In recent days, it has been announced that NLB is to place EUR 300m Tier 2 notes with a maturity of 10 years and a 5-year recall option. The order book for the issuance of NLB’s newest tier 2 notes was opened yesterday while the settlement is expected to be on 24 Jan 2024. The transaction also offers the possibility of repurchasing two Tier 2 notes before their call dates and applying for priority in the allocation of the new notes. The interest rate is set at 6.875% per annum.

This issuance refers to the launch of NLB’s newest bond, in the amount of app. EUR 300m. The bond, in the form of a tier 2 subordinated bond, is set to have a 10-year maturity, and after 5 years a recall option (10NC5), which is of course dependent on market conditions.

The interest rate is set at 6.875% per annum, with the issue price set at 100% of their nominal amount. reflecting current market conditions. Settlement is expected on 24 January 2024, maturity on 24 January 2034, and the reset date on 24 January 2029. The bookrunners for the issuance, except NLB are BNP Paribas, BofA Securities, Morgan Stanley, and Unicredit. NLB also made a special offer to the previous Tier 2 bondholders, specifically of the two EUR 120m bonds, with 3.65% and 3.40% interest rates, respectively, which are callable on 19 November 2024 and 5 February 2025, respectively. This offer gives the Noteholders of these two notes the opportunity to sell their current holdings in these notes and to apply for priority allocation of the new notes. As such, if this offer is accepted in its totality, EUR 240m of the new bond issuance would be “refreshing” the old two bonds, thus leaving only app. EUR 60m only as the remainder of the new bond issuance.

As a reminder, NLB has already issued several bonds in the last couple of years in a couple of forms, including Tier 2, Senior Preferred, and AT1 bonds. In total, the Bank issued EUR 510m of Tier 2 notes, EUR 800m of Senior Preferred notes, and EUR 82m of AT1 bonds, which together amount to EUR 1,392m of outstanding bonds.

Below you can see all the currently issued bonds.

NLB outstanding bonds’ details

Source: NLB, InterCapital Research

There are several reasons for the issuance of this new bond, including strengthening and optimization of the capital structure, meeting future MREL requirements, and general corporate purposes. Regarding MREL requirements, NLB already met its current requirement when it issued its newest bond in 2023. However, requirements change, and if this bond replaces the two smaller EUR 120m ones, then it would effectively also act as a “buffer” for the MREL requirements instead of them. Secondly, NLB recently announced its acquisition of Summit Leasing (more on which you can read here), which will add EUR 700m of risk-weighted assets, or RWAs. In total, by 2025 NLB plans on having an M&A capacity of EUR 4bn of RWAs, meaning that the extra capital acquired from the issuance of this new bond also supports this.

At the end of November 2023, the total loans issued by all the Croatian financial institutions amounted to EUR 43.1bn, representing an increase of 0.7% MoM, and 6.7% YoY. This has happened in spite of the elevated interest rates on most loan categories. In this quick overview, we took a look at how the loan and interest rate situation developed up until November.

In the latest report on the developments recorded by the Croatian financial institutions released by the Croatian National Bank, we can see that the loan growth in Croatia has not stopped, despite the elevated levels of interest rates across most categories. In November 2023, the total loan amount issued by all the Croatian financial institutions amounted to EUR 43.1bn, which is an increase of 0.7% MoM, and 6.7% YoY.

Delving into this development further, we can see that the two largest categories of loans issued, i.e. household and corporate loans, both recorded continued growth in November. For households, the total loans issued amounted to EUR 21.6bn, growing by 0.9% (or EUR 196m) MoM, and 8.6% (or EUR 1.7bn) YoY. On the flip side, corporate loans recorded an increase of 1% (or EUR 143m) MoM, and 6.2% (or EUR 850m) YoY.

Corporate and household loans growth rate (January 2015 – November 2023, %)

Source: HNB, InterCapital Research

To better understand what the drivers of growth were inside these categories, we took a look at both of them. Starting off with corporate loans, on a MoM basis, investment loans recorded the largest increase, at 1.4%, or EUR 80m. Following them there is the other loans’ category, which increased by 1.3%, or EUR 56m, while on the flip side, working capital loans recorded a decrease of 1.9%, or EUR 86m. However, when we look at the YoY data, all 3 loan categories recorded over EUR 100m of growth, with the other loans’ category increasing the most, at 10%, or EUR 388m. Next up there are investment loans at 6.3%, or EUR 344m, as well as working capital loans, at 2.9%, or EUR 125m.

Turning our attention to household loans, the largest MoM growth occurred on consumer loans, which increased by 1.2%, or EUR 95m to EUR 7.9bn. Following them there are housing loans, which grew by 0.6%, or EUR 68m, while other categories also recorded growth, but to a much lesser extent. Meanwhile, on a YoY basis, the largest increase was recorded by housing loans, which grew by EUR 981m, or 10%, followed by consumer loans, at EUR 732m, or 10%, and the other loans’ category, at EUR 73m, or 5.9%.

Composition of Croatian loans to households (October 2011 – November 2023, EURm)

Source: HNB, InterCapital Research

This growth has happened despite some of the highest levels of interest rates recorded since 2018. However, it should be noted that in November, the growth across all the major loan categories slowed down significantly or even stopped, at least on a monthly basis. The interest rates on new housing loans, for example, amounted to 3.64%, growing by only 0.04 p.p. MoM, but a more significant 0.58 p.p. YoY. Meanwhile, consumer loans remained unchanged MoM, but increased by 0.74 p.p. YoY, to 5.88%. Finally, Corporate loans also remained roughly unchanged MoM, but increased by almost 2.6 p.p. YoY, to 5.17%.

Given the fact that the ECB has stopped raising interest rates due to the increased possibility of a recession in the EU, a slowdown or even a full stop in an increase in loan interest rates was to be expected. Furthermore, recent sentiment has improved significantly as compared to the 2nd half of 2022 and the majority of 2023, as not only have the interest rate hikes stopped but there is also an elevated possibility of interest rate cuts later this year. If we also take into account that there is continued demand for loans in Croatia, with the elevated interest rates on those loans, it is still significantly more profitable for banks to continue offering loans, even if they do not increase interest rates. This is evident from the results of not only Croatian banks (such as ZABA or HPB) but also regional ones (NLB, Banca Transilvania, etc.), which all significantly boosted their top and bottom lines, all through higher average net interest margins.

Average new housing and corporate loan interest rates (December 2011 – November 2023, %)

Source: HNB, InterCapital Research