Earnings call transcript: NLB’s Q1 2025 sees strong loan growth and digital push

Nova Ljubljanska Banka (NLB) recently reported its Q1 2025 financial results, showcasing robust loan growth and a continued focus on digital transformation. The bank’s net operating income reached €126 million, supported by a 20% increase in loans year-on-year. With a market capitalization of €3.07 billion and a P/E ratio of 5.27x, InvestingPro analysis suggests the stock is currently trading below its Fair Value. The bank’s financial health score of "GOOD" and consistent revenue growth of 5.68% year-over-year underscore its solid market position.

Key Takeaways

• NLB achieved a net operating income of €126 million in Q1 2025.
• Loan growth surged by 20% compared to the previous year.
• The bank is accelerating its digital transformation efforts.
• A proposed 50% dividend payout was announced.
• The cost-income ratio is targeted to drop below 45%.

Company Performance

NLB demonstrated strong performance in the first quarter of 2025, with significant loan growth and solid deposit increases. The bank’s efforts in digital transformation are evident, as it aims to digitize 80% of new production processes. The integration of Summit Leasing and a focus on cost containment are strategic moves to enhance operational efficiency.

Financial Highlights

• Net operating income: €126 million
• Loan growth: 20% year-on-year
• Deposit growth remains solid
• Cost-income ratio: 46.7%, targeting sub-45%
• Proposed dividend payout: 50%

Outlook & Guidance

NLB maintains its 2025 revenue guidance, assuming European Central Bank rates remain stable at 2%. The bank expects continued loan growth and is exploring potential mergers and acquisitions in banking, leasing, and insurance sectors. A focus on digital transformation and achieving a 15% profitability target are key priorities.

Executive Commentary

"NLB is all about resilience," stated CEO Blas Brodnjak, emphasizing the bank’s strong market position and adaptability. He also highlighted the importance of digitization, saying, "We want to see a step change in digitization." CFO Archibald Kramsberg addressed cost management, noting, "Our ambition is to moderate labor cost inflation to maximum global inflation levels."

Risks and Challenges

• Economic uncertainties in key export markets could impact growth.
• Headcount reduction plans may affect employee morale and productivity.
• Potential compression of net interest margins poses financial risks.
• The pace of digital transformation may face technological and operational hurdles.

Q&A

During the earnings call, analysts inquired about the bank’s net interest margin compression and cost of risk expectations. The management also addressed the digitization strategy and explored potential economic growth scenarios, reflecting the bank’s proactive approach to navigating market challenges.

Full transcript - Nova Ljubljanska Banka dd Ljubljana (NLBR) Q1 2025:

Chorus Call Operator, Conference Operator, Chorus Call: Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome and thank you for joining the NLB Group Conference Call and Live Webcast to present and discuss the NLB Group First Quarter twenty twenty five Financial Results. All participants will be in a listen only mode and the conference is being recorded. The presentation will be followed by a question and answer session.

At this time, I would like to turn the conference over to Mr. Blas Brodnjak, CEO Mr. Archibald Kramsberg, CFO Mr. Andreas Burkhardt, CRO. Mr.

Brodnjak, you may now proceed.

Blas Brodnjak, CEO, NLB Group: Thank you very much. As always, I’d like to draw your attention to the classical disclaimer. Warm welcome to the regular performance call. It’s been another very strong quarter behind us. It is obvious that there has been a stretch given the rate environment, given certain tensions in the region as a whole.

Of course, there’s been significant repricing of public sector wages, so there has been quite some high inflation pressure still coming as a tale of previous inflation trends. But generally, what we can report is a very strong growth of business, and that’s the most important message. We have been able to offset the pressure of rates decline by significant growth, be it both organically or, of course, to the M and A, significant contribution of last year’s acquisition of Summit Leasing and its subsidiaries, asset management business, but above all, very strong organic evolution. That’s, I think, the most important message. We’ve seen very strong growth in retail and corporate and more or less universally so across the region.

Slovenia as a home turf, Serbia more or less has a very second strong base, second very strong base. And then, of course, the entire subsidiary landscape. All client segments, all product ranges, very good output in terms of fee income generation. So still, this ancillary universe performing very well. There’s been a temporary, I would say, tension in terms of investment.

I mentioned, of course, on one side the tales of inflationary pressures now more or less demonstrated by significant growth of talent remuneration, which is kind of catching up a bit, which is kind of normalization. But on the other hand, conscious investment. We have really decided a couple of months ago that we want to fast forward and accelerate digitization efforts. We have communicated within our Strategy 02/1930 communication that in principle, we aim for more than 80% of new production being conducted end to end digitally. But we have now decided more or less that the gradual development is maybe of a secondary priority.

We want to see a step change, which means that we really want to now front load certain investment in this area. You will see some one off, of course, evidence of that as well in terms of strategy implementation investment, in terms of clearly adding almost 300 people from leasing and asset management space. So this naturally brings a certain increase of the general cost base. But on the other hand, as said, there is a recurring evolution, which is contained to what we believe is proper remuneration of talent and conscious investment. And this is going to cater for value and originate value in the subsequent periods.

So the main message is the growth is there, significant growth of loan book organically and through the M and A. There is absolutely activity in place on our end to try to understand any actionable assets in the region to grow further through the M and A, both in banking, leasing space and of course, also eventually insurance, captive insurance. So we have been really consciously working on that and in this respect, trying to build the base of for growth also through M and A opportunities. But when it comes to general performance, we claim it’s been a very strong quarter. So given the fact that the rate decline has been really rapid in the last twelve months, we’ve more or less been able to be balanced in terms of net interest income evolution, in terms of total income evolution, delivering of what we’ve been guiding for.

And as said, in terms of cost, it is on one side indeed cost, but on the other side, this is really the conscious investment. And if you look at the costincome ratios of 46.7%, this is still south of what we have been guiding for the whole year. And in the second half of the year, of course, there is going to be much more cautious evolution in this respect as well. When it comes to general performance of asset quality, despite the full turmoil, more or less globally, and now recent even incidents we see in South And Asia, I’m today consciously wearing a symbol and that’s the heart of Sarajevo, which is simply a symbol of peace, but above all resilience. And this is who we are.

NLB is all about resilience. The structure of our books, the diversity of our books, diversification of our business is so significant that even in such turbulent environments, we can deliver upon key KPIs. And in terms of quality of production, so there is no significant deterioration of loan books, both in corporate or retail. There is indeed a kind of a normalization of cost of risk, which we have been guiding for, for ten years. It just didn’t crystallize.

So far, since there have been always continuously some write backs coming from the legacy portfolios. So in the first quarter of this year, they have not been recorded to the material extent. Some, but of course, not so material that this would then mask what is a normal recurring performance of a universal financial services provider. So 37 basis points cost of risk. Andreas will give you more flash to it.

It is on lower end of the guided range. There are some one off components into it. So towards the end of the year, will be talking about the guidance. We would not see this changing materially in adverse way. When it comes to profitability and delivery of above all normalized ROEs and RoRox in this respect, I believe this is a very strong output.

Net interest margin evolution, of course, is going in a certain direction, which was unavoidable, but through a set of various measures. We have addressed this very reasonably. So we have really we’re further reducing net interest income sensitivity to now EUR 67,000,000, let’s say, at one hundred percent one hundred basis point shift. And that’s, we believe, quite reasonable. We’ve had quite a successful issuance in Q1 of further notes at 3.5% yield, which is, we believe, now a very solid premium.

We need to pay still, but generally a very good issuance. And what is the most important message, I guess, to the stakeholders at this point of time is that the Management Board has suggested to the AGM, together with the Supervisory Board, obviously, to distribute first half of what is a growing dividend, significantly growing dividend, distributing 50% of last year’s profits, carrying at today’s prices north of 9% gross dividend yield, which is, we believe, a very solid promise. We’ve been active in various dimensions. So besides now finally integrating leasing business, there’s going to be some words and also dedicated to that later on. But there have been some add ons in terms of smaller acquisitions of, let’s say, mobile platforms, mobility, right, mobility platforms, web solutions in this respect associated with our listening business and by that addressing end to end mobility and so on.

What is the most important message, I guess, at this point of time, one of the most important ones in terms of structure and governance is that and I claim this has been a very solid proof of who we are and what we stand for and how attractive we have become as a business as a whole, that I’m absolutely glad that Reinhard Herr has decided to join the team as a Chief Transformation Officer and in the future, COO. And by that, adding real capacity into transition into what is going to be a digital bank. So our commitment is to be a digital bank in 02/1930 with more than 80% of delivery, more or less end to end digital. And Reinhard is going to help us, and we are happy he joined the team at the June subject, obviously, to regulatory clearances, which I don’t see as being potentially problematized. So we would welcome him at the June, he would immediately jump on and has hit his hands full.

He’s been helping us more or less already throughout the strategizing period, preparing the strategy as a senior McKinsey partner, and we are really happy that he’s investing his team in this game and by that becoming really a co contributor to the future success of our bank. We have opened a new gallery, which we perceived as not very meaningful for outside observers, but it is a very important symbolic message because NLB has resumed a buyout program of art pieces. We are talking about visual art. We’ve been more or less holding the largest proprietary private collection of contemporary Slovenian art. It contains more than 2,000 pieces, but we have been now starting adding with this new gallery that we opened, where we opened last in a couple of years, a couple of years ago, the Bank Museum of Slovenia.

Also the gallery, which is contributing every year pieces of contemporary art, visual art from all of the countries of our presence. And we will be adding Albania as well since this has been one of our target markets for the future as well. So in twenty to thirty years, I claim this is going to be one of the most relevant intersections of the contemporary art of the region. By that, I would pass the word to Archibald, who will then guide you through more details in financial terms. Andreas will talk about the asset quality, and I will come back with the outlook.

Thank you.

Archibald Kramsberg, CFO, NLB Group: Thank you, Plush. Very warm welcome from my side. On the macro front, I would say largely a stable environment despite the noise and we’re actually looking forward to a more stable Europe in that sense. We all follow the news flow around Germany, which broadly speaking is positive also for our region. So in that sense, we believe outlooks remain solid and then quite visibly above Eurozone.

So not much has changed here, here and there, slight shifts, ups or downs, but everything supporting what was mentioned before, the very strong organic growth environment and that remains to be the place the case going forward. You see the fundamentals remain strong and look at the loan growth across the region on the lower parts of the chart, they are all solidly single or even double digit. And this has, of course, helped very much our own portfolio. We’ll talk about that. There is these days a lot of talks about trade wars, and we just want to reemphasize our recurring message of not just the region is fairly well diversified in terms of its exports, but also the kind of the mix of the economies is fairly well diversified.

And of course, us as a bank serving this region, we are mirroring this picture more or less. So that’s, I think, a solid message despite all the noise around trade wars. So this region mostly is servicing into Europe. And of course, with Europe getting stronger, that is broadly speaking positive also for us. On the business performance as such, you’ve seen the key results, strong quarter, 01/2020 print of 126,000,000, give or take.

If you look year on year, actually slight even increase of revenue. So that’s, I think, a remarkable achievement despite a massive, of course, rate evolution that we all follow from 4% to now 2.25%. So that’s fairly significant in terms of rate evolution with one of our key reference rates. So I think we’ve digested that well. And as Plush said, it’s mostly or it is a function of very strong organic growth.

Look at loan growth year on year 20%. That is of course also including absorbing the acquisition of Summit Leasing. And also deposit growth, which, of course, is increasingly a matter of attention, of course, is solid, I would say. Quarter on quarter, you see a fairly normal evolution, I would say. And following trends, you see, again, very strong year to date loan growth.

We are very happy to observe gross loans growing 3% year to date. So that speaks for very solid foundation for full year guidance, which we’ll discuss later. All of this is underpinned by, I would say, more efficient balance sheet management. You see LTV going up before the structurally geared balance sheet a bit more towards longer durations, more fixed rate lending. We’ll talk about that in a minute.

And I think the matter of attention for us certainly is cost dynamics, cost income, which currently is at an okay level, but below our ambition of going to less than 45%, which I absolutely believe is feasible. We just today at Supervisory Board discussed so many positive signals on digital business uptake, which, of course, will fundamentally release a fairly significant amount of the fixed cost base going forward. And we’ll very much get focused on that and expect you to update frequently on efforts in that space. Of course, the joining of a CTO will help us getting even better organized around this agenda. On the NII, you see that, as I said, solid performance.

We digested, of course, yet other rate drops. Our current baseline assumes still a 2% year end lending rate for deposit rate for ECB. Let’s see, we put a 50% or so chance on that scenario, And I think the jury is really out. Our sensitivity, we’ll talk about it, is, of course, with significant delay to any such move. If you look at the margin compression over a year of you see some 25, 30 bps.

That is following an ECB drop of 175 bps. So there is a factor of one to five or so between whatever ECB does and however it affects our margin. So that’s, of course, a system which has lots of latencies. Of course, a function also of very active balance sheet management. On the evolution of NII, you see in numbers what I was mentioning before, reshift of balance sheet from cash to lending, also taking on bigger securities position, all of that structurally improving the balance sheet and, of course, placing as much as possible into loan business.

I mentioned a very strong loan growth. And that, in essence, continues in this year. You see quarter on quarter a slight decline, but that is mostly of technical nature given the funding operation we undertook in January. And of course, technically speaking, there is less day counts in Q1. NII sensitivity, you see here a kind of a quarterly evolution over the last couple of quarters.

It’s almost cut in half, which I think is really a quite substantial achievement. So here, we got the evolution right in a sense that we took action well on time, reducing NII sensitivity, not just in absolute, but also in relative terms. And you see here all the various positions that contribute to that. You see derivatives, of course, substantially improving the NII sensitivity these days. On non interest income, I would say solid continuation of a very successful story continuing with, in particular, worthwhile mentioning the continuous improvement on our service range, especially in the payment space.

We are now out with more or less customary payment services in all markets. So the Apple Pays and the likes and of course, we’ll continue to substantially invest in that space. This is just the beginning. Very much looking forward here to the results of the strategy deployment. In the meantime, I think a highlight remains our very successful investment fund and bank assurance franchise evolution, which in the meantime contributes really meaningfully and visibly to group.

And here, again, in markets like Serbia and Northern Macedonia, we’re just at the beginning of that evolution and journey. On the cost side, if you look at the normalized numbers year on year, 9% is rich. We acknowledge that. That is really a function of very much labor cost inflation. But to be honest, this has to come down and will come down.

So this dynamic will for sure not continue and will get much more focused also on headcount discipline because the labor cost per person will continue to go up. And for us, that’s a good thing because this region is just growing richer. So for us, that’s future revenue. If population earns more, that’s good for us. But of course, in terms of our own cost base, it puts all the more pressure on productivity, which is what we get extremely focused on going forward.

You see efforts ongoing on integrating summit leasing, so that will shed a headcount of some 45 people. We will reduce headcount by 100 and more headcounts in Serbia. And this is basically the beginning of an agenda of capacity adjustments going forward. And not to forget mentioning, we will consciously, but continue to invest in, of course, the digital landscape. So this is underpinning all the efforts of reducing fixed cost base.

As we mentioned earlier, the pickup of digital sales is really quite visible or starting to get very visible in the meantime in a number of markets. So we certainly want to take advantage of that also in the fixed cost base reduction. The balance sheet structure, as I said, I claim more efficient than last year. You see LTDs now in the mid-70s. That’s close to sweet spot, I would say, has still room to improve.

And you see a bit of a higher securities position, less cash. Cash has gone to loans, which also includes Summit leasing. On the deposit side, fairly similar structure. This is evolutionary, not revolutionary. And of course, a very, very valuable part of our franchise.

Very keen to continue to develop that, especially digital services will, of course, be key to maintain and grow this deposit base going forward. You see here the loan dynamics for this quarter, fairly strong performance across the range, not much more to be said about it, makes us very confident about our current guidance. You see here again the structure of the loan book in terms of fixed floats and the rate, the asset yields per se. And you see that the asset yields, of course, come down much, much slower than the base rate. So just to reiterate the point, base rate sensitivity or rate sensitivity is not to be mixed with base rate changes.

On the deposit dynamic, more or less flat around Slovenia and slight growth in our banks these days. It’s again a slight rebalancing in the markets from terms to sites in Slovenia, still partially into terms in other markets simply because there is partially very, very strong asset growth, which justifies to price up a little bit on term deposits to fund the very strong asset growth. And this is still, as you see in the numbers, a very, very profitable undertaking. You see that reflected in the deposit yields, which come down in Slovenia, given what I mentioned earlier, and continue to slightly go up in SEE banks. So of course, we get ever more focused, especially in our subsidiaries also on new customer acquisition and account relationships, which cater for the low cost deposit base.

On capital, again, continued story of fairly strong capital buffers. And that, of course, fully accounts already for the envisaged dividend of 50% of last year’s results. That’s fully factored in. And we still run buffer zones of some 300 basis points plus that caters still for if we were to entertain M and A, something in the ballpark of EUR 3,500,000,000.0, EUR 4 billion. And that is, in that sense, also unchanged.

We continue to work on efforts to, at some point, enhance our capital structure with AT1s. That’s continued effort. It’s more a matter of efficiency than ability. I think these days, capital markets would be very perceptive for any such undertaking. And we think at some point of something in the ballpark of EUR 300,000,000 as a new AT1 instrument.

Not to say too much about our MREL exposure. We are, of course, fully compliant with our funding operation in January. We more than fulfill requirements. And we think we got this right. In terms of pricing, spreads are now reasonable.

Rating is about to improve. So not much to be said further, and I pass on to Andreas on asset quality. Thank you.

Andreas Burkhardt, CRO, NLB Group: Yes. Archibald, thank you. On asset quality, well, no revolutions really. You’re pretty much used to the picture on the portfolio distribution. You see, of course, reflected the growth, which the colleagues both were already talking about.

Just as a reminder, last year, of course, this was additionally enhanced by the acquisition of Summit Leasing. So part of that growth from last year, especially retail consumer is a bias lead from that part. And that pushed also already also again a little bit up Slovenia from 48% to 49%. Asset quality remains very strong. What you saw in this quarter now a little bit more is staging in retail, whereas in corporate you see, well, actually fully flat development.

You remember last year, especially towards the end of the year, we had some jumps in staging, especially stage two on the corporate side. So here are no new surprises. That is very stable. In retail, we saw a little bit more inflows. This is already at that point of time more leveling out.

There was also one special effect which shall not repeat. Overall, still very, very good quality, but you see simply a little bit more movement than we saw sometimes in the past. But folio diversification is, of course, well, more or less unchanged. It’s very good. It’s very diversified.

Just please be a little careful when you compare with the last year. The logic is a little bit changed in the industries that’s coming from a legal regulatory change. But what you see here on that slide is the Q1 differences, which are very, yeah, moderate, normal, normally distributed, and especially, I mean, the few changes which are a little bit bigger in size, more or less know the biggest names here inside. This is very good quality, so here really nothing to worry about. Overall, NPL, well, increased in the first quarter by actually EUR 3,000,000.

Obviously, on the portfolio, this means still slightly, slightly shrinking NPL ratio. So also here, you can obviously see that there are no dramas from these NPLs. Still onethree is with zero delays. So basically, mostly in a healing phase and the coverage stays very, very solid and obviously above EU average. And geographically, the distribution remains as you would expect it.

Slovenia approximately half and then the rest distributed through our network roughly in a percentage as you would expect to see it given the size of these businesses. What we see, Blasch mentioned it, is actually on the NPL formation very moderate. On the cost of risk, a little bit of a normalization. It’s simply true that we see a little bit more smoke than when times were perfect. And we see on the other side less coming back from highly or fully provisioned items.

So that gives you now a little bit of a cost of risk charge. We are currently at 37 bps. I told you in retail, there’s a little bit of a one time effect if you sterilize it. For that, we are well, around 30 bps normalized. So that’s on the lower end of the guidance, and I’m actually very confident that we will solidly stay also this year within the guidance.

With this, I’m handing back over to Blasch for the outlook. Thank you. Thanks, Andreas.

Blas Brodnjak, CEO, NLB Group: So the main message here is that we have not changed the guidance. So I was mentioning the heart of Sarajevo being a symbol of resilience. Obviously, given the turbulence in economic environment and given the rate adjustments by the regulators, we are keeping the pace in terms of revenue. So this is really resilient operation. We are able to grow the business in terms of volumes and by that offset the pressure on economics of the business.

But on the other hand, clearly, the quality of this business is not suffering with this quick growth. So the asset quality remains more or less impeccable. Talking about cost of risk, we would rather see towards the lower end of the range than the upper end of the range, but this is a kind of a normal cost of risk. High single digit might as well be double digits, so we don’t change this right now. But if you look at the Q1 growth, if this were to stay, right, you would see even stronger performance in this respect.

There is clearly an ambition to pay out 50% of last year’s profits in two payments, right? The first tranche has already been convoked by the AGM. And hopefully then, of course, the stakeholders will support it at the AGM. On the other hand, clearly, as I said, we are not shying away from analyzing and eventually jumping on opportunities if they were to come our way, which was, of course, then might determine what would be happening with the second tranche or what would be happening clearly with AT1 issuances, which we would not be issuing just for the sake of issuing, but will be, of course, supporting the growth of business. And in this respect, that’s something that eventually might come.

The profitability is around this 15%, and this is from today’s perspective, but it’s, at the same time, really a function of further moves and further measures of the ECB. So we are operating, as Archibald said, with the assumption that 200 basis points, which might come quite soon in a matter of weeks, is here to stay towards the year end, right? And this is somehow, in our assumption set, a lending rate. So if this was to change, with more aggressive decline, of course, there are sensitivities, which we explained, right, and would require further measures. It’s never tethered as paribus.

It’s never just a vertical shift, means EUR 67,000,000 automatically by 100 bps. But of course, it’s something you need to then actively embrace in your set of assumption as an objective circumstance, which you have to deal with, right? So we are here showing this profitability metrics with the assumption of 200 basis points being real and true in a matter of weeks and then staying at that level. And that’s true also for the 2026 outlook, right, so for the upcoming year. So overall, the story of resilience, overall, the story of robust output in much less predictable and, I would say, much more adverse environment in terms of the rates, but at the same time, very, very clear focus, very clear focus on one side on territory of growth, clearly identified revenue pools, acceleration of strategic efforts towards digitization, leading then to efficiency improvements and cost containment.

Will not be able to, of course, reduce cost quickly, but we believe we can contain eventual growth. We will have less talents, different profiles of these talents and, of course, better paid talents, but much less, of course, manual interventions in the upcoming years. And that’s exactly the debate we’ve been having also today at the Supervisory Board meeting very, very, I would say, intensively. So overall, a good message, overall, a good value proposition. We’re still trading at below 6x earnings, right?

So pretty interesting opportunity still to invest and cordially invites I cordially invite everyone to still reconsider more investment. At the same time, the Management Board has chipped in a bit, right, in this quarter. So we have invested at the dip. And of course, we will be further supporting the growth of the share price, not only the share price. Clearly, we believe in this story that this is a story of future success.

It’s been a traditional successful story, but we believe the future in front of us is even brighter. I would stop here. Thank you very much for hanging in there and of course now opening floors for any questions and comments. Thank you.

Chorus Call Operator, Conference Operator, Chorus Call: Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press followed by one on their telephone. If you wish to remove yourself from the question queue, then you may press and 2. Those participating via the webcast, you may type your question via the live feedback box below the presentation. The first question is from the line of Diaz Miguel with Wound and Car.

Please go ahead.

Diaz Miguel, Analyst, Wound and Car: Hi, everyone. Thank you for the presentation and welcome to Reinhart. Good to have you on the team. I would like to better understand the underlying dynamics behind the net interest margin evolution this quarter, if that’s possible. So you had like 100 bps contraction in Euribor in the second half of twenty twenty four, plus two rate cuts in Serbia in the third quarter.

And still NIM remained solid, mean, presumably supported by higher share of fixed rate loans, the hedges, I mean so on. So now we see Euribor declining 38 bps in the first quarter of twenty twenty five, service flat and yet we see net interest margin declining 15 bps. Right? I see that there was a 36 bps drop in yields of the loan book in the first quarter. So, I would just like to understand why that was right now, while throughout the last year, the yield remained flat.

Can you please help me understand the underlying dynamics? Was this somehow just like some lag effect? And if so, like should we expect net interest margin to continue to compress in the coming quarters? Yes, that’s the first question.

Archibald Kramsberg, CFO, NLB Group: So I mean, it’s the mother of all questions. Thank you. So it’s there is so much going into this. And you mentioned a lot of these factors. It is, of course, as we said, we put lots of effort to improve the structure of the balance sheet so that it is less sensitive and we’ve outlined how and to which extent.

Then, of course, we continue to encourage fixed rate lending. You’ve seen a much higher level of fixed rate lending and retail lending in particular, especially in our subsidiaries is anyway at much higher levels than if you look at, let’s say, an ECP base rate. And so that’s simply a function of very strong loan growth, structural shift in the balance sheet. And of course, there’s also a bit of a time lag element in it. And I think the best way, if you really want to get a sense is look at our group NIMs.

They have compressed by, as I indicated before, sometimes 30 bps over a year. And ECB has dropped by 1.75. So that is a ratio of 1.5. And that’s a combination of all these measures. So going forward, that’s why we encourage readers of our balance sheet not to immediately take our NII sensitivity as a good handle of what’s happening in the P and L.

It’s giving you a basic sense. But of course, reality is more complex. And of course, we work very hard to keep this NII sensitivity as low as possible these days.

Blas Brodnjak, CEO, NLB Group: And there’s automatic lag because you sorry, because you have three months, six months, twelve months, your LIBORs depending on the structure of assets. And in this respect, of course, some reprice only in twelve months, some in three months, some in a month. So and that’s a structure that is that we usually we’re communicating also a table with the structure of your LIBOR sets, right? How much of it was six months, three months, twelve months Euribor. And this is like there is natural lag.

Diaz Miguel, Analyst, Wound and Car: Yes, understood. So just maybe if you could give us guidance like where do you see net interest margin at the end of the year assuming that ECB doesn’t drop below the 2%?

Archibald Kramsberg, CFO, NLB Group: I mean, we don’t guide specifically for NIM, but I guess we gave now quite specific handles on how you could think about it. I mentioned the ratio one to five as a very simplistic handle that has applied in the past. So it’s for sure not the worst handle to use as a guest for the future. But it’s there’s a lot going on that would exceed the, let’s say, this call to go into all details. You mentioned, subsidiary markets play a key role.

They run partially different rate regimes, base rate inflation levels are still different, Sergey in particular. So there’s too much going on to just give you one magic formula. But a basic handle, think is looking into the past, it’s not the worst predictor of the future.

Diaz Miguel, Analyst, Wound and Car: Okay. Got it. And just follow-up on this. Does the income guidance stands if the ECB cuts below 2%? Like what is your like generalistic comment on that?

Blas Brodnjak, CEO, NLB Group: Well, this is something we implicitly said, right? So we are saying we would be around EUR 1,200,000,000.0, if you look where we were last year and what was the output of net operating income in the first quarter, right? If we are remaining at 200 bps as the lending rate, we should be easily delivering the revenue, right, revenue guidance. So then it’s a function of how deep ECB would cut, and then you combine this sensitivity and this one to five rule and so on, and then you can you do your own math, right? So if it’s 25 bps, we should be somehow close to easily, right?

If it’s 75 bps or 100 bps, then we are talking about a different ballgame. And this, we don’t have a crystal ball.

Archibald Kramsberg, CFO, NLB Group: And of course, there are mitigants on the liability side. So I mean, the second best more technical handle you’ll find on the balance sheet metrics that we gave and disclosed. So because you’ve seen liabilities in Slovenia reprice to quite an extent, right? So if Euribos and ECB rates go down, cost of liabilities go down too.

Diaz Miguel, Analyst, Wound and Car: Okay. Maybe a question for Andreas. If we look at cost of risk for the first quarter, it implies more need than lower range of the guidance. Should this should we think of this like sort of like run rate for the next quarters? Or are you still confident that you could deliver the lower end of the guidance or closer to 30 bps?

Andreas Burkhardt, CRO, NLB Group: Look, of all, to give that answer, I am confident that we will be at the lower end of the guidance. And from today’s perspective, I mean, first of all, for the first quarter, I mentioned it, there was one technical error, not on our side, but on the side of a partner, which increased a little bit the cost of risk on the retail side. If you sterilize for that, we are actually close to 30 bps cost of risk for the first quarter. And nevertheless, have to say that in the first quarter, especially in January, we saw a little bit more than usual inflow in retail, especially here in Slovenia. And this is currently stabilizing and that has a little bit of seasonal effects, if you ask me, but at the same time it has, of course, also to do with the fact that we are trying hard to optimize it.

So we also here did some measures, both structurally how we approach overdue clients, but also simply in the parameters according to which we give loans. So in retail, I would expect that the trend is flattening. And in corporate, what we see is that times are more rough than they were, so you see surprises, but you see pretty much balanced positive and negative surprises. So this year, we didn’t have any bigger major topic which would be in my head, which I would be worried about. We had one-two negative surprises.

We had one-two positive surprises. That’s actually very much normal course of business. So also here, I don’t see that we would overshoot what we were planning. Of course, it’s a little bit early in the year and you never know what comes tomorrow in this macro environment. But for what we can see, I’m feeling comfortable.

Also, what you have to see is that this region, especially Slovenia, is to The US very moderately exposed, especially our client base. So also from that perspective, we don’t see any bigger shocks. It will be an interesting year, so I think I’m watching even more closely than in a regular year, and that’s why I will feel even more comfortable later in the year, if I can say the same, but for the time being I don’t have an indication that we would go up in cost of risk.

Diaz Miguel, Analyst, Wound and Car: Thanks a lot. I appreciate it. Just final question, if I may. I seem to remember being said that we would converge towards 15% effective tax rate. Yet, I look at tax rate in the first quarter, it’s still the same as it was in the first quarter, it’s still in 24%.

So, I mean, how should I think about this moving forward? What is the guidance for effective tax rate in 2025? And please exclude the tax on Slovenian assets from the calculation. What would you guide for?

Archibald Kramsberg, CFO, NLB Group: Mean unchanged for something a little bit less than €15,000,000 given the technically the DTA utilization in Slovenia because otherwise it will be pretty much 15,000,000 right?

Diaz Miguel, Analyst, Wound and Car: Okay, okay. Understood. Thank you so much.

Archibald Kramsberg, CFO, NLB Group: Thank you. Welcome.

Chorus Call Operator, Conference Operator, Chorus Call: Ladies and gentlemen, there are no further audio questions at this time. We will resume for some webcast participant questions. Apologies, we do have an audio question. It’s from the line of Dodik Gladden with Ersek Group. Please go ahead, sir.

Dodik Gladden, Analyst, Ersek Group: Good afternoon, gentlemen. Thank you for the call and congratulations on the first quarter solid result. Maybe just one follow-up question on the interest rates. I would not expect that you could pinpoint the exact measure, but how much competitors are influencing the now already visible reduction in the lending rates? Is that could that be observed in some way?

Blas Brodnjak, CEO, NLB Group: Some way, it is yes, in some way, it is outside of the Slovenia. To a certain extent, we were showing the deposit pricing, for example, which is a bit of a counterintuitive thing, right? Rates declining, but you see still some uptick in what we have to pay for deposits. So there’s quite some fight for deposits out of Slovenia. In Slovenia, it is more or less normal competitive pressure.

We have just I just got the data on market share evolution in the last twelve months. And Slovenia in Slovenia, we have been gaining in all market segments without having to eat too much into the price clearly. We have a power. We have a pricing power on one side, and we have the maturity power. So we can extend long term financing at reasonable terms, sitting on almost 90% against sites, right, which we pay practically zero in Slovenia.

So very strong position in Slovenia. We are now north of 30% in market shares in retail and corporate lending. Also in terms of total assets, we are now four percentage points almost ahead of the second player. So this difference has now really become obvious as being clearly a provider of universal financial services. In other countries, of course, it depends a bit on your market position.

So in Serbia, in the Boston and Herzegovina Federation, for example, we are an obvious price taker because in this respect, we are not big enough, right? And we are also not sitting on the optimized portfolio structure on the liability side, whereby in some other countries, where, of course, we are much stronger in terms of deposit gathering franchises, we have we are in better shape. So it really a bit depends on specific position in specific market. But generally, overall, we are more or less following the curve. You saw that the actual decline of the margin is not that dramatic given the how dramatic actually the rate decline was.

I mean 175 points is, what, 40% of what it used lower than it used to be, right? It’s almost half last. And that’s material, very material, right? And we, of course, then address this by replacing certain asset positions, acquiring some businesses and growing organically at fixed terms. But yes, there is fight.

But depending on our market position, we can fend it off better or a bit worse. But in Slovenia, we’re coping very well. In Serbia, obviously, there are some pockets where, of course, you are fighting, but we have a very strong production. The last months have been very good production as well, so we are happy with And overall now, what we are aiming at is actually improving the accessibility and ease of use and convenience of use of financial services in a sense of consumer loan accessibility via mobile app and so on, which, of course, is much less price sensitive when clients take the service. And in this respect, self-service format at a high level of convenience is much less price sensitive.

And in this respect, you do it much more. And then you focus on consumer loans and then you focus on leasing, which naturally carry higher nominal rates. So it’s, again, a mixed bag of various measures you actually introduce and how you position the balance sheet and by that address the margin as a whole. It’s a complex answer. There is no one simple answer.

Dodik Gladden, Analyst, Ersek Group: Understood. Thank you very much. Thank you.

Chorus Call Operator, Conference Operator, Chorus Call: The next audio question is from the line of Shikimich Jovan with ODDO. Please go ahead.

Shikimich Jovan, Analyst, ODDO: Yes. Hi, good afternoon everyone. I have a minor one on capital. I mean, CRR adjustment has been already digested in Q1 Because there was some kind of moves on op risk side and credit risk side, which kind of canceled each out each other.

Archibald Kramsberg, CFO, NLB Group: Yes. So it’s what you said. I think going forward, what we are still monitoring is the developments on market risk and when final implementation of so called Basel IV is to be expected that, as you may have followed, was shifted for a year. Now let’s see when it comes to play, but that would still be a fairly significant, I mean, much less than 1,000,000,000, but still significant RWA burden.

Shikimich Jovan, Analyst, ODDO: Once it is implemented, right? So it’s not yet.

Archibald Kramsberg, CFO, NLB Group: It’s not yet.

Shikimich Jovan, Analyst, ODDO: Any kind of profit? Yes. Okay, okay, okay. So net EUR 1,000,000,000 on risk weighted assets, more or less?

Archibald Kramsberg, CFO, NLB Group: Yes, a little bit less. And we, of course, are scrapping every reserves together because there’s still stuff to be done in collateral recognition that could be worse EUR 100,000,000, 2 hundred million. So we are getting very, very, of course, conscious on capital consumption, capital deployment and also waste, simple waste by not cleaning up collaterals, etcetera.

Shikimich Jovan, Analyst, ODDO: But it should not change impact somehow

Archibald Kramsberg, CFO, NLB Group: no, it doesn’t. I mean, the basic headlines are unchanged by any of that.

Shikimich Jovan, Analyst, ODDO: Okay. Okay. Appreciate it. Thank you.

Andreas Burkhardt, CRO, NLB Group: Welcome. Thank you.

Chorus Call Operator, Conference Operator, Chorus Call: Ladies and gentlemen, we will now proceed to webcast questions. The first webcast question is from Robert Broja with PKO VP Securities. And I quote, I have spotted that the average deposit costs in the Southeastern Europe are going up, whereas deposit base increased year to date. Is there higher competition for deposits in the Southeastern Europe despite rate cuts in Serbia? Thank you.

Blas Brodnjak, CEO, NLB Group: Yes, I mentioned this before. It’s really market specific. We’ve got a credit loan growth of what north of 25% in Kosovo, for example, and you have to fund this growth, right? And in order to grow 25% of the asset side, of course, you need to adjust the liability side. And if you are able to sell at nominal rate of 5% to 6% on the assets, of course, it makes sense to still pay one percent for the deposit, right?

And here you see this, very strong growth in cost of on the asset side, of course, cries for some somehow a bit more an uptick in what you pay for the deposits, but it’s worthwhile paying for. And there are some pockets in other subsidiaries as well that exactly address that, right? So in order to have lucrative growth, you, of course, go for deposits. And if you have a weaker position than in Slovenia and in Serbia, then, of course, you pay up a bit. Otherwise, it’s not any specific deviation from what would be logical to expect.

Chorus Call Operator, Conference Operator, Chorus Call: Thank you, Seth. The next webcast question is from Antoine Horvathik with Allianz. And I quote, Your 2025 outlook stays the same. Does that mean that your estimates regarding NII and net interest income or ECB rate didn’t change? Or did some offsetting take place?

Thank you.

Blas Brodnjak, CEO, NLB Group: Maybe for the third time, the same kind of an attempt to explaining, right? So we operate with the assumption that the rate will remain at 200 bps and we’d not go below 200 bps. Under these circumstances, the guided for level of revenue should not be in jeopardy in any way. It would have to be comfortably achieved, right? Then if it’s then 25 bps lower, it should still not be a big problem.

If it’s 100 bps lower, then of course it’s a struggle. That’s why we have been already now starting working proactively on various measures, including cost management, right, really consciously taking into our hands every single hire in a parent bank, for example, having to hit the management board and so on. So it is much more conscious cost containment on one side and much more conscious decision making of what investment we will take and what we will skip for time being. But overall, assuming 200 basis points, assuming relatively then stable environment, let’s say, up till the end of the year, right, it should be carefully meeting these metrics, right, in terms of revenue, in terms of costincome ratio, in terms of then final output. And then, of course, margin is a combination of various mixed bag of whatever effects and phenomenons in this what you originate, how you position the balance sheet.

There is, of course, liquidity reserves placements. There is how much of fixed production is with cash loans. Then, of course, there is housing loans, which where you cross sell five other products, which is then booked under the fee income as well. So it’s a combination of various stuff. It’s not only net interest income, it’s also fee income.

That’s why we also show total operating margin and not only interest margin because, of course, you can also reprice some packages. Of course, there is payments. Of course, there are other services, asset management services, insurance business, where you make also income. So it’s not only net interest income, it’s total operating income significantly driven by fee income as well. And that’s what we’ve been doing as well, right, successfully originating fee income.

That’s also one of the very important measures to address pressure in net interest income as well.

Chorus Call Operator, Conference Operator, Chorus Call: Thank you. We have a follow-up from Mr. Renton Horvacek, and I quote, How will the digitization impact the number of your branches? Do you have any quantitative targets? Do you expect rather equal effects across all countries?

Or will some countries be more impacted?

Blas Brodnjak, CEO, NLB Group: Well, this is going to be a journey. We have what we have been guiding for is that until 02/1930, we would see ourselves reducing total headcount in the banking group by some 20% to 25%, right? And that should come from all of the corners. How many branches we will have, it’s premature to say, a bit premature. But at the end of the day, we might have different formats of branches and not necessarily fewer branches.

Not necessarily much less branches, but there will be potentially an office with two advisers instead of three tellers and 10 advisers as of today, right? So it might be totally differently positioned. At the aspiration of originating more than 80% end to end digitally, we’ll naturally, of course, reduce a need for classical setup, for classical brick and mortar setup. We are already somehow trying to test cashless branches for some specific period of time, right? Not necessarily fully cashless, but there are hours in a day where you can’t do cash and then people start learning and start simply not being surprised that there is no cash service and they simply start using ATMs more.

Generally, for cash transition towards, of course, instant payments, card payments, other digitized payments, forms of payments and so on. It’s a combination of various phenomenons that we will be simply developing in front of our eyes. Whatever we put in production and we set some KPI has so far positively surprised. So whatever we have really enabled end to end digitally is after a couple of months in production delivering better results that we have been actually expecting, right? Which means that and that’s why we know when we saw how this actually helps, that’s why we decided to fast forward and accelerate a bit of investment to simply enable whatever is of a standardized repetitive nature, transactional nature, be enabled end to end digitally.

And then comes the entire CRM space, right, where you, of course, want to capture all of this data and then become much more relevant and meaningful in the sense that you anticipate the future needs, that you are really relevant in sense that you are at the right time at the right place with the right solution. And in this respect, of course, you fuel then the entire sales engine, which is reactively 20 fourseven available with relevant digital push. So it’s going to be this combination that should drive the entire FTE requirement group wide, you know, down by at least 20%. So how much this year? It’s tough.

And Archibald was mentioning, okay, 100 plus Serbia, Forty plus leasing here, a couple of 10 here, a couple of 10 there. But then real effects should come in 2027 and on because, as I said, majority of this fast forwarding would be happening this year and next year. I’m talking about mobile apps for retail. I’m talking about mobile apps for SMEs And then, of course, group rollout of those. More or less, digitizing end to end all standardized services.

So you can now already get 20 fourseven cash loan up to 40 ks credit card limit, overdraft limit, savings deposits, savings accounts, deposits, some basic insurance, asset management, end to end digital ready now, 20 assisted by contact center, digitally signed. Right? No single sheet of paper and no need for interaction for majority of these services already. If there is a need of interaction 247 happening through the contact center at 02:00 at night. So no need for classical branch at all already.

You know? And now, of course, this is going to be monitored on a day more or less on a daily basis. And then adjustments will be following in a sense of how many branches do we really need, how many of these branches actually need to offer the entire portfolio of services and ideally, how many ideally, most of them or even all of them become asset management offices, right? And the transactions are performed in self-service format by clients themselves. So that’s the ideal outcome, right?

There will still be cash. Cash will not fully disappear, but it might be done and driven down to 10% or 20% of today’s volume. There will still be, of course, visiting of branches, but this might be reduced to 10% of today’s volume, but then it would be much more meaningful because then you would want to sell, of course, the entire asset management insurance portfolio services, long term savings plans and so on instead of just paying instead of people that can do this via simply taking a photo or ideally through direct debits, not requiring anything from anyone, not even themselves.

Chorus Call Operator, Conference Operator, Chorus Call: Thank you. The next webcast question is from Willie Kelly with Frontera Capital. I quote, amid trade uncertainty, what have you observed in terms of demand for CapEx and working capital demand for clients? Do you anticipate any deterioration in asset quality, particularly in terms of working capital financing? Andreas

Blas Brodnjak, CEO, NLB Group: will give you details. But generally, what we have been observing is that people that have had challenges, and we’ve been dealing with them, are reporting now. There is improving order books. Books. There is visible more activity.

If you look at the production output in Germany and first reports on confidence on production and also Slovenia, which is, as you saw the chart, predominantly exporting to European Union, right? 80% of exports is more or less European Union. There are some signals and signs of revival in Europe. Of course, all of this resilience invested into either defence or resilience, right, are of course going to, for sure, increase the general economic activity in Central Europe, which is our main basin. So I wouldn’t observe deterioration.

I would rather observe quite some revival of activity. But I would ask Andreas to give you more flesh.

Andreas Burkhardt, CRO, NLB Group: Yes, I mean, not too much to add. I mean, compared to last year, actually, we see at the moment more positive signs. Last year, at one point of time, we indeed also saw a fallout with a couple of clients. But here it’s a lot also the structural preparedness. So it’s not that situation last year became so severe anywhere that a well prepared client would have had problems, but clients which had structural problems already for a while and didn’t work on them, they saw more impact last year.

So that’s also why you saw on the corporate side more staging. This has not only flattened out, as you saw in the first quarter, but we also see more positive signs, actually. Of course, it’s never a unique picture. Interestingly enough, despite the turbulences on the political side in Serbia, we don’t really see much impact there. Where we see more impact on the corporate side in a sense of that businesses are slowing down is at the moment in Republika Supska, so in the Serbian part of Bosnia Herzegovina.

Let’s see what impact that will show so far on the NPL side staging. We don’t really see impact, that part of course at the moment is slow is showing some slowdown. This is for sure a point which I’m watching closely, but globally I can just reconfirm what Blas just said.

Blas Brodnjak, CEO, NLB Group: On the other hand, is a household situation and Slovenia is reporting on historic low unemployment. And all over the region, we see very, very low unemployment rates. So whoever is really willing to work can find job easily. So there is practically very low delinquencies. There are some issues with the parameterization of certain portfolios, which you test out, but then we quickly adjust and calibrate in retail pockets right here and there where you test cash lending a bit.

But this is all with a totally palatable territory, right? So 30 basis points cost of risk for universal financial services provider is totally reasonable, right? And it’s normal and expected in normal times and normal cycle, right? Finally, it’s there. And as said, it was a bit masked for the decade with write backs, which is not a normal situation that you have continuous high write backs.

Chorus Call Operator, Conference Operator, Chorus Call: Thank you. The next question is from Rona Garia with Dan Rose. And I quote, question number one. Is there any upside risk to your estimates due to the recent stimulus introduced by Germany? And question number two, what is your expectation for wage inflation over the next twelve to twenty four months?

Blas Brodnjak, CEO, NLB Group: Well, I was somehow indirectly mentioning the boost to the economy of the region. If there was significantly higher investment, obviously, in production, right, in manufacturing, be it defense related or whatever related with multiplication effect on other industries. So it is very difficult to judge. But as said, Slovenia and the region is strongly embedded into Central European Industrial basin, and we should be somehow, of course, benefiting from it. If we are now at 1.5% growth when Germany was stagnating and the region is at 3% growth, whilst Germany was stagnating, if Germany shows some signs of growth, this can only be beneficial for the region, right?

It is from here where we see it, it’s thirty five minute drive to Austria and forty five to Italy. I mean, is the heart of Europe. And this is the industrial basin of Europe, right? Northern Italy, Switzerland, Southern Germany and Austria. So if these guys pick up, then we should pick up even faster.

And usually, there is a multiplication effect. So in this respect, I am absolutely yes. If you ask me if there is an upside potential, for sure, is an upside potential for the recovery of economy going back to 2%, two point five % growth rates for Slovenia and 3%, four % to 4% growth rates for Western Balkans countries. What I’m more banking on is actually, hopefully, European Commission realizing that there is no simply no alternative to acceleration of accession of Western Balkans countries to European Union, right? We can now again be all philosophizing about rule of law and other aspects of life.

We have a war in Europe. So I would really be surprised if Ukraine has a fast track to European Union and Western Balkans has missed out. This would be the biggest possible strategic mistake ever even someone can consider. So what we really, as people from Western Balkans wearing the carrying the heart of Sarajevo, preach for and promote for is, for crying out loud, let’s embrace Western Bulkest European Union. This will be the real acceleration of our business.

This would mean explosion of our business, right? And in this respect, that’s something we hope for. Of course, we are who are we to say, but we are counting on it and that’s why we are firm believers that this region has very high prospect. If now we grow at 3% from very low base or lower base, relative lower base, once you have all structural funds coming for the infrastructural buildup of the region during the accession and immediately after, you could see double digit growth, high you could see high single digit growth for quite some time for the whole region basically. And that’s definitely something that is the space to be.

Archibald Kramsberg, CFO, NLB Group: On labor cost inflation going forward, this should for sure slow down. So we our ambition is kind of to moderate this to maximum kind of global inflation levels. And that, frankly, will have to also be paired with the measures on productivity that we mentioned now several times.

Blas Brodnjak, CEO, NLB Group: Yes. There is attention coming from public sector because there have been populistic measures in form of, for example, even up to twenty percent one off hikes of minimum wage in form of 11% repricing of public sector wages, right, more or less pre elections and so on. So for quite some time, there might be some stretch, but mid single digit, let’s say, is somehow reasonable expectation. And then, of course, then after somehow following the inflation rates.

Chorus Call Operator, Conference Operator, Chorus Call: Thank you, sir. Ladies and gentlemen, in the interest of time, other questions all other questions will be answered in writing. At this time, I would like to turn the conference over to management for any closing comments. Thank you.

Blas Brodnjak, CEO, NLB Group: Thank you very much. There’s not much to add. In principle, I believe we have addressed all of the upsides. I just had a meeting with a colleague of mine coming from another bank, a very interesting operation, and he said there are no problems or challenges. There are just So this slide took us a very, very strong lesson.

So there are many upsides in front of us, and we are going to address them. Thanks for hanging in there with us and trusting in us so far. We are firmly convinced that this is going to be a continuous success story. We are coping well. We are resilient.

We are strong. We are connecting the region, and we believe in peace. Thank you.

Chorus Call Operator, Conference Operator, Chorus Call: Pleasant afternoon.

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