Market announcement

Title

LHV Group’s financial plan for 2018 and five year financial forecast

Message

LHV Group is disclosing the financial plan for 2018, that forecasts the group’s
income to increase by 20% and consolidated net profit to grow by 10%. 

During 2017 LHV Group achieved record levels in all its’ business volumes.
During the year, LHV Bank deposits grew by EUR 760 million, loans by EUR 194
million, and the volume of funds managed by LHV Asset management by EUR 129
million, supported by pension funds growth. For this year, LHV forecasts a 25%
increase of the loan portfolio and a 13% decrease of consolidated deposits.
Funds managed by LHV are forecasted to grow by 15%. LHV Group’s pre-tax profit
is planned to amount to EUR 28.2 million in 2018 (21% increase from 2017). 

Key figures              FP2018   2017        ∆
-----------------------------------------------
Loans                       916    732     +25%
-----------------------------------------------
Deposits                   1344  1537*     -13%
-----------------------------------------------
Cost/income ratio (C/I)   52.0%  54.6%  -2.6 pp
-----------------------------------------------
ROE (attr. to owners)     16.7%  17.6%  -0.9 pp
-----------------------------------------------
Capital adequacy          16.9%  18.3%  -1.4 pp
-----------------------------------------------

* Includes deposits of payment intermediaries, expected to decrease by EUR 300
million. 

LHV has over 5,300 shareholders and over 900 bond investors. In order to
provide investors with the most up-to-date and relevant information, last year,
LHV Group started to disclose monthly results and financial plan. 

Comments by Madis Toomsalu, CEO of LHV Group:
"One of the cornerstones of the Corporate Governance practices followed by LHV
is the equal treatment of investors. That is why we have decided to disclose
also a five-year financial forecast. Compiling such a forecast is not new for
LHV, however it is the first time we will make it public. 

The keywords of the 2018 Financial plan are quality in continuing existing
services and development of the new business line. The economic environment
remains good, the underlying trends being broad based economic growth, rise in
companies’ productivity and investments and also growing wages. The financial
sector is healthy and mainly characterized by the increasing loan volumes and
low overdue levels. 

In 2018, LHV is focusing on growing in every domain of our business, sticking
to the principles of simplicity and modernity, when it comes to our products: 

  -- We will continue perfecting e-channels, renewing our internet bank,
     improving the mobile bank app with many new functionalities and launching a
     new pension application to the market. With open banking in mind, we will
     continue developing our APIs. We will introduce an offering to younger
     clients and car insurance. We will join the real time euro payment system
     and prepare for joining the real-time pound payments system. We will form
     an on-site team in our UK office and begin servicing clients there.
  -- Deposits will grow at a pace on par with last year. The majority of
     deposits will be taken in from retail customers; somewhat less will come
     from companies. Regarding financial intermediaries, we see a deposit
     increase from different customers; however, a very high deposit balance of
     one particular payment provider makes us expect a decrease in the deposits
     of the business line as a whole. In 2018, we are broadening our list of
     sources for financing.
  -- Loans continue to grow in record speed. The biggest source of growth will
     be loans to companies, followed by small loans by our Lithuanian business
     unit Mokilizingas and home loans issued in Estonia. All other loan products
     will continue to grow. We will also start providing factoring services.
  -- Regarding our services to financial technology companies the focus remains
     on establishing a branch in United Kingdom, preparation to join the Pound
     payments system and beginning to service clients in London. We will
     concentrate on the following sectors: neo-banks, currency service providers
     and payment intermediaries.
  -- Regarding pension funds, we will introduce to market a new II pillar
     pension fund, which invests only in Estonia. In 2017, LHV pension funds
     made Estonia-oriented investment decisions in the sum of EUR 170 million
     and Estonia-related investments will continue to grow in the coming years.
     At the same time, we are not excluding any other investment opportunities,
     any region or economic sector. The goal remains to provide best possible
     yields for our customers.

In 2018, the group has sufficient capitalization in order to finance growth,
but preparations will be initiated in order to refinance subordinated bond
issue in 2019 and raise new capital, needed for growth." 

Long-term forecast – a five-year plan

AS LHV Group discloses hereby the financial forecast for the coming five years.
According to this forecast, the income of the group should grow on average 15%
yearly, at the same time costs will grow 8% yearly. Based on the financial
forecast LHV’s consolidated net profit would reach EUR 54.1 million in 2022. 

Key figures           FP2022  FP2021  FP20220  FP2019  FP2018
-------------------------------------------------------------
Pre-tax profit          63.6    53.9     45.7    35.1    28.2
-------------------------------------------------------------
Loans                   1510    1362     1240    1093     916
-------------------------------------------------------------
Deposits                2154    1922     1714    1520    1344
-------------------------------------------------------------
Cost/income ratio        41%     43%      45%     49%     52%
-------------------------------------------------------------
ROE (attr.to owners)   19.7%   19.1%    17.3%   19.1%   16.7%
-------------------------------------------------------------
Capital adequacy       20.7%   19.2%    17.8%   17.1%   16.9%
-------------------------------------------------------------

* Business volumes shown in EUR million

Comments by Madis Toomsalu, CEO of LHV Group:
"One of the prerequisites of the five-year financial forecast is the
persistence of the current economic environment. The choice not to forecast the
turning of the economic cycle does not mean neglecting possible risks. Our
credit decisions and different stress tests continuously take into account
abrupt stress scenarios; likewise, we consider them when determining our
capital buffers. Out of the other main prerequisites we can highlight
significant growth of business volumes, accrual of income from the financial
intermediaries business line, higher credit loss resulting from a conservative
approach, rise of the Euribor according to market forecasts, the capitalization
and depreciation of the sales expenses of Asset management, persistence of II
pillar pension fund payments at today’s level and the decrease in pension fund
administrative fees due to volume growth as set by regulations, persistence of
our dividend policy and the effect of the banking tax. 

The items of the financial forecast, that potentially could differ from reality
the most, are deposit volumes and income from servicing financial
intermediaries. Additionally, the absolute level of interest income is
partially dependent on changes of Euribor rates and in addition to economic
conditions, the realization of credit losses could also depend on other reasons
related to individual customers. 

We forecast that the consolidated pre-tax return on capital will reach at least
20% every forecasted year. The UK branch activation expenses as well as the
impact of the banking tax will affect the 2018 net profit’s return on capital
belonging to shareholders. According to the five-year forecast, the aim is to
also move towards 20% ROE in terms of net profit attributable to the
shareholders. The five-year forecast anticipates that both in 2019 and 2020 new
capital shall be raised by issuing bonds. 

In conclusion, the long-term financial forecast is ambitious, but realistic. We
can carry out the plan with the help of more than 360 people, working in LHV,
this number is likely to rise during this period. I hope that also henceforth
our people will be motivated by the passion to raise the importance of LHV,
that is to say Estonian capital, in the local financial services market and
equally to help along to the LHV’s breakthrough in new markets and business
fields." 



LHV Group will make changes to the 2018 Financial plan in case it becomes
likely that the planned net profit will differ more than 10% compared to the
financial plan. The five-year forecast will be updated at the beginning of 2019
or together with the changes to the 2018 Financial plan, if needed. 

In order to present the financial plans to media, LHV will hold a press
briefing on 13 February starting at 11 a.m at LHV Tallinn office. The
presentation will be broadcast live (in Estonian) on LHV’s Facebook page
https://www.facebook.com/LHVPank/. 

LHV Group is the largest domestic financial group and capital provider in
Estonia. LHV Group's key subsidiaries are AS LHV Pank and AS LHV Varahaldus.
LHV employs over 360 people and over 135,000 customers use LHV’s banking
services. Pension funds managed by LHV have over 176,000 active customers. 


         Priit Rum
         Communication Manager
         Phone: +372 502 0786
         Email: [email protected]