As NLB held a FY 2019 pre-publication call, we are bringing you some key takes from it. Note that the company will publish their FY results on 20 February 2020.
On Wednesday, NLB Group held a pre-publication call, in which the CEO and the CFO of the bank presented the Group’s operations in FY 2019 and expectations for the following period.
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Q4 & FY Results
The management has stated that from a revenue point of view, Q4 has been a standard quarter for NLB, meaning that no one-offs were recorded. Cost wise, Q4 will show somewhat higher costs, as the last quarter is seasonally the quarter with highest costs (the company gets going with their investment program). However, cost dynamics will be positive compared to the previous year.
The management also stated that we should expect slightly higher employee costs (low single digit growth), as the markets in which the company operates are experiencing wage inflation of 3.5% – 4%. Besides that, NLB experienced normalization of remuneration of the management which slightly affected the employee costs.
In line with the company’s expectations, 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 year. As a result, new provisions for redundancies will appear (mostly in the Slovenian market), which will affect the company’s profitability to a certain extent, though, the management deems that it is necessary for cost discipline and future efficiency improvement.
In Q4, NLB observed normalization of cost of risk, unlike in Q3 when cost of risk amounted to -31bps, which further boosted the bottom line. This does not come as a surprise as it is not plausible to observe negative cost of risk going forward.
Regarding cross-boarder lending, NLB expects solid growth (especially in Serbia), 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. Besides that, the company’s introduction of leasing services is still pending and the company is hoping to launch it in Q1 or Q2 of 2020.
Turning our attention to the balance sheet, NLB recorded solid loan growth in 2019, however also a further increase of deposits, which does come at a certain burden. As of 9M 2019, the Group operated with a relatively low L/D ratio of 67.9%, showing room for further loan growth.
Potential Impact on the Consumer and Housing Loan Restriction
Starting of November 2019, the Bank of Slovenia changed 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 filed a constitutional assessment of the mentioned restrictions.
It is important to note that the restrictions will create a temporary dip, while the Group will adjust to it as soon as possible. However, since the measure was introduced in November, the effect will not as visible in the FY results, rather Q1 will show to which extent is the consumer lending affected.
Potential Acquisition of Komercijalna Banka
The management discussed the 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.
NLB is currently discussing the sale with Serbian Government, and the Finance Minister of Serbia, Siniša Mali has stated that he expects the completion of negotiations to occur within 2 – 4 weeks.
The management of the NLB Group has previously 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.
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.
Sale of NLB Vita
In December, Sava Re and NLB a signed a sale, purchase and transfer agreement regarding 100% of the share capital in NLB Vita. To read about why NLB sold Vita, click here. The management could not give much comments on the mentioned sale but noted that the impact of the sale is positive. The mentioned sale is in line with the company’s policy of the wind-down of the non-core segment. It is important to add that the one-off effect of the sale will be visible in the 2020 financials.