IC Market Espresso 4 Feb 2019

Introducing NLB
Nova Ljubljanska Banka (NLB), the newest addition to the Ljubljana Stock Exchange, piqued a lot of interest lately. As as result, we will be adding NLB to our coverage and you can expect a detailed company research in the future.  Until then, here is an overview of NLB’s history and key indicators.

Nova Ljubljanska Banka (NLB) is the largest financial institution in Slovenia, with market share by total assets of 23.5%. Their core business is banking, and they additionally offer services such as asset management and insurance. Besides in Slovenia, NLB operates in five ex- Yugoslavia countries: Macedonia, Kosovo, Montenegro, Bosnia & Herzegovina and Serbia.

wdt_ID Key Indicators 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 9m 2018
1 L/D ratio (%) 143 123 114,4 105,6 104,7 86,2 75,9 75,1 74,2 70,2 69,1
2 NPL ratio (%) 3,8 9 14,5 21,3 28,2 25,6 25,5 19,3 13,8 9,2 7,6
3 ROE* (%) 3,1 n/a n/a n/a n/a n/a 4,8 6,6 7,4 14,4 11,9
4 Net interest margin (%) n/a 2,4 2,3 2,4 2,24 1,7 2,7 2,9 2,7 2,57 2,53
5 Cost of risk (bps)** n/a 200 255 315 n/a n/a 171 75 38 -62 -45

Source: InterCapital Research

*From 2009 – 2013 ROE is noted as “n/a”, as their net income was negative

**company’s own calculation

The beginning (and the dispute with non-Slovenian citizens)

In 1994, NLB was founded on the basis of the Constitutional Law, adopted by the Slovenian Parliament and part of the operation and the assets of Ljubljanska Banka, which still exist, was ceded to NLB. In Croatia the deposit holders of Ljubljanska Banka Zagreb Branch (which asset and operations wasn’t ceded to NLB) transferred their deposits according to Croatian legislation to certain Croatian bank and were paid by such banks (and later received funds from the Republic of Croatia) and such deposits were transformed into public debt of Croatia. However, these banks have filed the suits against NLB, whereby the plaintiffs claim that NLB is responsible for the liabilities relating to the foreign currency deposits held with Ljubljanska banka, Zagreb Branch.  NLB has consistently objected to these claims. This led to a still ongoing disputes that could potentially cost NLB app. EUR 168,5 m + interest. However, in July 2018, the National Assembly of the Republic of Slovenia passed the Act on the Protection of the Value of Capital Investment of the Republic of Slovenia in Nova Ljubljanska banka, by which the Succession Fund of the Republic of Slovenia would compensate for negative financial impact  – this is the sums recovered from NLB by enforcement of final judgements delivered by Croatian courts with regard to the transferred foreign currency deposits, that is the principle amount, accrued interest, expenses of court, Attorney’s expenses and other expenses of the plaintiff and expenses related to enforcement with the accrued interest.

2008/2009 Financial Crisis

The Global Financial Crisis did not circumvent Slovenia, whose GPD in 2009 decreased by 7.8%. The crisis adversely affected NLB as well, whose NPL ratio went from 3.79% in 2008 to 28.2% in 2012, when it reached its peak. Over the same period, non-performing loan portfolio went from EUR 554m to EUR 3.7bn.

Source: InterCapital Research 2

2013 Recapitalization

In 2002, the Slovenian state sold 34% of shares of NLB for EUR 435m to Belgian KBC Group, which was bought back in 2012. In 2013, the state became the sole owner of NLB and a restructuring process followed.

In accordance with the recommendations of the European Council, the Asset Quality Review (AQR) and “bottom-up” stress tests were conducted in 2013. The AQR identified a EUR 1.7bn capital shortfall in an adverse scenario (including the effect of new deferred tax assets).

 As a result of that, the Bank of Slovenia enforced extraordinary measures which included termination of all of NLB’s obligations in respect of its share capital and the EUR 250m of hybrid instruments and subordinated debt by way of a bail-in and a EUR 1.5bn capital increase which was covered completely by the Republic of Slovenia.  

In 2016, the Constitutional Court of the Republic of Slovenia conducted the constitutional review of the regulative provisions that govern the bail-in and deemed them as constitutional, including especially the provision which excluded the right of the affected investors to claim damages or use any contractual remedy against NLB. Nevertheless, some of the affected investors have initiated and some have announced they initiated proceedings against NLB, in which they claim compensation for the losses they incurred because of the bail-in. All these proceedings are currently suspended (whether by special court order or actually) until the preliminary issue whether or not any compensation will be payable to the affected investors by the Bank of Slovenia is resolved. Note that NLB has not made any provisions for these claims and considers them baseless. 

2018 Public Offering

In November 2018, the shares were offered by the selling shareholder, in which the state sold 59% of its shares at EUR 51.50 per share (collecting EUR 609m) at a P/B of 0.67x.

One of the reasons the offering was conducted was so that the Slovenian state would be in line with the made the European Commission (EC) in relation to the EC decisions taken in connection with the state aid proceedings involving NLB capital increases in 2011, 2012 and 2013, pursuant to which the state would reduce its share towards 25% + 1 share in a set timeframe. On 14 November 2018, NLB was listed on Ljubljana Stock Exchange and also on London Stock Exchange where NLB is traded in form of GDRs (5 GDRs representing 1 ordinary share). Note that since the offering, NLB’s shares have increased by 21.2%.

NLB Today
NLB’s Recent Performance

As previously mentioned, besides in Slovenia, NLB also operates in Macedonia, Kosovo, Montenegro, Bosnia & Herzegovina and Serbia. In Slovenia, they hold a 23.3% market share in retail lending and 30.4% in retail deposits. They also hold a solid amount of market share, by total assets, in all other markets where they are present, besides in Serbia. To be specific, they hold (by total assets) 15.9% in Macedonia, 16.5% in Kosovo, 11% Montenegro and 1.5% of market share in Serbia. In Bosnia and Herzegovina their market share is split across the Republic of Srpska (17.6%) and the Federation of Bosnia and Herzegovina (5.1%). As of September 2018, they have 349 branches, of which 241 are outside of Slovenia.

Since the restructuring in 2013, NLB observed positive results. Their net fee and commissions income has been increasing for most of the years, while their net operating income has shown mixed results. Furthermore, their impairments and provisions improved significantly amounting from EUR -141.4m, in 2014, to EUR 19m in Q3 2018.

In 2013, NLB’s net income became positive and has been increasing since, especially in 2017 when it grew by 105% YoY amounting to EUR 225.1m, making it their record year. However, when observing their T12 2018 net income, it decreased by 11% mostly due to the lower release of credit impairments and provisions and higher income tax. The graph bellow shows NLB’s bottom line for the period 2008 – T12 2018.

Source: InterCapital Research

According to the company management, for 2017, NLB paid out a dividend amounting to EUR 270.6m, which translates into EUR 13.53 dividend per share and a dividend yield of 22% (at the current share price). EUR 189m was paid out from the companies net income and EUR 82m was paid out from previous years’ retained earnings. This would make the dividend pay-out for 2017 amount to 84%. However, if we only took into consideration the part paid out from NLB’s 2017 net income, the dividend per share would amount to EUR 9.45, while the dividend yield would amount to 15%. Note that as dividend was paid out prior to the IPO, the Slovenian state was entitled to the full dividend.

Also, despite the pressure on the bottom line, caused by reasons mentioned above, NLB’s potential future dividend pay-out seems attractive. The company management has set a target of a dividend pay-out around 70% for the years 2019 – 2023.

Meanwhile, when looking at the bank’s multiples , NLB is traded at P/E of 6.26, while P/B is at 0.77. When comparing them to their regional peers, NLB is traded at multiples below the average.

Turning our attention to loans and deposits, since 2013, loans have mostly been decreasing, while deposits have continued to increase each year. This has resulted in each year lower L/D ratio, which amounts to 69.1%, as of September 2018.  NLB’s management has set a target of L/D ratio to be below 95% for the years 2019 – 2023. Note that the current low L/D ratio should not be too troubling, as it could be partially explained by interest rates being at an all-time low.   

The graphs below show P/BV and P/E of NLB’s regional peers and NLB’s loans and deposits from 2008 – 9m 2018, respectfully.

Source: Bloomberg, InterCapital Research

*Dividend of EUR 270.6m was deducted from NLB’s book value.

Source: InterCapital Research

Đuro Đaković Concludes a Continuation of a Deal Worth HRK 71.8m
The value of the contract would make for 14.3% of the company’s T12 2018 revenues.

Đuro Đaković published a document stating that Đuro Đaković Specijalna vozila, a company within Đuro Đaković. has concluded an agreement with a German buyer on continuation of production and delivery of freight wagons for the transport of rolled sheet metal.

The delivery will be continued from April 2019, while the value of the contract is HRK 71.8m. Note that the value of the contract would make for 14.3% of the company’s T12 2018 revenues.

Activity on the BELEX in January
The Belgrade Stock Exchange published their trading statistics for January 2019, posting an average daily turnover of roughly EUR 0.21m.

The Belgrade Stock Exchange published their trading statistics for January 2019, posting an average daily turnover of roughly EUR 0.21m, which represents a decrease of 57% MoM.

Of the total value traded in the period, Sojaprotein had the highest turnover accouting for 65% of the total monthly turnover, amounting to EUR 2.7m NIS follows with 7%, while Impol Seval and Komercijalna Banka account for roughly 4% of the total monthly turnover.

Turning our attention to BELEX15, the index observed decerase of 6.18% MoM. Meanwhile, the best performing share was Komercijalna Banka, which increased by 36%.

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