Yesterday, NLB held its 9M 2023 pre-call. In today’s overview, we’re bringing you the key takeaways.

The current macroeconomic situation is somewhat stable in Slovenia and the region, despite the uncertainty about the future. The newest conflict in the Middle East between Israel and Hamas, the still-high inflation rates, and the subsequent interest rate hikes, as well as of course the continued conflict in Ukraine, are the main factors. In this environment, NLB has seen a reduction in the growth of new loan production, amounting to single digits, and it is expected to stay in this range due to the high-interest rates currently present. On the other hand, despite the spread between the loan and deposit interest rates widening ever farther away, new deposit production hasn’t slowed down as much. NLB has started offering various forms of investments/savings and other financial vehicles that would be used as an alternative to both other investments but also the low interest rates on their own deposits.

NLB expects that Q3 2023 will be strong in terms of performance, as the higher interest rates more than compensate for the slower loan production. Furthermore, the interest expenses (mainly related to deposit interest rates) haven’t increased as much. In Q4, there might be some seasonality effect on operating expenses, and for that period they expect the one-off balance sheet tax effect on the mortgage book in Serbia, which should have a EUR 10m-20m effect on the bottom line in Q4. However, NLB noted that this is offset by the discontinuation of caps on fees on certain products in Serbia, starting from September 1st, which should largely offset this. As such, all the “losses” recorded in Q4, will be offset in the period afterward.

Except this, they do not see the cost of risk (CoR) increasing significantly, in fact, they’re keeping to their previous guidance (30-50 bps), and could even outmatch it. A little bit of the CoR increase could be seen on the retail side, but this is expected due to higher interest rates. On the flipside, this is also offset by the better CoR on the corporate side, with a lot of old case resolutions coming as well. As such, NLB is sticking to its current outlook on all lines, albeit op. expenses, even though they’re doing everything they can to maintain them at the EUR 490m level for FY, might be breached slightly.

NLB’s management also commented on the new banking windfall tax in Slovenia, which pertains to 0.2% tax on total assets of NLB (NLB in Slovenia only, not the Group). At the current asset levels, this would yield app. EUR 30m per year in higher taxes. However, the proposal is meeting opposition from corporate clients and parliament opposition parties alike. This is due to the fact that this tax is not the only one, as there are also discussions about a corporate income tax increase, up to 4 p.p. higher than it currently stands. As such, it is hard to say when and in what form will the tax be implemented. NLB also commented that this tax might have a lot stronger impact on smaller banks rather than on NLB itself.

Furthermore, NLB also commented on M&As and dividend payments, and what can be expected in the future. The Company is eyeing possible M&As in the region, and they mentioned a possible deeper foray into leasing, but there are no actionable targets at this time. They do have enough assets to be able to achieve their M&As if the opportunity arises. This brings us to the dividend. The 2nd dividend tranche for 2023 is on track and to be proposed at the GSM meeting which will be held soon. In the 2022-2025 period, NLB allocated EUR 500m for the dividend payments, each year stepping up the payment. If the potential M&A does happen, the Company might have to revise the dividend payment, however, this would mostly be focused on the latter period (2025 and later), and would not mean a decrease in the dividend, but rather a smaller increase. In fact, in the absence of the M&A target, a higher absolute dividend amount could be expected.

Finally, NLB commented on their strategy until 2030. No details have been given as of yet as the strategy is still being discussed. However, the management said that it will present the strategy during its next investor day in Ljubljana, in 2024. As such, a more detailed plan for the future of the NLB Group will be presented there.

By the end of August 2023, the total loan amount issued by all the Slovenian financial institutions declined by 0.6% YoY but remained roughly the same MoM. Meanwhile, the average new housing loan interest rate amounted to 3.98%, an increase of 0.35 p.p. YTD, but a decline of 0.05 p.p. MoM. Lastly, the average new consumer loan interest rate amounted to 6.72%, an increase of 0.04 p.p. YTD, but a decrease of 0.07 p.p. MoM.

The latest report regarding the Slovenian banking sector has been published by the Slovenian Central Bank, BSI. According to the report, the total amount of loans issued amounted to EUR 27.1bn, which means that on a monthly basis, it remained the same, while on a YoY basis, it declined by 0.6%. This is a far cry from the double-digit (13% YoY high in September 2022) growth that was witnessed in 2022, and this continues the trend of decline present in 2023. Inside this category, housing loans amounted to EUR 8.11bn, increasing by only 0.01% MoM, and 1.64% YoY. Furthermore, corporate loans amounted to EUR 10.5bn, a decrease of 0.7% MoM, and 1.1% YoY. Finally, consumer loans amounted to EUR 2.65bn, an increase of 1.3% MoM, and 7.2% YoY.

Housing and corporate loans YoY growth rate (2017 – August 2023)

Source: BSI, InterCapital Research

This decrease clearly shows that the interest rates have increased to such an amount, that it is getting harder and harder to justify new loans, both for households and corporates. This is pretty evident if we look at the other side of the equation, i.e. the interest rates on these loans. Inside Slovenia, the new fixed housing loans had an interest rate of 3.98%, decreasing by 0.05 p.p. MoM, but increasing by 0.35 p.p. YoY. Next up, there are consumer loans, which had an average interest rate of 6.72%, representing a decrease of 0.07 p.p. MoM, but an increase of 0.04 p.p. YoY. Corporate loans, both the ones that are smaller ones (<EUR 1m), and the larger ones (>EUR 1m) recorded interest rates of 5.92%, and 4.69%, respectively. In absolute amounts, these recorded the largest changes, with the smaller loans recording a 0.25 p.p. decrease MoM, while the larger ones recorded the opposite, an increase of 0.93 p.p. MoM. On a YTD basis, the growth is even more pronounced, with the smaller loans recording a 1.23 p.p. increase, while the larger ones grew by 1.18 p.p. YTD.

Average fixed interest rates by categories (2017 – August 2023, %)**

Source: BSI, InterCapital Research

*For years until 2023, data refers to the yearly average

**In January 2023, no data is available for large corporate loans, and as such it is presented as 0

Here we can see that as the new loan production basically stagnated and then stopped, so did the increase in the interest rates, at least the ones orientated to households. This is to be expected, and increasing the loan interest rate amount right now would be even less attractive. As a point of comparison, we also included the comparison vs. Croatia, as well as the European Monetary Union, EMU.

Comparison of average fixed interest rate by categories in Slovenia vs. Croatia and EMU (August 2023, %)

Source: BSI, HNB, InterCapital Research

As of August 2023, the Slovenian housing interest rates were 0.52 p.p. higher than the ones in Croatia, and 0.30 p.p. higher than the ones in the EMU. Consumer loans meanwhile, were 0.85 p.p. higher than in Croatia, but 1.13 p.p. lower than in the EMU. Furthermore, small corporate loans had a 1.22 p.p. higher interest rate in Slovenia than in Croatia, and one 0.86 p.p. higher than in EMU. Finally, large Slovenian corporate loans had an interest rate that was 0.39 p.p. lower than in Croatia, but 0.68 p.p. higher than in the EMU.

Here you can find the dates for the upcoming events of the regional companies.

Due to the nature of these events, they are subject to change (might be postponed or canceled).