LHV intends to acquire the unit of Danske Bank involved with Estonian private loans

AS LHV Pank, a subsidiary of AS LHV Group and Danske Bank A/S have reached an agreement that LHV will acquire Danske Bank’s unit involved with Estonian private loans, that essentially consists of the loan portfolio of private clients in the amount of approximately 470 million euros (as at the end of February 2019). The parties have agreed on the material terms of the contract and intend to sign it on 5 June.

The transaction will be finalised in the autumn of the current year, when the final scope and price of the transaction will also be determined. Prerequisites for finalising the transaction are getting permission from the Competition Authority and raising additional capital for AS LHV Group. The transaction is not to be considered a transaction with related parties.

AS LHV Pank and Danske Bank A/S have agreed on the price of the transaction, according to which a discount of 39 million euros will be subtracted from the volume of the portfolio at the moment of the transaction. The estimated price of the transaction will be around 410 million euros.

The volume of the loan portfolio of the unit as of the end of February is 470 million euros, about 97% of which are home loans. According to LHV’s assessment, this is a well-guaranteed strong credit portfolio. Whereas the interest rates of granted home loans were essentially near cost price, the transaction is only possible due to the discounted sale of the portfolio. It is presumed that the volume of the portfolio will decrease to 450 million euros by the moment of the transaction. The balances and settlements of clients will not transfer with the unit when making the transaction. At the same time, the unit is accompanied by a few employment contracts, the specific number of which will be determined by the moment of making the transaction.

With the transaction, LHV Pank will take over serving about 10,800 private customers. According to LHV’s settlement analysis approximately 80% of these are new customers for LHV.

Current loan customers of Danske Bank do not have to change anything in their activities, and they will be provided with more specific instructions as soon as the transaction is finalised in the second half of 2019. LHV intends to automatically open a personal account for loan servicing at LHV bank for every client and formalise amendments to contracts so that all that the clients have to do is redirect loan payments to their new bank account. The current loan terms will not change with the automatic transfer of loans, unless clients themselves wish to amend the contracts.

The financial impact of the transaction

The intended transaction will have a significant impact on the financial situation of LHV.

As of the end of April 2019, the loan portfolio of LHV Pank amounted to 1016 million euros. By acquiring the unit, the loan portfolio of LHV will grow by about 450 million euros. In addition to the existent deposits, LHV will raise a total of 280 million euros of new financing in order to finance the transaction.

In the short term, LHV Pank will finance the added volume of loans with deposits taken from Estonia and foreign markets. The deposits of Estonian clients have grown faster than planned. If this trend continues, it is possible to finance the transaction to a significant extent through local deposits. The rest of the financing will be involved through deposit-taking platforms where Raisin will be the main partner. Through the latter, deposits will be taken from German, Austrian, Dutch and Spanish private persons. Still, this is a source of financing that is on the more costly side, which is why LHV Pank intends to finance the home loan portfolio in the long term through issuing covered bonds.

From 2021, the additional income from the portfolio will be 4.0 million euros per year. On average, the transaction will improve the return on equity (ROE) of LHV Pank by 0.4 percentage points per year. By that time all one-off expenses will have been made and the expensive short-term deposits raised for the transaction will have been replaced with more favourable covered bonds. Additionally, the financial plan takes into account that the discount included with the transaction will be reflected in accounting through interest income over the life of the portfolio. In case of significant change or termination of loan contracts, the discounts related to the contracts will be included in income at the same time.

In 2020, the additional profit from the transaction will amount to 1.7 million euros. The financial results will then be still affected by the costlier short-term deposits, which are planned to be replaced with more favourable covered bonds in 2020.

Since the loan portfolio will be acquired in the autumn of 2019, the transaction will predominantly add costs this year. According to LHV’s assessment, in 2019, the transaction will bring LHV a loss of 2.7 million euros, 1.05 million euros of which originates from net interest income, 1.54 million euros from the provision accompanying the portfolio, and 0.12 million euros from additional administrative costs.

AS LHV Group will update their financial plan after the transaction has taken place. Subject to the timing of the transaction, updating of the financial plan may occur in the beginning of 2020 in the course of regular updating of the financial plan.

Upcoming steps for raising capital

In order to acquire the unit of Danske Bank involved with the loan portfolio of Estonian private clients AS LHV Group will have to raise additional capital, which the group will use to increase the capital of its subsidiary, AS LHV Pank. To finance the loan portfolio to be acquired, LHV Group requires 27 million euros of own funds, at least 16 million euros of which are Tier 1 own funds and 11 million euros of which are Tier 2 own funds.

To raise additional capital, LHV plans the following steps in the coming months:

• Issuing subordinated bonds
  To raise capital, AS LHV Group will organise an issuance of subordinated bonds in June of this year, which will be the second issuance of the bond programme in progress. Subscription of bonds will take place from 5 June to 21 June. 15,000 bonds with a nominal value of 1000 euros and an interest rate of 6% will be offered. LHV has the right to increase the issue size to up to 20 million euros. A separate notice has been published concerning the bonds.
• Issuing additional Tier 1 own funds
  To raise capital, AS LHV Group will organise a private placement of additional Tier 1 own funds to financial institutions and proficient investors with a larger investment portfolio in June of this year. Due to the complexity of the bond, the instrument will not be put on public offer. Subscription of bonds will take place from 5 June to 21 June. 150 bonds with a nominal value of 100,000 euros and an interest rate of 8% will be offered. LHV has the right to increase the issue size to up to 20 million euros. The bonds are perpetual. After receiving permission from the Financial Supervision Authority, LHV will have the right to redeem the subordinated bonds in part or in full as of 28 June 2024.
• Further issuance of AS LHV Group shares
  Since in order for the transaction to take place it is required to involve Tier 1 own funds, i.e. share capital, AS LHV Group will organise an additional issuance of shares in the form of a rights issue, presumably in September. The size of the share capital required is 15 million euros. A decision of the Supervisory Board of the company is required for issuing shares, and the terms of the potential issuance must be approved by an extraordinary meeting of the shareholders of LHV Group, held presumably in August or September. The issuance of shares and offering these to shareholders has to be approved by the Financial Supervision Authority.

Comments by LHV

"This is an important event for us. LHV’s loan portfolio will increase by 40% as a result of the transaction taking place, and the importance of retail banking in LHV’s business will increase dramatically. This event can also be considered significant in Estonian banking since a bank based on Estonian capital intends to take over the business of outgoing foreign capital and considerably increase its market share in a strategically important sector," said Madis Toomsalu, CEO of LHV Group.

"LHV has indeed grown to become the largest domestic financial group, but the success of the transaction requires us to take on over half a billion euros of deposits and, considering the growth of existing business volumes, raise capital to the extent of about 50 million euros through three different capital instruments. The latter is divided between bonds and share capital," Toomsalu clarified.

"The transaction is built on the principle that in addition to using the deposits of Estonian clients, we will temporarily finance ourselves with deposit-taking platforms. Next year, we hope to issue long-term covered bonds which will make the financing cost more favourable. With this transaction, the formulating of provisions, re-registering of guarantees and other one-off costs must be taken into account at the beginning. The regular effect without one-off factors of the portfolio to be acquired will be revealed on the income statement in 18 months, also increasing the return on equity of the whole bank compared to the current financial plan," said Erki Kilu, Chairman of the Management Board of LHV Pank.

"After the transaction is finalised, we will certainly invite new loan clients to use all other LHV services as well. We can serve the new clients in the best possible way: we offer all banking services, the best service in Estonia, a network of ATMs across Estonia, and an extremely comfortable internet and mobile bank," said Kilu.

LHV Group is the largest domestic financial group and capital provider in Estonia. LHV Group's key subsidiaries are LHV Pank and LHV Varahaldus. LHV employs over 400 people. LHV’s banking services are used by 174,000 clients, and pension funds managed by LHV have more than 177,000 active clients.

New public offering of subordinated bonds of LHV Group

AS LHV Group announced a public offering of LHV’s subordinated bonds, that includes offering up to 15,000 additional subordinated bonds of LHV ”LHV Group subordinated bond 28.11.2028” with the nominal value of EUR 1,000, interest rate offered to the investor 6.0% per annum and maturity date 28.11.2028.

LHV has the right to increase the offering volume until issue date by EUR 5 million and issue up to 5,000 additional subordinated bonds as a result of which the total number of the bonds offered in the course of the public offering may be up to 20,000 and the total volume of the offering may rise to EUR 20 million. The public offering is carried out only in Estonia.

The offering is the second series of LHV’s bond program, created on the basis of the Prospectus. Under the program, LHV has the possibility to issue subordinated bonds in a total volume of up to EUR 45 million in the course of several issues.

Subordinated bond represents an unsecured debt obligation of LHV before the investor. The subordination of the bonds means that upon the liquidation or bankruptcy of LHV, all the claims arising from the subordinated bonds shall fall due and shall be satisfied only after the full satisfaction of all unsubordinated recognised claims in accordance with the applicable law.

Subordinated bonds will be offered at a price of EUR 1,004.83 per one bond. In addition to the nominal value of the bond, the subscription price also contains the interest accumulated by the value date, which the investor will be returned together with the quarterly interest payment.

The time schedule of the offering of the subordinated bonds is as follows:

In order to subscribe for the subordinated bonds, an investor has to submit during the subscription period to the custodian who holds the investor’s securities account opened at Nasdaq CSD SE a correct subscription undertaking.

Before investing into LHV’s subordinated bonds we ask you to acquaint yourself with the Prospectus, its annexes and the final terms and conditions of the offering.

Official notice of the offering

Acquaint yourself with the LHV base prospectus, its appendix, the updated summary of prospectus (ET), the terms and conditions of subordinated bonds, the final terms of the second offering and its appendix (ET). Acquaint yourself with the presentation for LHV subordinated bond investors.

Home page of subordinated bond offering