LHV Group unaudited results for Q2 and 6 months of 2020

In the second quarter of 2020, AS LHV Group earned EUR 3.6 million in consolidated net profit. AS LHV Pank earned EUR 2.8 million and AS LHV Varahaldus EUR 1 million as net profit.

Compared to the first quarter of this year, the net profit of the consolidation group decreased by EUR 3.9 million or by 53%. Compared to the second quarter of 2019, net profit remained lower by EUR 4.1 million or 54%. The return on equity of LHV Group was 5.7% in the second quarter. The results of otherwise successful quarter were influenced primarily by the loan impairments in the amount of EUR 7.7 million made because of the emergency situation and COVID-19.

In Q2, the volume of assets of LHV Group grew to EUR 3.7 billion. During the quarter the Group’s consolidated loan portfolio increased by EUR 65 million to EUR 1.8 billion (+4%; +52 million euros in Q1). Consolidated deposits increased by EUR 134 million to EUR 3.09 billion (+5%; +252 million euros in Q1). Most of deposit growth came from regular customers. The total volume of funds managed by LHV grew by EUR 96 million in the second quarter and reached EUR 1.44 billion (+7%; -30 million euros in Q1).

In the first 6 months of 2020, the consolidated net profit of AS LHV Group was EUR 11.0 million, that was EUR 1.6 million lower than the first half-year of 2019. In 6 months, AS LHV Pank earned EUR 10.9 million and AS LHV Varahaldus EUR 0.4 million as net profit.

Comments by Madis Toomsalu, CEO of LHV Group:

“Second quarter results were affected by the global health and economic crisis. Nonetheless, difficult times proved that as long as we are pursuing a long-term vision, we have the opportunity to shape the end result. LHV is governed by our long-term growth ambitions and that is why we reckon the past quarter to be a strong one.

Even though the growth in business volumes remained moderate and loan losses were higher, the acquisition of the Danske corporate and local government portfolio, the successful issue of covered bonds, engagement of capital, submission of the application for authorisation of LHV Insurance, facilitation of USD payments and introduction of the green LHV action plan constitute activities which are bound to take us beyond the horizon in a profitable and sustainable manner.

The customer base of the bank is growing, 8,000 new bank customers added during the quarter. We have continued pursuing our open and local credit policy, reviewing all loan applications on a customer-by-customer basis. Our loan portfolio grew by EUR 65 million in Q2. At the same time, we granted grace periods to our existing customers in the total amount of EUR 350 million. Predominantly, customers use the grace periods as a precautionary measure for ensuring liquidity. We therefore expect the scheduled repayments to resume after expiry of the grace periods.

To secure a growth in business volumes, signed an agreement to purchase the Danske corporate loan and public sector loan portfolio. At the moment of the conclusion of the contract, the portfolio amounted to EUR 312 million, but this volume will somewhat decrease by October, when the transaction is scheduled to be completed. The agreed discount of EUR 19 million will be retained. The permission of the Competition Authority is required for the completion of the transaction.

In the beginning of June, LHV's first issue of covered bonds was concluded. The amount of the issue was EUR 250 million, for a period of 5 years and at an annual interest rate of 0.12%. 31 institutional investors from Europe participated in the issue. The covered bonds received a rating of Aa1. Covered bonds provide alternative means for engaging financing, important considering the bank's quick growth and efficiency in interest expenses.

We also engaged a further EUR 15 million from investors via bonds included in own funds. Additional capital engagements of the year will depend on the rate of growth of the loan portfolio and the need for further write-down of loans. The decisions regarding capital engagements must be made within the next few months.

During the quarter, we filed the application for authorisation of LHV Insurance with the Financial Supervision Authority, as well as disclosed LHV's green projects and activities to reduce our impact on climate.

While Q1 was characterised by a sharp drop in stock markets, the markets showed a strong recovery in Q2. All pension funds managed by LHV Asset Management showed a positive yield in Q2, while the funds with the greatest stock market risk also generated the highest yield. The number of active pension fund clients has somewhat risen and is now close to 179 thousand, adding 1,200 customers in Q2.”

Report of LHV Group can be found 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 and LHV Varahaldus. LHV employs about 470 people. LHV’s banking services are used by about 224,000 clients, and pension funds managed by LHV have about 179,000 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.

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.