Digitalization And Western Balkans Expansion Will Drive Stronger Long-Term Earnings Quality

Catalysts

About Nova Ljubljanska Banka d.d

Nova Ljubljanska Banka d.d is a leading universal banking group in Slovenia and the Western Balkans, providing retail, corporate, leasing and asset management services across its regional footprint.

What are the underlying business or industry changes driving this perspective?

• Acceleration of group wide digitalization, including the NLB DigIT hub, rollout of a unified mobile platform and robot assisted processes, is set to lift self service levels above 80 percent and reduce headcount over time. This supports revenue resilience while structurally improving the cost income ratio and net margins.
• Strong loan growth in underpenetrated Western Balkans markets, where credit volumes and loan to deposit ratios are still below Eurozone averages, creates a long multi year runway for asset expansion at attractive spreads. This underpins sustained revenue and earnings growth.
• Scaling of asset and wealth management and bancassurance offerings, first proven in Slovenia and now being deployed in Serbia and North Macedonia, should materially increase fee and commission income that is capital light. This lifts overall returns on equity and earnings quality.
• Continued integration of leasing businesses, with early synergy realization and planned full time employee reductions, is expected to unlock operating leverage on a larger balance sheet. This enhances pre provision income, net margins and ultimately earnings per share.
• Progress toward an A credit rating and disciplined capital management with a 50 to 60 percent payout policy position the bank to fund double digit loan growth while maintaining attractive, growing dividends. This can support valuation through higher sustainable earnings and reduced perceived risk.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Nova Ljubljanska Banka d.d's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 38.3% today to 37.3% in 3 years time.
• Analysts expect earnings to reach €550.7 million (and earnings per share of €27.57) by about December 2028, up from €493.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €637.6 million in earnings, and the most bearish expecting €487.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.4x on those 2028 earnings, up from 7.1x today. This future PE is greater than the current PE for the SI Banks industry at 4.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A sustained decline in euro and local interest rates, combined with already low deposit pricing, could cap or compress net interest margin above 3%, limiting the benefit from strong loan growth and constraining revenue and earnings growth.
• Rising stress in specific industrial pockets such as steel and automotive suppliers, including a few mid sized and larger corporate exposures already moved to Stage 2, could trigger higher than guided 30 basis points cost of risk, eroding net margins and reducing earnings.
• Ongoing acceleration of digitization, IT investment and talent costs running at 7 to 8 percent like for like growth and up to 10 to 12 percent of revenues for technology, might not be fully offset by efficiency gains and headcount reductions, putting upward pressure on the cost income ratio and squeezing earnings.
• Regulatory and political interventions in key growth markets, such as potential caps on fees and commissions or pressure on lending and deposit rates in Serbia and other Western Balkans, could slow mid single digit to high single digit fee growth and compress overall revenue and net margins.
• Planned balance sheet expansion toward EUR 50 billion, combined with Basel IV trading book treatment and higher risk weighted assets in non euro subsidiaries, could force tighter capital management and constrain loan growth or dividend payouts around 50 percent, dampening the outlook for earnings growth and shareholder returns.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €201.39 for Nova Ljubljanska Banka d.d based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €1.5 billion, earnings will come to €550.7 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of €175.5, the analyst price target of €201.39 is 12.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.