NLB D.D. (NLBR) – Equity Research Update: Q3 2025 Resilience and Valuation Re-Rating

I. A. Investment RecommendationRating: BUY (Reaffirmed)Target Price (TP): 209.00 EURUpside Potential: 16.1% (Based on a current market price of 180.00 EUR)NLB Group’s Q3 2025 results mark a critical inflection point, confirming that the bank has effectively countered the primary sectoral headwind: Net Interest Margin (NIM) compression following the ECB rate cut.1 The bank’s ability to achieve a 2% sequential increase in Net Interest Income (NII) in Q3 is a highly positive surprise that significantly de-risks the short-term earnings outlook.This operational resilience, driven by superior volume growth and structural balance sheet adjustments, validates the Group's status as a top-tier regional player in Southeast Europe (SEE). Consequently, the valuation thesis is strengthened, warranting a sustained price target of 209.00 EUR, previously the high-end consensus forecast.2 B. Key Q3 2025 Performance HighlightsMetricQ3 2025 (Quarterly)YTD 9M 2025 (Cumulative)Key InsightNet Profit (PAT)EUR 131.6 millionEUR 406.0 millionStrong profit accumulation supports full-year beat expectation.Total Loan Growth 11% YTD Outpaces consensus (9.1% FY25E 2), validating high-volume strategy.Net Interest Income (NII)+2% QoQ Resilient Direct mitigation of the "Income Risk" highlighted in the sector review.Net Fee & Commission Income (NFCI)N/A+8% YoY Accelerated diversification (up from 5% in H1 3).Topline (Total Revenue)N/AEUR 963 million Resilient performance despite 150bps YoY drop in interest rates.II. Operational Resilience and Income Risk Mitigation The core of the updated investment thesis lies in NLB’s successful navigation of the Income Risk (Dohodkovno tveganje) environment, a critical concern identified by regional regulators.A. Countering NIM Compression with Volume and StructureThe ECB's June rate cut 1 was expected to trigger an acute NII decline in H2 2025, as assets re-price downwards faster than funding costs. NLB's Q3 results decisively counter this narrative:NII Growth: The 2% quarter-on-quarter NII growth demonstrates the bank's successful "deliberate reduction of NII sensitivity with enhancement of long-term exposures." This structural adjustment has largely insulated the bank from the adverse rate environment, a significant competitive advantage over less agile peers.Loan Volume as the Profit Driver: NLB’s aggressive market expansion has proven to be the most effective hedge against margin pressure. Gross loans grew by 11% YTD, with SEE markets achieving an impressive 13–14% growth. This successful execution of a high-volume strategy confirms that management has secured the necessary operational leverage to sustain profitability.B. Diversification and Operational ExcellenceThe quality of earnings is enhanced by the robust growth in non-interest sources:Accelerated NFCI: Net Fees and Commissions accelerated to 8% YoY growth in the first nine months, significantly higher than the 5% YoY reported in H1 2025.3 This is driven by strategic initiatives to expand the service ecosystem, including asset management, bancassurance, and trade finance. This stable, non-interest-based revenue stream provides a crucial buffer against future macroeconomic volatility.Cost Control: While the bank continues to make "transformational strategic investments" in technology and AI, the clear strategic goal remains to increase speed-to-serve and reduce cost-to-serve. These investments, focused on digital transformation and moving towards a customer-centric model, are the foundation for maintaining a favourable Cost-to-Income (C/I) ratio (consensus 48.1% FY25E 2).III. Strategic Trajectory and 2030 AmbitionsThe Q3 results validate the confidence in NLB’s ambitious 2030 targets of €50 billion in Total Assets and €1 billion in Net Profit.SEE Growth Engine: The bank is leveraging the structural potential of the SEE region, which exhibits banking penetration levels approximately half that of the Eurozone. The 13–14% lending growth in these markets is proof that NLB is successfully capturing this organic opportunity. This strong positioning and execution reinforce NLB's goal of becoming the undisputed regional champion.Digital and Organisational Innovation: The Supervisory Board explicitly recognizes that achieving scale requires "to smartly and relentlessly accelerate our digital and organisational innovation." Continued investments in technology and talent are expected to increase operational efficiency and drive higher customer satisfaction (transactional NPS), underpinning the long-term C/I ratio improvement.Capital Strength: The balance sheet remains "very robust," with sound portfolio quality and a strong funding base achieved without material increases in average funding cost. This capital strength (CET1 consensus 15.5% E 2) is vital, enabling the bank to pursue its M&A consolidation strategy across fragmented SEE markets while continuing its aggressive capital return policy (consensus dividend 12.86 EUR E 2).IV. Valuation and Forecast RevisionA. Earnings Forecast Revision (FY 2025E)Based on the 9M PAT of EUR 406.0 million, the bank is on track to comfortably exceed the implied consensus earnings.MetricPrevious H1 Assumption (PAT H2)Revised 9M Data (PAT 9M)Revised FY 2025EForecast YTD PAT (9M)N/AEUR 406.0 million Q4 2025E PATEUR 148 million (Q2 level) 5EUR 130 million (Conservative estimate)N/AFY 2025EHigh confidence in reaching high-end consensus RoE.The earnings trajectory remains strong, reaffirming the high consensus RoE of 14.5% for 2025E and 13.7% for 2026E.2 This sustainable, high return on equity, significantly above the cost of equity, is the core justification for a premium valuation.B. Valuation Methodology (Reaffirming TP 209.00 EUR)The continued exceptional operational performance and strong strategic validation post-Q3 warrant the application of a higher premium multiple.We maintain the target price of 209.00 EUR, which is anchored by a Price-to-Book (P/B) multiple of 1.27x on the Book Value Per Share (BVPS).BVPS (June 30, 2025): 164.9 EUR 6Justified P/B Multiplier: 1.27x (Premium over the previous 1.14x, reflecting reduced income risk and confirmed strategic growth)Target Price Calculation: 1.27 x 164.9 = 209.42 EURThis target represents the value of a high-growth regional consolidator with proven execution capabilities in mitigating macro headwinds. At a current price of 175.00 EUR, the resulting 16.3% upside confirms the strong BUY recommendation.