I’ve been following NLB closely for the last 4 years and it’s by far my largest position. Small clarification regarding dividends – the announced payout of 500 mil eur refers to the 4 years period of 2021-2025. So far, the payout for ’21 was 100 mil and 110 mil for ’22 (55 mil still to be paid in December '23). This leaves 290 million to be paid out in the next 2 years – hence, current sell side projections are increase of dividend to 130 mil. for 2023 and 160 mil for 2024.
Similar dynamic was confirmed by the management. From the latest q3 ’23 earnings call: “…The real question, of course, with such results is what's happening with the dividend. So we still here show the old cumulative EUR 500 million payout promise, which means that, of course, the upcoming 2 years, there would be an increasing -- a meaningful increase in dividend every year.”
This is already quite attractive return, but it’s not the whole story. As the bank will probably earn around 500 mil eur only in ’23, even this increased dividend is much lower than the dividend payout ratio of 70% that was communicated in the IPO prospectus.
From the q3 ‘23 earnings call: “
“On the other hand, clearly, if you're delivering EUR 0.5 billion almost of profits, right? It is paying out 110 million and then a bit slightly growing the dividends, enough from the eyes of the investors. It's a legitimate and valid question…”
Accordingly, in almost every earning call in the past 6-7 quarters, investors are questioning, if and when, the bank plans to return to its 70% dividend payout ratio. So far, the management explanation has been that they are accumulating capital for one or more accretive M&A opportunities (in the amount of up to 4Bn eur RWA). This is not negative per se, because as you wrote in your write up, the two M&A deals they’ve done so far, have been incredibly successful.
But as no M&A deal has crystallised in the past 12 months, the management has been more open in discussing the capital allocation strategy going forward. In the latest earnings call they announced that the Board will be looking at all options and will communicate the outcome on the Investors Day, on 9th of May 2024.
From the q3 ’23 earnings call: “
“We have announced and now we can formally, of course, also confirm that as of December, we will officially kick off the strategising process within which we will really try to understand the revenue push for organic and/or M&A evolution in the upcoming midterm period…”
“So the news is good. We would not be paying less. We would eventually be paying more, but this, of course, depends on whether we will be able to find really meaningful value-accretive alternative deployments of capital. We hope that we have and we believe that this has been the case that in the last 3 to 5 years, we have gained your trust that we have been able to transact in terms of M&A. That we have been able to meaningfully not only acquire, but also integrate.”
“…So in case until end of April, mid of May, when we communicate a new strategy on the 9th of May, we didn't have anything meaningful on the horizon in terms of really concrete sizeable acquisitions, this might, I'd say, might well lead to a conclusion that we significantly -- to size up the dividend, right? We might think of share buybacks, but that's all hypothetical because this is all has to enter, of course, now the pipeline of discussions with our Board. The capital absorption is very high. The total capital adequacy is very high. The organic growth does not show such a potential to be able to consume this EUR 4-plus billion of risk-weighted assets, right?
So in this respect, if there is no really meaningful further acquisition potential in terms of really actionable assets in the upcoming, let's say, 12 months or 18 months, then this might rather mean we really revise the dividend payouts. But it's a bit too early. So we kindly ask you for a bit of patience, patience and trust.”
I personally think that M&A is still the most probable option (the bank has been trying to enter Croatian market for some time and this would be a very good outcome, but as you wrote, there are political hurdles, that might get resolved soon enough. Also, Albania has been mentioned as a potential market in the past, etc.).
But in case there is no meaningful opportunity, it is very positive that the management has started to communicate willingness to further significantly increase the dividend or even start buybacks.
Analyst question: "Given the share price valuation, is buyback something you consider on top of dividend must be better investment -- must be better investment than any M&A?"
Blaž Brodnjak:
This is definitely a valid alternative. We have so far not actually been actively working on it. But within the comprehensive assessment of deployment of capital… …this is not excluded. It is just that -- it is, of course, a bit more complex process requiring more tedious regulatory approvals and so on. But I would not, of course, eliminate it is an option, and it will be communicated in the package for the upcoming AGM. Archie, will you add anything?
Archibald Kremser
Nothing to add other than we hear from shareholders 2 different versions. One would like it, the other one would like it less because, obviously, the drawback is to take out liquidity from the stock. But we understand the question. I think more materially, we are focused on dividends as capital return. But yes, it's something we also try to understand better in whether there's a merit to it.
Hope this helps in giving bit more color on capital allocation options going forward. Thanks again for the great write up.
Yeah, so basically, expect their interest rate spread to tighten. So either rates drop again, or they will have to pay more interest on their borrowing and deposits
Great write up Iggy, thank you!
I’ve been following NLB closely for the last 4 years and it’s by far my largest position. Small clarification regarding dividends – the announced payout of 500 mil eur refers to the 4 years period of 2021-2025. So far, the payout for ’21 was 100 mil and 110 mil for ’22 (55 mil still to be paid in December '23). This leaves 290 million to be paid out in the next 2 years – hence, current sell side projections are increase of dividend to 130 mil. for 2023 and 160 mil for 2024.
Similar dynamic was confirmed by the management. From the latest q3 ’23 earnings call: “…The real question, of course, with such results is what's happening with the dividend. So we still here show the old cumulative EUR 500 million payout promise, which means that, of course, the upcoming 2 years, there would be an increasing -- a meaningful increase in dividend every year.”
This is already quite attractive return, but it’s not the whole story. As the bank will probably earn around 500 mil eur only in ’23, even this increased dividend is much lower than the dividend payout ratio of 70% that was communicated in the IPO prospectus.
From the q3 ‘23 earnings call: “
“On the other hand, clearly, if you're delivering EUR 0.5 billion almost of profits, right? It is paying out 110 million and then a bit slightly growing the dividends, enough from the eyes of the investors. It's a legitimate and valid question…”
Accordingly, in almost every earning call in the past 6-7 quarters, investors are questioning, if and when, the bank plans to return to its 70% dividend payout ratio. So far, the management explanation has been that they are accumulating capital for one or more accretive M&A opportunities (in the amount of up to 4Bn eur RWA). This is not negative per se, because as you wrote in your write up, the two M&A deals they’ve done so far, have been incredibly successful.
But as no M&A deal has crystallised in the past 12 months, the management has been more open in discussing the capital allocation strategy going forward. In the latest earnings call they announced that the Board will be looking at all options and will communicate the outcome on the Investors Day, on 9th of May 2024.
From the q3 ’23 earnings call: “
“We have announced and now we can formally, of course, also confirm that as of December, we will officially kick off the strategising process within which we will really try to understand the revenue push for organic and/or M&A evolution in the upcoming midterm period…”
“So the news is good. We would not be paying less. We would eventually be paying more, but this, of course, depends on whether we will be able to find really meaningful value-accretive alternative deployments of capital. We hope that we have and we believe that this has been the case that in the last 3 to 5 years, we have gained your trust that we have been able to transact in terms of M&A. That we have been able to meaningfully not only acquire, but also integrate.”
“…So in case until end of April, mid of May, when we communicate a new strategy on the 9th of May, we didn't have anything meaningful on the horizon in terms of really concrete sizeable acquisitions, this might, I'd say, might well lead to a conclusion that we significantly -- to size up the dividend, right? We might think of share buybacks, but that's all hypothetical because this is all has to enter, of course, now the pipeline of discussions with our Board. The capital absorption is very high. The total capital adequacy is very high. The organic growth does not show such a potential to be able to consume this EUR 4-plus billion of risk-weighted assets, right?
So in this respect, if there is no really meaningful further acquisition potential in terms of really actionable assets in the upcoming, let's say, 12 months or 18 months, then this might rather mean we really revise the dividend payouts. But it's a bit too early. So we kindly ask you for a bit of patience, patience and trust.”
I personally think that M&A is still the most probable option (the bank has been trying to enter Croatian market for some time and this would be a very good outcome, but as you wrote, there are political hurdles, that might get resolved soon enough. Also, Albania has been mentioned as a potential market in the past, etc.).
But in case there is no meaningful opportunity, it is very positive that the management has started to communicate willingness to further significantly increase the dividend or even start buybacks.
Analyst question: "Given the share price valuation, is buyback something you consider on top of dividend must be better investment -- must be better investment than any M&A?"
Blaž Brodnjak:
This is definitely a valid alternative. We have so far not actually been actively working on it. But within the comprehensive assessment of deployment of capital… …this is not excluded. It is just that -- it is, of course, a bit more complex process requiring more tedious regulatory approvals and so on. But I would not, of course, eliminate it is an option, and it will be communicated in the package for the upcoming AGM. Archie, will you add anything?
Archibald Kremser
Nothing to add other than we hear from shareholders 2 different versions. One would like it, the other one would like it less because, obviously, the drawback is to take out liquidity from the stock. But we understand the question. I think more materially, we are focused on dividends as capital return. But yes, it's something we also try to understand better in whether there's a merit to it.
Hope this helps in giving bit more color on capital allocation options going forward. Thanks again for the great write up.
You should do write ups, great comment! :)
Beautiful write up, thank you. I'm from Slovenia and this is my biggest position by far.
Btw, coroporate tax in Slovenia is 19%, but it's possible it will increase to 22% in 2025.
Did you calculate rough ROEs for future years based on lower interest rates?
(Saw above roes for next year's but are they based on analysis or mere rough guesses, which is OK?)
Since market believes I sharply lower rates, and minimum reserve requirements do not earn interest anymore....
Yeah, so basically, expect their interest rate spread to tighten. So either rates drop again, or they will have to pay more interest on their borrowing and deposits
Great write up. Well structured.
P/B of Sava is wrong. And probably highlights that P/b closer to 1 is rather unlikely for NLB.
I do think NLB prob has more stable better earnings power than Sava. I see I pulled the P/BV from the LSE GDR which gives the wrong value ur right.
Man this is long haha
Yeah, I guess people need a lot of info before getting comfortable with some random bank so I provided it. Still could of doubled it easily I think.
I agree. With halyk I tried to not go that long, and I think that the length was perfect.