AS LHV Pank, a subsidiary of listed Estonian financial services group AS LHV Group, and Danske Bank A/S have signed an agreement which will see LHV acquire Danske Bank's business unit which operates Estonian corporate and public sector credits, which as at the end of April amounted to approximately €312 million.
LHV Pank and Danske Bank have reached an agreement on the price of the transaction. A discount of €19 million will be subtracted from the volume of the portfolio as calculated at the moment of the transaction, LHV informed the stock exchange on Monday.
The transaction will be finalized in October 2020 and the final scope and price of the transaction will also be determined then. The volume of the portfolio is anticipated to amount to €280 million at the moment of finalizing the transaction. The Competition Authority of the Republic of Estonia will need to grant permission before the transaction can be finalized.
The agreed transaction is not a transaction between related parties.
Madis Toomsalu, CEO of LHV Group, said: "This is an important event for us. As a result of realization of this transaction the loan portfolio of LHV will grow by about 15 percent 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."
He added: "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."
The business unit to be acquired by LHV consists of the credit portfolio of Estonian corporate clients and the public sector, the volume of which is €312 million. Approximately 42 percent of the portfolio consists of corporate loans, while loans to local governments make up 54 percent.
According to LHV's assessment, the portfolio 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 of employees will be determined when the transaction is finalized.
With the transaction, LHV Pank will take over from Danske Bank the servicing of about 670 business clients and 85 public sector customers.
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 almost €1.75 billion. With the acquisition of the business unit, the portfolio will grow by about €280 million. In addition to the existent deposits, LHV will raise a total of €250 million 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 programs 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 programs 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 raised through deposit mediating platforms where Raisin and Deposit Solutions are the principal partners for LHV. Through these platforms, LHV will acquire deposits of German, Austrian, Dutch and Spanish private individuals.
When finalized, the additional profit from the portfolio acquired through the transaction will be €4 million 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 in 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 have to be reckoned with at the beginning of the transaction.
Acquiring the business unit of Danske Bank which operates the loan portfolio of Estonian corporate customers and the public sector requires in total €22 million of funds from LHV. At least €15 million of this is LHV Tier 1 funds and €7 million of which is LHV Tier 2 funds. In May, the LHV Group raised €15 million of additional Tier 1 capital that will also be used to finance this transaction.
It is possible that LHV will need to raise €15 million 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, impairments and the issuing of new loans to customers.
LHV Group 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.
Editor: Helen Wright