LHV is the largest
domestic
capital provider
in Estonia

In Q3 of this year, AS LHV Group earned EUR 39.5 million in net profit. AS LHV Pank earned EUR 36.0 million in net profit, LHV Bank Limited EUR 3.2 million, AS LHV Varahaldus EUR 0.6 million, and AS LHV Kindlustus EUR 0.3 million. The return on equity attributable to the Group’s shareholders was 31.6% in Q3.

In Q3 of 2023, the Group generated consolidated revenue of EUR 81.5 million, i.e., 9% more than in the previous quarter. Of the revenue, net interest income accounted for EUR 68.1 million, and net fee and commission income for EUR 13.6 million. The operating expenses of the consolidation group amounted to EUR 32.8 million in Q3, i.e., 1% less than in Q2. Net profit for the quarter was EUR 3.8 million more than in the previous quarter (+11%) and 3.7 times higher than in the same period last year.

As at the end of September, LHV Group’s consolidated assets stood at EUR 6.59 billion. Over the quarter, assets increased by EUR 284 million, i.e., 5%. The Group’s consolidated deposits increased by EUR 254 million over the quarter to EUR 5.32 billion (+5%; EUR +195 million in Q2). The consolidated loan portfolio grew by EUR 122 million over the quarter to EUR 3.38 billion (+4%; EUR +104 million in Q2). The total volume of funds managed by LHV decreased by EUR 13 million to EUR 1.45 billion in Q3 (-1%; EUR +14 million in Q2). The number of processed payments related to clients who are financial intermediaries amounted to 13.2 million in Q3 (+18% compared to 11.2 million payments in Q2).

Consolidated net revenue of AS LHV Group for the nine months of 2023 amounted to EUR 224.8 million (+92% compared to 2022) and total expenditure was EUR 96.5 million (+54%). The consolidated net profit of the Group for the nine months was consequently EUR 108.2 million, i.e., EUR 71.1 million more than a year ago (+191%). Over the nine months, AS LHV Pank earned EUR 107.8 million in net profit, UK Bank Limited EUR 2.2 million in net profit, AS LHV Varahaldus EUR 1.1 million in net profit, and AS LHV Kindlustus EUR 0.1 million in net loss. The return on equity of LHV Group was 30.8% over the nine months. LHV outperformed the financial plan disclosed at the beginning of September by EUR 4.0 million with regard to net profit for the nine months.

A strong quarter for LHV, as previously expected, was characterised by the profitable performance of the Estonian enterprises, capital raising, and the development of business in the United Kingdom. Over the quarter, LHV updated its financial plan, increasing its profit target for the current year by 29%. In September, LHV Group organised a public offering of subordinated bonds, raising EUR 35 million in Tier II capital. A record 16,255 investors participated in the offering, which was oversubscribed 16 times.

In a still uncertain economic environment, we managed to increase the number of clients and client activity is improving. The focus has been on deposits: the shift of clients from demand deposits to fixed-term deposits continued. During Q3, demand deposits decreased by EUR 191 million, while fixed-term deposits increased by EUR 445 million, of which EUR 142 million was raised through deposit platforms. Deposits from regular clients increased by EUR 79 million over the quarter.

The quality of the loan portfolio has remained at a good level, despite a small change in the retail small loan portfolio, where an increase in delays has been observed. Growth in the Group’s loan portfolio has been as expected.

During the quarter, the number of LHV Pank’s clients increased by 6,600 to 407 thousand. Client activity in terms of settlement services and card usage remained at a good level. The loan portfolio of LHV Pank increased by EUR 176 million, of which EUR 83 million was issued to LHV Bank and EUR 95 million to clients, which in turn was split equally between retail and corporate banking. Demand for credit is showing some signs of growth after a more stable period. The new student loan period started, with more activity than last year. In September, the employer branding agency Instar named LHV Pank the most attractive employer for both Estonian students and experienced employees.

In August, the business of the UK branch of LHV Pank was successfully transferred to LHV Bank. As a result, servicing of clients’ payments in pounds, interfacing with payment systems, and the contracts related to servicing these payments were transferred to the new bank. The current UK branch is in the closing process. LHV Bank introduced a new IT system and replaced its loan system.

In addition to increasing its loan portfolio to EUR 61 million, LHV Bank started to attract deposits from the UK market through the Raisin deposit platform. Connections to other platforms are ongoing. Business volumes in the Banking Services segment were a record high in Q3, driven by growth in companies operating in new sectors. Strong results are reflected in better-than-planned profitability. In Q3, LHV Group increased the share capital of LHV Bank by EUR 12 million.

In the pension fund market, LHV’s actively managed funds had the best rate of return in Q3. Growth in LHV funds was led by bonds, private equity, and equity positions contributing to the energy sector, while the major equity markets were in the red.

The reason for the decline in the volume of funds managed by LHV Varahaldus was due to the payouts made at the beginning of September and the lower-than-expected rate of return. Pillar III assets grew quarter on quarter. The number of active pension clients decreased by 4,000 over the quarter, due to clients leaving pension Pillar II in September. The increase in profit from asset management has been supported by a lower-than-planned cost base.

The net revenue of LHV Kindlustus continued its upward trend, while expenses remained in line with the financial plan. In Q3, gross premiums fell. During the quarter, 15,300 new claims were registered and 17,600 were closed. As at the end of the quarter, clients had 228,000 valid insurance contracts. The number of clients covered by insurance increased to 160 thousand.

Comment by Madis Toomsalu, Chairman of the Management Board at LHV Group:
‘The record braking bond offering that took place at the end of the third quarter proved investors’ continuous belief in what we do. LHV’s capitalisation is at a good level, enabling us to go on with active lending in Estonia as well as in the UK. Our revenue base in Estonia is broad, but the results have mainly grown with the help of interest income. More and more also interest costs are increasing, which is why group efficiency is one of the main keywords for the upcoming financial planning. The performance of the UK bank is encouraging. Our loan portfolio and payment volumes are growing, and we are preparing for including deposits.’

AS LHV Group’s reports are available at: https://investor.lhv.ee/en/reports/.

LHV Group is the largest domestic financial group and capital provider in Estonia. LHV Group’s key subsidiaries are LHV Pank, LHV Varahaldus and LHV Kindlustus in Estonia, and LHV Bank in the United Kingdom. The Group employs over 1,020 people. As at the end of September, more than 407,000 clients were using LHV’s banking services, LHV’s pension funds had 125,000 active clients, and 160,000 clients were covered by LHV Kindlustus. LHV Bank holds a banking licence in the United Kingdom and provides banking services to international financial technology companies, as well as loans to small and medium-sized enterprises.

AS LHV Group (hereinafter LHV) hereby announces a public offering of LHV’s subordinated bonds. The offering is conducted on the basis of the prospectus registered by the Estonian Financial Supervision and Resolution Authority (FSA) on 11 September 2023, that has been disclosed on the date of this announcement on the web pages of LHV and the FSA. The public offering of the subordinated bonds will be carried out only in Estonia.

This is the first issue of the subordinated bonds, in the amout of up to EUR 25 million, with the possibility to increase the issue size to up to EUR 35 million, under the new bond programme. Under the new bond programme, it is possible to raise up to EUR 200 million in total.

Main terms of the offering

LHV offers publicly up to 25,000 subordinated bonds of LHV „EUR 10.50 LHV Group subordinated bond 23-2033” with the nominal value of EUR 1,000, the maturity date 29.09.2033 and a quarterly paid fixed interest rate offered to the investor at the rate 10.50% per annum. In case of oversubscription of the bonds LHV has the right to increase the offering volume by up to 10,000 additional bonds as a result of which the total number of the bonds offered in the course of the public offering may be up to 35,000. Subordinated bonds will be offered at a price of EUR 1,000 per one bond. Subordinated bonds will be issued in a dematerialised book-entry form and registered in Nasdaq CSD SE under ISIN code EE3300003573.

The subscription period for the bonds will start on 12 September 2023 at 10:00 and will end on 26 September 2023 at 16:00. The offering will be targeted to Estonian retail and institutional investors.

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. Among other things, with subordinated bonds, the risk of conversion of liabilities and claim rights (bail-in risk) must be considered.

Timetable of the offering

Submitting subscription undertakings

In order to subscribe for the subordinated bonds, during the subscription period, an investor has to submit a subscription undertaking to the custodian who holds the investor’s securities account opened at Nasdaq CSD SE, with the format accepted by the custodian and in accordance with the prospectus and offer conditions. The undertaking must be submitted before the end of the subscription period. The investor may use any method that such investor’s custodian offers to submit the subscription undertaking (e.g., physically at the client service venue of the custodian, over the internet or by other means). The subscription undertaking will be forwarded to Nasdaq CSD SE.

Listing and Admission to Trading of Subordinated Bonds

LHV intends to submit an application to Nasdaq Tallinn AS for the listing and admission to trading of the LHV’s subordinated bonds on the Baltic Bond List of the Nasdaq Tallinn Stock Exchange. The expected date of listing and admission to trading is on or about 2 October 2023.

While every effort will be made and due care will be taken in order to ensure the listing and the admission to trading of the subordinated bonds, LHV cannot ensure that the subordinated bonds will be listed and admitted to trading.

Availability of Prospectus and Terms of the Offering

The Prospectus has been published and can be obtained in electronic format from LHV’s website https://investor.lhv.ee and from the website of the Financial Supervision Authority https://www.fi.ee. Additionally, the Estonian translation of the Prospectus has been disclosed previously and made available together with the Prospectus on the LHV website https://investor.lhv.ee and is also available through the information system of Nasdaq Tallinn Stock Exchange. The terms and conditions of LHV’s first subordinated bonds offering together with the summary of the prospectus and translations to Estonian have been published and can be obtained in electronic format from LHV’s website https://investor.lhv.ee/.

Before investing into LHV’s subordinated bonds we ask you to acquaint yourself with the prospectus, the final terms and conditions of the offering and if necessary consult an expert.

LHV Group is the largest domestic financial group and capital provider in Estonia. LHV Group’s key subsidiaries are LHV Pank, LHV Varahaldus, LHV Kindlustus, and LHV Bank Limited. The Group employs over 990 people. As at the end of August, LHV’s banking services are used by 403,000 clients, the pension funds managed by LHV have 127,000 active clients, and LHV Kindlustus protects a total of 160,000 clients. LHV Bank, a subsidiary of the Group, holds a banking licence in the UK and provides banking services to international financial technology companies, as well as loans to small and medium-sized enterprises.

Important information:

This notice is an advertisement for securities within the meaning of the Regulation No 2017/1129/EU of 14 June 2017 of the European Parliament and of the Council European Parliament and does not constitute an offer to sell subordinated bonds or invitation to subscribe to subordinated bonds. The offer to acquire the subordinated bonds is made solely on the basis of the prospectus that is approved by the Estonian Financial Supervision and Resolution Authority and made public on the day of the announcement of public offering. The Prospectus is available on the websites of the Estonian Financial Supervision and Resolution Authority and AS LHV Group on addresses fi.ee and investor.lhv.ee/en respectively, the last of which also contains the mentioned conditions and summary of prospectus. Before making an investment decision, investors should read the information published in the prospectus in order to understand all details related to the investment. The approval of the prospectus by the Estonian Financial Supervision and Resolution Authority should not be regarded as endorsement to AS LHV Group or the offered securities. The shares will be publicly offered only in the Republic of Estonia.

In relation to the better than forecast quality of the credit portfolio and higher base interest rates, AS LHV Group’s financial results for the current year have exceeded the financial plan published in February, which is why the company is publishing its updated financial plan for 2023.

The updated financial plan has accounted for the actual economic results and the continued slow increase of loan and deposit interest rates. While currently, the quality of the credit portfolio remains good, the macroeconomic situation is complicated and the financial plan has proactively taken the creation of provisions into account. A success fee for Varahaldus has not been presumed in this year’s plan.

Compared to the plan published in February, the updated financial plan for 2023 has forecast a 14% higher interest income, but a 4% lower fee and commission income. The higher revenue growth is due to larger business volumes, a higher interest rate, and pre-financing at a lower interest rate. At the same time, fee and commission income is affected by the lower income rate from investment services.

The expense forecast has been raised by 9%, but the impairment of loans has been reduced by 67% compared to the previous forecast. This indicates directly the levels forecast until the end of 2023 and does not indicate long-term levels of loan losses. The quality of the credit portfolio has been very strong and the level of loan impairment abnormally low. This has partly been facilitated by the high increase in prices, which has sharply decreased in the past few months. Operating expenses are affected by the significantly increased payment rate of the deposit guarantee fund, as well as the cost of services purchased. Going forward, we also expect an increase in interest expenses, originating both from the continuing increase of deposit expenses as well as the refinancing of previously issued long-term bonds.

The updated financial plan forecasts a 29% higher net profit and a 5.8 percentage point higher return on equity based on net profit.

The business volumes of the Group’s companies remain largely at the same level compared to the previous plan. The only significant difference is in terms of the larger UK loan portfolio and the increased volume of payments by financial intermediaries.

Comment by Madis Toomsalu, Chairman of the Management Board at LHV Group:

“After ten years of the zero interest rate policy of central banks, financial markets have moved back to their historic average, and figuratively speaking – money once again has a price. Although pulling away from the long-term anomaly is no easy task, it forms a basis for a more optimal and sustainable economic structure.

LHV has managed to grow its business in this controversial economic environment, and as the return of assets has increased faster than the cost of obligations in this cycle of rising interest rates, the results are surpassing the current financial plan. In the case of decreasing interest rates, the result would be the opposite. Investments made in the Estonian economy are mostly financed by banks. The underdeveloped capital markets have not offered enough competition. This is why the existence of strong and well-capitalised banks is of critical importance.

LHV intends to direct the profit earned back to the growth of loan volumes, raising additional funds from the market via capital instruments, at that. Together with the company’s self-financing, LHV’s capital is amplified in the economy to up to a tenfold final investment, or an even larger home loan portfolio.

LHV’s results are affected the most by the performance of the two banks in the Group. Recently, we separated our UK business from LHV Pank and transferred the servicing of our financial intermediary clients to LHV Bank. In addition, the updated plan has increased the volume of loans in the United Kingdom, as the current annual objective is already coming to fruition in September. In the current year, all important subsidiaries of the LHV Group are expected to achieve profitability, as even the revenue base of LHV Kindlustus is increasing, supported by increased business volumes, and its activities are profitable.’

LHV Group is the largest domestic financial group and capital provider in Estonia. LHV Group’s key subsidiaries are LHV Pank, LHV Varahaldus, LHV Kindlustus, and LHV Bank Limited. The Group employs over 970 people. As of July, LHV’s banking services are being used by 404,000 clients, the pension funds managed by LHV have 127,000 active clients, and LHV Kindlustus protects a total of 161,000 clients. LHV Bank, a subsidiary of the Group, holds a banking licence in the UK and provides banking services to international financial technology companies, as well as loans to small and medium-sized enterprises.

The Estonian Financial Supervision and Resolution Authority (FSA) has issued a precept to AS LHV Pank as a result of supervisory proceedings in 2022 and also issued a 900,000 euro fine for misdemeanour. LHV Pank agrees with the supervisional remarks.

The FSA conducted an on-site inspection to assess the compliance of LHV Pank’s financial intermediaries business line’s control systems. The supervisory proceedings identified deficiencies regarding the assessment and management of money laundering and terrorist financing risks; as well as in the solutions for onboarding and monitoring of clients to faultlessly fulfil the due diligence measures set for the bank. The remarks included a lack of resources and shortcomings in the fulfilment of obligations.

According to Kadri Kiisel, the Chairman of the Management Board of LHV Pank, LHV was engaged in improving the risk control system of the financial intermediaries business line even before the beginning of the inspection. As of today, LHV has eliminated a large part of the 22 shortcomings identified by the FSA. Work will continue until the end of this year.

"The development of risk control is a continuous work for the bank that has been in focus side by side with the growth of the Financial intermediaries business line. We are treating the supervisory observations with appropriate priority and commitment. Among other things, we have implemented changes to the assessment and management of risk and significantly increased the team active with due diligence. The inspection results showed that the FSA’s expectations are at a high level and there is a need for improvement of indicated processes and procedures, so that we could more thoroughly know our customers as well as the activities of their end customers," Kiisel commented.

LHV Group is the largest domestic financial group and capital provider in Estonia. LHV Group’s key subsidiaries are LHV Pank, LHV Varahaldus, LHV Kindlustus, and LHV Bank. The roup companies employ over 970 people. As of July, LHV’s banking services are being used by 404,000 clients, the pension funds managed by LHV have 127,000 active clients, and LHV Kindlustus protects a total of 161,000 clients. LHV Bank, a subsidiary of LHV Group, holds a banking licence in the UK and provides banking services to international financial technology companies, as well as loans to small and medium-sized enterprises.