Yesterday, the management board of the NLB Group held a conference call in which they discussed the implications of the Covid-19 situation on the Group’s operations.
The CEO, Blaž Brodnjak, opened the call stating that the bank is so far maintaining normal operations and critical functions are running smoothly. The bank is providing all services, where majority of business is in transaction, while volume of asset management business and lending is reduced at the moment, due to the pandemic. Roughly half of the branches of the bank are open, while the management is taking a sequence of steps in insuring stable operations of the company.
When looking at the banks portfolio, on the corporate side, the most impacted industries (such as hotels, restaurants, transportation) account for less than 10% of the exposures. Meanwhile, roughly 20% of the entire portfolio could be considered to be medium impacted (industries like wholesale, retail, automotive). The management notes that on the corporate side a rising usage of revolvers and overdrafts are being witnessed, while the clients are requesting restructuring. Almost all countries in which the bank operates, are allowing for moratoriums, so the bank will for smaller ones use frame now foreseen by the regulator.
The management also notes that in high risk industries, they might observe increased cost of risk and potential higher default rates, especially on the corporate side. But at the moment it is still too early to quantify the effect, however they add that it seems manageable from the bank’s perspective.
On the retail side, the company is not witnessing any imminent bigger problems yet. They note that they expect a considerably reduced demand for new loans, which would come from potential job uncertainty of retail clients. They add that retail clients are also using less credit cards as a result of people staying at home and a decrease in usage of revolving credit.
Slovenian Government has introduced Intervention Act which allows Slovenian borrowers, who suffer liquidity problems caused by COVID-19 epidemic, both corporate and retail, to apply for grace period for loans with Slovenian banks. A deferral is granted for at least twelve (12) months, whereas the bank and the borrower can agree on terms which are more favorable for the borrower. As regulators see this crisis as systemic risk and they have imposed grace period for stressed borrowers, the bank does not see strong impact on their profitability anytime soon. According to management, moratoriums will apply so higher impact will come in the following period, when the bank will be able to assess how their clients’ businesses are impacted. Therefore, then will be the time when they will have to record potential provisions. As this measure is deferring payments for borrowers, the management sees this rather as a liquidity burden, not at interest income burden as interest is accrued during the period. This measure will also somewhat increase workload in operations, as monthly reporting of borrowers in distress about their financial situation to banks is introduced.
Capital and Capital measures
The bank operates with a strong balance sheet and has completed most of its capital agenda prior to the Covid-19 situation, issuing in excess of EUR 200m of Tier 2 capital, which is now necessary to absorb both the market situation and the acquisition of Komercijalna Banka.
The management notes that they would be interested in issuing Tier 1 capital, however this is mostly subject to market condition, so as of now we can expect that NLB will hold back on Tier 1 issuance.
Dividend policy
NLB is currently faced with a challenge of absorbing both the acquisition of Komercijalna Banka and the current market situation posed by Covid 19 crisis. The fact that issuance of Tier 1 capital seems to be closed due to market conditions is not accommodating. The company does not plan on revising their medium-term dividend policy and is comfortable with fulfilling the 70% payout ratio for the coming years, however dividend for 2019 will be synchronized with absorbance of Komercijalna Banka. Consequently it is challenging to predict the dividend for the year 2019. Unlike in Croatia, where the Central Bank required banks to retain 100% of their 2019 earnings, no such move is currently in sight in Slovenia.
Acquisition of Komercijalna Banka
In February NLB announced that they have entered into a share purchase agreement with the Republic of Serbia for the acquisition of an 83.23% ordinary shareholding in Komercijalna Banka.
NLB acquired the 83.23% shareholding for the amount of EUR 387m, which will be payable in cash on completion. Such a price puts the transaction multiple at P/B 0.77 and P/E 6, while it implies a valuation of EUR 465m for the 100% stake in Komercijalna Banka. Since the SPA, the market conditions have changed and the remaining shares of Komercijalna Banka are traded at quite lower multiples on the Belgrade Stock Exchange. The management pointed out that the fundamental prospects for Komercijalna Banka have not changed. Value created potential and the merits of the transaction as well as the economic prospects of the region have not necessarily changed, according to the management.
