Nova Ljubljanska Banka d.d. (NLBR) Earnings Call Transcript & Summary

So just a quick technical note for our attendees. Please do use Q&A section for asking questions even during the presentation, and our presenters will answer verbally. After the presentation, we will have around 20 minutes for Q&A session. So feel free to use Q&A functionality of the Zoom. Okay. So do you see the presentation? Everything looks good in technical sense. So feel free to start at your own convenience whenever you're ready.

Thank you, Sandra. Okay. Warm welcome, and thank you for all the participants still being with us on a Friday afternoon. Very happy to see such an attendance. I will start with the general overview of Q1, then I'm joined with my colleague, Peter Burkhardt, who will present a bit more in depth the actual results and, of course, provide the outlook and how we see this year and also the upcoming years in terms of our performance. So when it comes to Q1, I'm happy to say and then happy to inform all our investors and the other public that the Q1 was very, very successful. In terms of business, in terms of activities that were done in the first quarter, as you see, we had a profit of EUR 231 million, which is more or less close to last year's profits or the whole year profit. Of course, this is also due to the one-off effect. We booked the negative goodwill of acquisition of N Banka, roughly EUR 172 million. But also, if we are not considering this one-off effect, the overall business was also very, very good in first quarter. So we had roughly 30% growth, be it Q-on-Q be it year-on-year. As you can see, we also had very nice loan growth, of course, also due to the acquisition of N Banka. They, of course, had roughly EUR 1.1 billion of loans which, of course, were booked in Q1. But also a part of that, we had roughly EUR 1.5 billion growth in loan portfolio, which means that also NLB d.d. in Slovenia and our other subsidiaries showed quite strong and robust loan growth. Of course, with that comes net interest income growth, net fee and commission income growth, especially proud of net fee and commission income growth year-on-year and Q-on-Q. Year-on-year, especially high growth because, of course, last year, it was still a bit influenced by COVID. While this year, we are seeing very nice developments on this front. When it comes to asset quality, we are very proud to say that we haven't seen any worsening of asset quality in Q1. On the contrary, NLB d.d. in Slovenia and all other subsidiaries actually have negative cost of risk, which means still net release of provisions. Why? We haven't seen very, very, very much of new NPLs and stage migrations. And on the other hand side, we are still seeing some very successful resolutions of legacy NPLs. It's still -- the market is still there. So we are resolving some old cases and of course, booking positive P&L effect out of that one. Having said that, so we did have roughly EUR 9 million effect coming from N Banka because we booked ECLs from the performing portfolio. But of course, this is one-off. This was done at the acquisition. This was a one-off in the first quarter and more or less that was it. While for the year-end, I will go to that one at the end of the presentation. The capital position, of course, influenced by the acquisition of N Banka and of course, some effects coming from negative regulation of adjustments from our bond portfolio. But all in all, still highly above all regulatory requirements. And immediately, of course, I have to add this here that we are expecting to book negative goodwill into the capital most likely in H1, which, of course, will then additionally boost and increase our capital position. One important effect we are especially proud of happened after Q1. We communicated that one already, the rating agency, Standard & Poor's, actually increased our ratings which, given the fact that rating agencies are actually forward-looking. But I would say that they have realized and this gives us confidence that they are viewing our balance sheet and also our NPL, our strategy given, of course, the things that are happening in the world and all the difficulties that are there. They are still viewing us very positively and this led them to the rating increase. We also increased formally -- we also formally, 3 of our Board members received the approvals from the Central Bank. So we now have new Board members. All of them presented the results on our Investor Day, which was held on 12th of May, a very successful event, I must say. So of course, all the investors that were there saw it live or in hybrid format. But of course, if interested, it's still available also on our website. So with this, I would leave it to my colleague, Peter, to go into a bit more details when it comes to results, and then will come back with the integration and, of course, the outlook.

Yes. Thank you, Valerija. Warm welcome also from my side. It's always a pleasure to see a lot of interest from the region and for the region because this is the region that is -- the region where we operate. Like we say it, in the market in terms, it's where we are home and where we would like to see us all together prosper. Looking at the performance indicators of the first quarter, like Valerija said, this was quite successful first quarter. The key highlights, of course, are strong net interest income growth and net fee commission income growth leading to recurring result before impairments and provision growth of practically 28% year-over-year, which is quite impressive. We managed to keep costs fairly contained. There is the uphill struggle, which we are climbing now for quite some time but not only NLB. Practically the whole region and the whole world has to deal with certain be it labor, price inflation or other, let's say, G&A inflation. So that's -- I think that is on our mind that we are focused on, and we are, of course, paying a lot of attention to it. Another thing, of course, that you can see is negative goodwill, as mentioned. This was immediately at the day of the acquisition booked in P&L, regulatory contribution or inclusion. It becomes after verification of the regulator. This, of course, is a onetime effect that is not included in the calculation of the ROE after taxes, which was 12% and I mean presents an important backbone for the NLB being attractive investment opportunity for anyone looking at the NLB. At the moment, net interest margin is, I would say, flattish -- continues to be flattish as the environment in the first quarter was still a bit depressed or under pressure because of the low margin environment. As you are all aware of the fact, the situation has evolved since then also in the first quarter, but most importantly also in the second quarter. So this is, let's say, the ratio or indicated that you can, of course, watch. But what we are -- I would not say proud, but what we are content with this, of course, the positive performance in terms of operational business margin, that includes the whole component of the capacity of the NLB Group to generate revenue. This one is increasing quarter-over-quarter. And as you will see, as I flip slides also year-over-year. So this is the momentum in the revenue-generating capacity that we are happy of. Cost-to-income ratio, of course, a function of income and cost, like you can see, we were quite successful with that one. And what is another -- I was looking at the presentation that Komercijalna Banka had entered the question on the cost of risk and how the current environment is evolving. At the moment, there is still no indication that things that were prevalent in the 2021 have changed in the first quarter. So that's a good, let's say, a good starting point of the year, but there will probably be questions how we expect this to evolve and Valerija will give outlook on the -- also on the cost of risk. Another thing about the income statement to worth mentioning. These are, of course, the numbers that include contribution from the Sberbank, but N Banka as we renamed it shortly, but this was 1 month out of 3 in the first quarter. So the contribution is clearly presented on each category in each slide. And as you can see, it's -- and in the first quarter, it was not meaningful and one can say that these are the strong underlying results of the whole bank. Valerija already mentioned the strong growth of loans to customers. What is striking, what is important to highlight is, of course, that this was the quarter also because of the inclusion of N Banka, but this was the quarter where we saw favorable trends in terms of LTDs. So that means that deposit growth, which was a function of epidemic environment has now abated a bit. But still, we see NLB practically on all markets being the first choice when it comes to population, putting their savings. So we are well positioned for that. So that's this -- on this slide, so then moving on, there is on the -- like I said, on the net interest income, what we saw is, of course, that the still low interest rate environment had an effect on net interest costs or on the interest expenses. At the same time, net interest income was performing quite well and being stable. That's quarter-over-quarter, growing 1%, but year-over-year, growing 11%. So quite strong results also on this key item line. When it comes to net noninterest income, this was, I would say, a fairly regular quarter without any substantial one-offs, without any net noninterest income, nonrecurring items. So out of that, you can see that fee and commission income is really a strong performing line for the NLB in Slovenia, but also for the other countries in the region as well, where we operate. At our Investor Day, we went really strategically top-down presenting where we are in terms of certain fee-generating activities at NLB, but also in the region. The key highlight or the main messages that we would -- that we are working on, of course, increasing the level of fee and commission income going forward, but also diversifying the revenue streams out of that, in particular, in strategic foreign markets. As this is, let's say, the ongoing debate about the costs, we saw some pickup in terms of costs year-over-year. Quarter-over-quarter, I would say this decline is less or is of less importance because the fourth quarter is normally seasonally strong with costs. But cost containment is high on our agenda, and we are, let's say, working on maintaining costs also being quite vocal or quite explicit in terms of in terms of where we expect cost in this year to be. One thing which is, of course, relevant is there are some integration costs, which impact NLB Group in 2021, but also in 2022 as a function of, firstly, the acquisition of Komercijalna Banka. But then, let's say, going forward, also the function of integrating N Banka to the NLB d.d. in Slovenia. We see a lot of so-called value-added costs incurring. So that means that we are incurring costs, which generate value for shareholders in the coming quarters. So this is, again, another quite successful item line when it comes to NLB. In loan dynamics, excluding the contribution or the impact from the acquisition of N Banka. We had 4% loan growth on, let's say, organic basis. And the growth has been spread throughout the region and also throughout the segments in terms of retail growth, but also on the corporate in -- practically in all key categories and like I said, in all geographies. So really, really strong dynamics here. To some extent, there is -- there was visible strong performance of new loan origination housing in Slovenia. We would assume that's partially a function of population trying to, let's say, if the term is correct, front-load the increases of interest rates. But at the same time, still indicates that as long as there is incremental supply in the market, there is still enough demand. So we would say that this is investing into a long-term relationship with our clients. So one of the tactical decisions that we did. But at the same time, we are slowly now starting to reprice the market -- to reprice our loans as, of course, a function of what goes on, on the capital markets. Capital, you can see on the capital front that we have successfully digested increase of the RWA as a function of the acquisition again. That was additionally EUR 1 billion of RWA coming from the acquisition, around EUR 1 billion. And additionally, EUR 100 million to EUR 150 million out of the organic growth. So with that, our total capital ratio stood at 15.8 and CET1 ratio stood at 13.7, all well above regulatory requirements. Another thing which is extremely important to mention here is, of course, that all the envisaged and announced dividend payments in 2022 would not impact capital ratios in any way. So then just moving on to the asset quality. There are a couple of takeaways from the asset quality front that I'm sure that there will be a lot of questions to that. One thing is, of course, that our credit portfolio or our loan book is well diversified. That means diversified in terms of retail and corporate and within the retail to consumer loans and mortgage loans approximately 50-50. And within the corporate there is equal distribution between the key or large and the SME, but also looking at the geographic dispersion of the portfolio. Of course, Slovenia is the most important part, but also with the acquisition of Komercijalna Banka, the importance of the so-called strategic foreign markets is increasing. So that's one thing which is worth highlighting or mentioning. The other is, as Valerija said, with the acquisition of N Banka, their portfolio was included to our books based on the fair value accounting. That means that it either went into Stage 1 loans or into Stage 3 loans. That's the reason why Stage 2 here on this graph has not moved. So this was the exercise based on the accounting regulation. Also, the reason why NPL ratio went down. And another important point to keep in mind is that we are -- let's say, our collateral coverage or our coverage of this loans is extremely high, as you can see on this slide. So well diversified and well collateralized is a reason why we see this good momentum continuing in terms of still low cost of risk. You can see here minus 17 cost of risk. So we had net annualized of course, net releases of impairments and provisions. And as Valerija mentioned, we had EUR 8.9 million of 12-month ECL, expected credit losses in the first quarter as a function of acquiring N Banka. And one thing which continues to be the case is this EUR 7.4 million of repayments of written off receivables. We still see the current environment as quite favorable for this activity to continue. So now I'll pass the word over to Valerija.

Thank you, Peter. So on KB integration, I will not bother you with the details. They are presented on the slide, but maybe the most important message is, and we are especially proud of that one. This is the showcase of the integration. So this is the integration that went without any major hiccups. It was delivered on time. It was delivered on budget. So we are extremely proud of that. And of course, I would say the most important, even more important, we really gained experience in this. So of course, integrating the 2 banks in Montenegro was on a smaller scale or was the first one. Then, of course, Komercijalna Banka, that was a really large one and it went out smoothly. Now we are just moving the team to Slovenia, of course, because we already started the integration of N Banka as well. And what is especially very, very positive here is that despite the fact that's roughly 400 people that were involved in the project of the integration. Of course, the integration involve the entire Komercijalna Banka and of course, also a lot of people from Slovenia as well. But despite the fact that they were dealing with the integration, they were able to grow their business as well. So they managed to do that, and we are especially proud of the colleagues what they did, how they performed. And of course, we see a very, very strong momentum here. Now they are, of course, off the hook with the integration process, which means that, of course, they will focus on business and perform even better in the future to come. You'll see some basic data here. So roughly EUR 4.7 billion of total assets of the merged banks. Branch network already reduced and, of course, more to follow and servicing more than 1 million clients. So this is it on Komercijalna. And like I said, the team just moved actually immediately after they concluded the integration of Komercijalna Banka. The integration of N Banka already started. Probably most of you will know that. After we acquired the bank -- very, very soon after that, we, of course, dissolved corporate governance. So we call the general assembly, we appointed the Supervisory Board, we appointed the management Board. Now all the activities -- all the following activities have been met already the teams are working, the teams started working. Of course, it's difficult to say right now still when we are planning to complete this integration. But I think that given the experience and the know-how that we have, we would set ourselves quite ambitious targets when it comes to the integration and the completion date. That would be it. From there on, I would move to the outlook. So how we see this year, how we see next year and then also we went a bit further during our Investor Day and presented our '25 ambition. So when it comes to '22, actually, we increased our regular income guidance. Probably some of you remember that our previous guidance was a bit lower when it comes to the regular income. But given the performance, given what we are seeing on the branch, we actually expect that we would be able to grow even more, which is a bit counterintuitive given, of course, the circumstances. But we do believe that we would be able to do so. So our current guidance when it comes to the regular income is roughly EUR 690 million. One important point to add here, all the outlook lines except for the cost of risk, are not included N Banka. So N Banka is not included in that one, which means that, of course, once we include N Banka as well, this number would be higher. We would come out most likely with the revised outlook when we publish the half year results, and give you a bit more clarity on that one. But even excluding N Banka, you can see that we are quite ambitious when it comes to the regular income, and of course, the next year exceeding EUR 700 million. When it comes to costs, we project the cost to be somewhere in the range of 21. And for the following years, like Peter already mentioned, this is definitely very, very high on our agenda. So cost control and cost discipline. And of course, we definitely plan to then keep cost on a stable basis. When it comes to cost of risk, like I said, this is the only item line that is already including N Banka and their portfolio. And with that in mind, our projection for the cost of risk for this year is roughly 30 bps, then for '23, 30 to 50 bps. We are expecting high single-digit loan growth. You have seen data for Q1, 4%, very meaningful. And we definitely expect these trends to continue, unless, of course, we would see any major, major disruptions on our markets. Dividend, you already saw. So we announced and we called the first AGM. It will take place on 20th of June. We proposed EUR 50 million to be paid. And of course, then most likely in the fourth quarter, we would call another general meeting and propose distribution of the rest of the EUR 50 million -- of the additional EUR 50 million. When it comes to ROE, around 10% in '23, above 10%. So I think this is definitely achievable. But like I said, of course, the revised version coming up after we do all the math and include N Banka into this one. And then maybe just to add, like I mentioned, so we went even beyond that, and we look a bit further. So we've set ourselves quite ambitious targets for '25. And our main premise, I would say our main guidelines here are that, of course, we would like to provide stable and growing dividends to our shareholders. And at the same time, we would like to grow. We would like to grow organically. But of course, if the opportunity arises, if the opportunity comes, we will also like to grow inorganically, so via further M&As. Our ambition for '25 is to have regular profit exceeding EUR 300 million. EUR 100 million out of that coming from Serbian markets. So you can see that we are really, really ambitious when it comes to Serbian markets, but we think it's achievable. So altogether, EUR 300 million. And when it comes to dividend, we were quite explicit here, provided euro terms. So in the period from '22, so this year until '25, we are actually -- our ambition is to distribute roughly EUR 500 million of dividends. I think that this is really a very solid and a very good dividend payout. And like I said, it's a very high dividend. It's a very nice dividend. And in addition to this, we would also like to grow. And with all this -- with having said this, we still think that we would have some room to grow with roughly EUR 1.5 billion in risk-weighted assets. So we will definitely opt for the tactical M&As. So this is briefly from our end. I see questions popping in already. Thank you. Thank you, of course, for your attention. Peter and I are available, like our CFO, likes to say 24x7. So if there are any questions, always very welcome to contact us directly, and we are available to answer any questions.

So I see first question here from Luka. What was the effect of higher yield on bond portfolio? How much was the loss in OCI from negative bond price development? I think, Luka, that was mentioned on the slide. Peter is showing that right now. So EUR 55 million. EUR 55 million is the amount, so this was booked in Q1 and this was the effect coming from the OCI. Then, could you please comment on real estate sector? Yes. Could you please comment on the real estate sector? Well, I'm not quite sure what comment exactly on the real estate sector is meant here. But in principle, probably this relates to, of course, still our very high production in housing loans, but I think Peter explained that one. That we are seeing a bit of a front loading, I would say, because people are expecting interest rates to go up. So we have seen really high production of housing loans. But all in all, when it comes to our mortgage portfolio and our housing portfolio, our NPLs and our defaults in this segment were historically very, very low and extremely low. So all in all, I would say that we are very comfortable here. We don't expect any major downturns. But of course, how the market or the real estate market will develop for that, that's to be seen.

Yes. Probably the question goes to -- because of all the warnings that we have seen from Bank of Slovenia and now recently, ECB has been the biggest risk for the -- for probably the Europe. What we see in Slovenia, in particular, is that loan-to-value ratios are still quite low. This was also mentioned from Bank of Slovenia when they relaxed their macro prudential policy on consumer loans that they see real estate prices in Slovenia based on their model at 13% overvalued, which I would say is still within 1 standard deviation of the overpricing. But at the same time, the loan-to-value in the banking sector is still quite low, around 60% for the banking sector.

Yes. Okay. Do you have any direct exposure to Russia, Ukraine, including Russian individuals? We -- I think we commented that already on several occasions, but just to repeat -- our direct exposure to Russia amounted to roughly EUR 20 million, and these were Russian Govies. EUR 13 million out of that was repaid already. So EUR 7 million still left and we do not have any other direct exposures. The Russian individuals, honestly, not that I would be aware of and nothing concerning. And just to say again, our direct -- and of course, we do have companies that have their operations and their revenues coming from these markets. But we are regularly in touch with these clients. We haven't seen any warning signs so far. And like I said, direct exposure, practically down to 0. And indirect exposure also not material. So no major concerns on that front.

Yes. I would just jump in here because I can see that someone clicked that we have answered the question from Luka again. Can you explain the effect of higher interest rates on your P&L this year and next? What are your expectations regarding this year's movement in NIM? How have you started to already lift fixed interest rates on loans? So the answer is, of course, in the long version of the presentation published on our web page, we have, let's say, so-called theoretical calculation of NII sensitivity to higher rates for the scenario of parallel shift for 50 and 100 basis points. You can have a look at it there. So the scenarios or the analysis, which we're conducting, of course, show that this environment is good not only for the NLB but practically for the whole banking sector. Immediately, like you asked us in the first question, we had fair value for OCI hits on the capital. But at the same time, we are now already, as mentioned, slowly repricing our loans. Of course, not to shake the market completely, but of course, trying to be really mindful that this is probably a regime shift that would have a certain impact on all the banks working in this environment. So when it comes to NIM, of course, NIM is a factor, of course, of the -- of also the interest expenses. And as you have seen, we have went out with the public announcement a couple of months ago that we intend to issue our Tier 2 bonds at that time when the market was too volatile. We stopped that activity for a certain period but there is still intention from the bank to issue bonds in this year, and that would have an impact on the interest expenses and then also impact NIM. So there are 2 forces, one going in one direction, the other one going in the other direction.

Okay. Thank you, Peter. Can you talk a bit more about your digital strategy in the future? What can we expect regarding new mobile applications and new digital products? I think that digital and of course, digital offering is in the forefront of every bank these days, and we are doing our homework here. Like our CEO likes to say, our homework is to offer the same experience as the fintechs are offering and to be best-in-class. This, of course, needs constant development, constant investments, but we are there. You probably saw that we actually started and even we have our digital IT firm, it's based in [ Bandra ]. We have very, very ambitious targets. We have roughly 400 data scientists in NLB Group. We are really developing capabilities in all our markets and in Slovenia, trying to get the best of every market and the people that are there. And like I said, it's matching the best customer experience and having the same fronting wherever you come from, be it from Slovenia, be it from Montenegro, be it from any other country. And I think that we are doing well. Today, you can practically, at the click of a button at 4 in the morning, you can have all the services, except for the mortgage loan available online in a few minutes. But of course, it doesn't end here. A lot of banks are offering that. So it's constant improvement to be it in our apps, be it in digital products, be it in new offerings. And then we have I would say, very, very capable people doing that. And then I think that, of course, this will definitely continue. Okay. When do you expect the NPL ratio to start increasing, considering the increased macroeconomic risks? 2022 or later? If I would have a crystal ball, very difficult to say. Like I said, in the first quarter and then also in April, we haven't seen any worsening of asset quality. But of course, let's be honest, inflation is here. We are a bit more worried what is happening on the retail front. We do have some clients that, of course, would be influenced by supply chain disruption, by inflation, by energy prices. So we are definitely monitoring that. Now to be very precise and forward looking, of course, I cannot be, but I think that when it comes to the guidance that we provided, it's quite specific one. So for this year, we expect cost of risk to be at 30 bps. And of course, then gradually increasing, whereas we see our normalized cost of risk to be somewhere in the range from 40 bps to 50 bps. But like I said, it's very difficult to comment whether this will happen in July or November, but so far so good.

Yes. And the next question is linked to what you just said. How high will 30 bps cost of risk in 2022 be in actual euros? The calculation is quite simple. Let's say, the average loan book is probably expected at, I don't know, EUR 11 billion, EUR 12 billion in 2022. So multiplying that with 30 bps would give you the number. Then we have the question from Luka does the capital adequacy presented already include the assumption of EUR 50 million dividend payment? It gets even better. It includes EUR 100 million dividend promise or expectation or ambition, call it whatever you like. So this EUR 100 million, which is in our outlook, which is communicated regularly, is not included into regulatory or into capital adequacy ratios. So that means paying debt would not further decrease CET1 or total capital ratio or any other capital ratio that you would want. And we have question from Mikash because of net profit for takeover of N Banka, can we expect higher dividend proposal in fourth quarter? Unfortunately, or, let's say, the fact is that not. We are quite specific, I would say, one of the most specific issuers, of course, in this region, but also looking broader in terms of communicating absolute amount of dividend payments. There is, of course, the balancing guide between returning capital to shareholders and growing inorganically and the bank tries to or would like to take advantage of the situation, which is fast evolving. One of the reasons why we were successful with the -- at the time Sberbank acquisition. Now N Banka is, of course, that we were prepared and we were -- we had the needed capital buffers, we had the size and we had liquidity, and we were prepared because we are looking at the market constantly and looking at the opportunities. So this is the balancing act that we would not take this one-off event of negative goodwill as something to be paid to shareholders.

Then we have an additional question from Luka, what is the weighted average maturity of the loan portfolio? Is it constructed in a latter structure of the same proportion maturing each year? Look, honestly, now you got me. I don't have the data at me but -- at hand, but I will definitely -- we will get back to you on this one. I would say it's not very, very, very same proportion every year, but it fluctuates a bit because, especially in the COVID times, a lot of loans were shorter term. On the other hand side, of course, we do have now housing loans growing drastically in the later period, which, of course, usually have longer maturity, but with the details we'll come back to you.

Okay. Then we have Andreas with -- he said first redemption, we call it squeeze out process both types of shares of Komercijalna Banka? Of course, the squeeze-out is intended to get us to 100% on both classes of shares, yes. And the last one, from Luka, how the dividend payment will not affect capital adequacy that is not included in presented? Okay. to have it clear, the profit that we had in 2021 is, of course, the accounting profit. The regulatory capital. We only include part of the achieved profit. So 100% are left on the side were not included into regulatory capital and payment would, by that not impact the capital ratios. So I think we went.....

EUR 100 million. EUR 100 million.

Yes. We went a bit quicker with answering that because we are mindful of the fact that Posratsala is already waiting there. Like we mentioned a couple of times, and I think Sandra would mention it as well. Sandra, sorry for not letting you speak. We would really encourage everyone with the questions to get in touch with us through this context, and we would be glad to continue this discussion on one-on-one or 5-on-1 basis. So thank you.

Yes. Thank you. Thank you, all of you, for joining us today. And Sandra, sorry for hijacking your role.

No problem. It was really great. I mean there are many questions, and you make such a good team because you complemented each other and it looks really, really great.

Thank you. It's a pleasure.

Thank you, Sandra. We wish you all a nice afternoon, a nice weekend. And of course, be in stay in touch.