LHV to acquire the Danske Bank’s unit involved with Estonian corporate and public sector credits

AS LHV Pank, a subsidiary of AS LHV Group, and Danske Bank A/S have signed an agreement according to which LHV will acquire Danske Bank’s business unit operating the Estonian corporate and public sector credits, that as at the end of April amounted to approximately 312 million euros.

LHV Pank and Danske Bank A/S have reached an agreement on the price of the transaction, according to which a discount of 19 million euros will be subtracted from the volume of the portfolio as calculated at the moment of the transaction. The transaction will be finalised in October of the current year and then the final scope and price of the transaction will also be determined. The volume of the portfolio is anticipated to amount to 280 million euros at the moment of finalising the transaction. The Competition Authority of the Republic of Estonia will have to grant permission before the transaction can be finalised. The agreed transaction is not a transaction between related parties.

The business unit acquired by LHV consists of the credit portfolio of Estonian corporate clients and the public sector, the volume of which is 312 million euros. About 42% of the portfolio consists of corporate loans and 54% consists of loans to local governments. According to LHV’s assessment, this is a strong credit portfolio with relatively low capital requirements for the loans involved with local governments. The business unit will be acquired with employees. The exact number will be determined when finalising the transaction.

With the transaction, LHV Pank will take over from Danske Bank the servicing of about 670 business clients and 85 public sector customers.

The financial impact of the transaction

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

As at the end of April 2020, the loan portfolio of LHV Pank amounted to 1,746 million euros. By acquiring the business unit, the portfolio will grow by about 280 million euros. In addition to the existent deposits, LHV will raise a total of 250 million euros to finance the transaction. Due to the deposits of Estonian customers growing at an exceeding pace, the transaction can be financed in the long-term through local Estonian deposits.

In the short term, central bank financing programmes and, if needed, deposit mediating platforms will also be used as sources of financing. Using the facilities provided by the central bank entails borrowing money from programmes offered by the ECB, that sets part of the acquired credit portfolio as a guarantee. It should be noted that the interest rates of the central bank are lower than those of the deposits.

The rest of the financing will be involved through deposit mediating platforms where Raisin and Deposit Solution are the principal partners of LHV. Through these platforms LHV acquires the deposits of German, Austrian, Dutch and Spanish private individuals.

When finalised, the additional profit from the portfolio aquired through the transaction, will be 4.0 million euros per year. On average, the transaction will improve the return on equity (ROE) of LHV by approximately 0.4 percentage points per year. The discount included with the transaction will be reflected in the accounts through the interest income over the lifespan of the portfolio. Should a significant change or termination of the loan contracts occur then LHV will include the discounts related to the contracts in the income statements for the same period.

Provisioning the portfolio and re-registering the guarantees and other one-off costs will be taken into account at the beginning of the transaction.

Acquiring the business unit of Danske Bank involved with the loan portfolio of Estonian corporate customers and the public sector requires in total 22 million euros of own funds from LHV. At least 15 million euros of this is Tier 1 own funds and 7 million euros of which is Tier 2 own funds. In May, LHV Group included 15 million euros of additional Tier1 capital that will also finance this transaction. It is possible that LHV will need to raise 15 million euros worth of share capital through an additional share issue. The exact amount is still to be specified and depends on the depreciation of the existing loan portfolio the impairments and the issuing of new loans to customers.

Comments by LHV

„This is an important event for us. As a result of realisation of this transaction the loan portfolio of LHV will grow by about 15% and the importance of the public sector as part of LHV’s business will increase by leaps and bounds. We continue to follow our strategy and grow our business even when the times are tougher,“ Madis Toomsalu, CEO of LHV Group said.

„After acquiring this portfolio, LHV has financed about 85 local governments or their business entities, including several of the bigger cities in Estonia. We consider that a bank based on Estonian capital could be a good and flexible financial partner for the local governments. To all our customers we offer our recognized best customer service and comprehensive banking services – in addition to loan products and payment services also point-of-sale terminals, our nation-wide ATM network and handy internet bank and mobile app,“ Madis Toomsalu added.

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 460 people. LHV’s banking services are used by 219,000 clients, and pension funds managed by LHV have 178,000 active clients. Additionally, LHV’s UK branch offers banking infrastructure to more than 120 financial service providers, that in turn intermediate LHV’s payment services to their customers around the world.

AS LHV Group established the non-life insurance undertaking AS LHV Kindlustus

Today, on 6 May 2020, AS LHV Group and Toveko Invest OÜ signed the foundation resolution of non-life insurance undertaking AS LHV Kindlustus, and approved the company’s articles of association. The main business of the undertaking will be offering non-life insurance products. Obtaining an activity licence from the Financial Supervision Authority is still required to commence the operations of the insurance undertaking.

The share capital of AS LHV Kindlustus is EUR 1,250,000, which has been divided into 1,250,000 shares with a nominal value of EUR 1, in a way that 65% of all shares of AS LHV Kindlustus (812,500 shares) belong to AS LHV Group, and 35% (437,500 shares) belong to Toveko Invest OÜ. The new undertaking is a subsidiary of AS LHV Group, and belongs to the LHV consolidation group. Pursuant to an agreement of the shareholders, the share capital of AS LHV Kindlustus will be increased to EUR 5,000,000 before obtaining the activity licence.

From the standpoint of LHV Group, the purpose of establishing a non-life insurance undertaking is to provide additional value to LHV’s retail clients, and, more broadly, to improve insurance opportunities on the Estonian market while acting profitably. Offering insurance protection to the clients of LHV and Euronics will create a synergy that guarantees the insurance undertaking with enough insurance premiums to cover damages and costs, and to achieve profitable operation immediately upon the commencement of insurance operations.

AS LHV Kindlustus intends to apply for an activity licence during this year. From establishing the company to receiving the activity licence, LHV Kindlustus will bear the costs and generate a loss. LHV Group will publish the financial forecast related to the subsidiary after receiving the activity licence.

The company’s Supervisory Board includes four members: Madis Toomsalu (Chairman), Erki Kilu, Jaan Koppel, and Veiko Poolgas. The first meeting of the Supervisory Board of the company was also held today.

Tarmo Koll and Jaanus Seppa were appointed Members of the Management Board of AS LHV Kindlustus. Tarmo Koll’s powers as a Member of the Management Board come into effect as of today. Jaanus Seppa will take his place as Member of the Management Board as of 1 September 2020, also becoming the Chairman of the Management Board. Members of the management of AS LHV Group do not have personal interests in establishing AS LHV Kindlustus.

Tarmo Koll is a Member of the Management Board of AS LHV Kindlustus. Before that, from 2014 to 2019, he was the Chief Financial Officer and Head of Estonian Operations of the insurance company Ergo Balti, and was a Member of the Management Board of Ergo Insurance SE and Ergo Life Insurance SE. Before that, he operated as the responsible actuary and head of department in the same company. Tarmo Koll is the owner and Member of the Management Board of Aktuaarsed Lahendused OÜ, and he also belongs to the Management Board of the Estonian Actuarial Society. Tarmo Koll holds 530 shares of AS LHV Group.

Jaanus Seppa was appointed Member of the Management Board of AS LHV Kindlustus; his powers will commence on 1 September 2020. Previously, Seppa worked at the Lithuanian non-life insurance undertaking Compensa Vienna Insurance Group ADB, being a Member of the Management Board and the Head of the Estonian branch from 2015 to 2019. Jaanus Seppa holds 9248 shares of AS LHV Group.

Madis Toomsalu is the Head of AS LHV Group and the Chairman of the Supervisory Boards of AS LHV Pank and AS LHV Varahaldus. As of today, he is also the Chairman of the Supervisory Board of AS LHV Kindlustus. He is also Member of the Management Board of MTÜ FinanceEstonia. Madis Toomsalu and the persons related to him own 53,819 shares of AS LHV Group. Madis Toomsalu is entitled to a total of 90,920 shares of AS LHV Group for the options issued in 2018, 2019 and 2020.

Erki Kilu has been the Chairman of the Management Board of AS LHV Pank since 2008. In addition, Mr Kilu serves as a Member of the Supervisory Board of AS LHV Finance, AS LHV Varahaldus and AS LHV Kindlustus, and is the Chairman of the Management Board of the Estonian Banking Association. Erki Kilu holds 133,200 shares of AS LHV Group. He has the opportunity to acquire 87,214 shares of AS LHV Group for options issued in 2018, 2019 and 2020.

Jaan Koppel has been a member of the Supervisory Board of AS LHV Finance since 2013, and as of today, he is also a Member of the Supervisory Board of AS LHV Kindlustus. Additionally, he serves as a member of the Management Board of OÜ Toveko Invest, Sandman Grupi Aktsiaselts, Osaühing Raglor, Euronics Baltic OÜ, OÜ Veicoland and SND Invest OÜ; he is the Chairman of the Management Board of SIA “Euronics Latvia” and a Member of the Supervisory Board of aktsiaselts METAAN and Aktsiaselts Antista. Jaan Koppel and the persons related to him do not hold shares of AS LHV Group.

Veiko Poolgas has been a Member of the Supervisory Board of AS LHV Finance since 2013, and as of today, he is also a Member of the Supervisory Board of AS LHV Kindlustus. Additionally, he is a Member of the Management Board of Sandman Grupi Aktsiaselts, SIA “Euronics Latvia”, Osaühing VP Invest & Holdings, and OÜ Veicoland. Veiko Poolgas and the persons related to him do not hold shares of AS LHV Group.

LHV announced its intention to establish an insurance company with the 18 February stock exchange announcement: https://cns.omxgroup.com/cdsPublic/viewDisclosure.action?disclosureId=922262&messageId=1162155. Permission to consolidate was received from the Competition Authority in April.

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 450 people. LHV’s banking services are used by nearly 217,000 clients, and pension funds managed by LHV have nearly 178,000 active clients.