The Estonian Competition Authority on Friday granted AS LHV Pank permission to acquire the Estonian corporate and public sector credit portfolio of Danske Bank A/S.
The transaction will be finalized in October of the current year, when the final scope and price of the transaction will also be determined, LHV Group told the stock exchange.
Danske Bank's business unit operating the Estonian corporate and public sector credits 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, according to which a discount of €19 million will be subtracted from the volume of the portfolio as calculated at the moment of the transaction.
As a result of the realization of this transaction, the loan portfolio of LHV will grow by about 15 percent. The volume of the portfolio is anticipated to amount to €280 million at the moment of finalizing the transaction.
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. About 42 percent of the portfolio consists of corporate loans and 54 percent 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 finalizing 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.
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, LHV said.
The rest of the financing will be involved through deposit mediating platforms where Raisin and Deposit Solutions are the principal partners of LHV. Through these platforms LHV acquires the deposits of German, Austrian, Dutch and Spanish private individuals.
When finalized, the additional profit from the portfolio acquired through the transaction, will be four million euros per year. On average, the transaction will improve the return on equity (ROE) of LHV by approximately 0.4 percentage point 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.
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 of own funds from LHV. At least €15 million of this is Tier 1 own funds and €7 million of which is Tier 2 own funds.
In May, LHV Group included €15 million of additional Tier 1 capital that will also 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 the impairments and the issuing of new loans to customers.
Editor: Helen Wright