflation, but manageable. They also see much more consolidation in Serbia and in Slovenia in the longer term, and their guidance for 2022/2023 is bullish. Finally, they affirmed that they will pay out the 2nd dividend tranche in December. Given that in their outlook they said that they will pay out EUR 100m for dividends in 2022, and EUR 50m was already paid out for the 1st one, EUR 50m remains, which would imply a EUR 2.5 DPS. At the current share price, this would amount to a DY of 4.7%. Together, this would mean that in 2022, the DY of NLB is 8.5%.
