Market announcement

Title

LHV intends to acquire the unit of Danske Bank involved with Estonian private loans

Message

AS LHV Pank, a subsidiary of AS LHV Group and Danske Bank A/S have reached an
agreement that LHV will acquire Danske Bank's unit involved with Estonian
private loans, that essentially consists of the loan portfolio of private
clients in the amount of approximately 470 million euros (as at the end of
February 2019). The parties have agreed on the material terms of the contract
and intend to sign it on 5 June.

The transaction will be finalised in the autumn of the current year, when the
final scope and price of the transaction will also be determined. Prerequisites
for finalising the transaction are getting permission from the Competition
Authority and raising additional capital for AS LHV Group. The transaction is
not to be considered a transaction with related parties.

AS LHV Pank and Danske Bank A/S have agreed on the price of the transaction,
according to which a discount of 39 million euros will be subtracted from the
volume of the portfolio at the moment of the transaction. The estimated price of
the transaction will be around 410 million euros.

The volume of the loan portfolio of the unit as of the end of February is 470
million euros, about 97% of which are home loans. According to LHV's assessment,
this is a well-guaranteed strong credit portfolio. Whereas the interest rates of
granted home loans were essentially near cost price, the transaction is only
possible due to the discounted sale of the portfolio. It is presumed that the
volume of the portfolio will decrease to 450 million euros by the moment of the
transaction. The balances and settlements of clients will not transfer with the
unit when making the transaction. At the same time, the unit is accompanied by a
few employment contracts, the specific number of which will be determined by the
moment of making the transaction.

With the transaction, LHV Pank will take over serving about 10,800 private
customers. According to LHV's settlement analysis approximately 80% of these are
new customers for LHV.

Current loan customers of Danske Bank do not have to change anything in their
activities, and they will be provided with more specific instructions as soon as
the transaction is finalised in the second half of 2019. LHV intends to
automatically open a personal account for loan servicing at LHV bank for every
client and formalise amendments to contracts so that all that the clients have
to do is redirect loan payments to their new bank account. The current loan
terms will not change with the automatic transfer of loans, unless clients
themselves wish to amend the contracts.



The financial impact of the transaction

The intended transaction will have a significant impact on the financial
situation of LHV.

As of the end of April 2019, the loan portfolio of LHV Pank amounted to 1016
million euros. By acquiring the unit, the loan portfolio of LHV will grow by
about 450 million euros. In addition to the existent deposits, LHV will raise a
total of 280 million euros of new financing in order to finance the transaction.

In the short term, LHV Pank will finance the added volume of loans with deposits
taken from Estonia and foreign markets. The deposits of Estonian clients have
grown faster than planned. If this trend continues, it is possible to finance
the transaction to a significant extent through local deposits. The rest of the
financing will be involved through deposit-taking platforms where Raisin will be
the main partner. Through the latter, deposits will be taken from German,
Austrian, Dutch and Spanish private persons. Still, this is a source of
financing that is on the more costly side, which is why LHV Pank intends to
finance the home loan portfolio in the long term through issuing covered bonds.

From 2021, the additional income from the portfolio will be 4.0 million euros
per year. On average, the transaction will improve the return on equity (ROE) of
LHV Pank by 0.4 percentage points per year. By that time all one-off expenses
will have been made and the expensive short-term deposits raised for the
transaction will have been replaced with more favourable covered bonds.
Additionally, the financial plan takes into account that the discount included
with the transaction will be reflected in accounting through interest income
over the life of the portfolio. In case of significant change or termination of
loan contracts, the discounts related to the contracts will be included in
income at the same time.

In 2020, the additional profit from the transaction will amount to 1.7 million
euros. The financial results will then be still affected by the costlier short-
term deposits, which are planned to be replaced with more favourable covered
bonds in 2020.

Since the loan portfolio will be acquired in the autumn of 2019, the transaction
will predominantly add costs this year. According to LHV's assessment, in 2019,
the transaction will bring LHV a loss of 2.7 million euros, 1.05 million euros
of which originates from net interest income, 1.54 million euros from the
provision accompanying the portfolio, and 0.12 million euros from additional
administrative costs.

AS LHV Group will update their financial plan after the transaction has taken
place. Subject to the timing of the transaction, updating of the financial plan
may occur in the beginning of 2020 in the course of regular updating of the
financial plan.



Upcoming steps for raising capital

In order to acquire the unit of Danske Bank involved with the loan portfolio of
Estonian private clients AS LHV Group will have to raise additional capital,
which the group will use to increase the capital of its subsidiary, AS LHV Pank.
To finance the loan portfolio to be acquired, LHV Group requires 27 million
euros of own funds, at least 16 million euros of which are Tier 1 own funds and
11 million euros of which are Tier 2 own funds.

To raise additional capital, LHV plans the following steps in the coming months:

Issuing subordinated bonds
To raise capital, AS LHV Group will organise an issuance of subordinated bonds
in June of this year, which will be the second issuance of the bond programme in
progress. Subscription of bonds will take place from 5 June to 21 June. 15,000
bonds with a nominal value of 1000 euros and an interest rate of 6% will be
offered. LHV has the right to increase the issue size to up to 20 million euros.
A separate notice has been published concerning the bonds.
(https://cns.omxgroup.com/cdsPublic/viewDisclosure.action?disclosureId=891233&me
ssageId=1121890)

Issuing additional Tier 1 own funds
To raise capital, AS LHV Group will organise a private placement of additional
Tier 1 own funds to financial institutions and proficient investors with a
larger investment portfolio in June of this year. Due to the complexity of the
bond, the instrument will not be put on public offer. Subscription of bonds will
take place from 5 June to 21 June. 150 bonds with a nominal value of 100,000
euros and an interest rate of 8% will be offered. LHV has the right to increase
the issue size to up to 20 million euros. The bonds are perpetual. After
receiving permission from the Financial Supervision Authority, LHV will have the
right to redeem the subordinated bonds in part or in full as of 28 June 2024.

Further issuance of AS LHV Group shares
Since in order for the transaction to take place it is required to involve Tier
1 own funds, i.e. share capital, AS LHV Group will organise an additional
issuance of shares in the form of a rights issue, presumably in September. The
size of the share capital required is 15 million euros. A decision of the
Supervisory Board of the company is required for issuing shares, and the terms
of the potential issuance must be approved by an extraordinary meeting of the
shareholders of LHV Group, held presumably in August or September. The issuance
of shares and offering these to shareholders has to be approved by the Financial
Supervision Authority.



Comments by LHV

"This is an important event for us. LHV's loan portfolio will increase by 40% as
a result of the transaction taking place, and the importance of retail banking
in LHV's business will increase dramatically. This event can also be considered
significant in Estonian banking since a bank based on Estonian capital intends
to take over the business of outgoing foreign capital and considerably increase
its market share in a strategically important sector," said Madis Toomsalu, CEO
of LHV Group.

"LHV has indeed grown to become the largest domestic financial group, but the
success of the transaction requires us to take on over half a billion euros of
deposits and, considering the growth of existing business volumes, raise capital
to the extent of about 50 million euros through three different capital
instruments. The latter is divided between bonds and share capital," Toomsalu
clarified.

"The transaction is built on the principle that in addition to using the
deposits of Estonian clients, we will temporarily finance ourselves with
deposit-taking platforms. Next year, we hope to issue long-term covered bonds
which will make the financing cost more favourable. With this transaction, the
formulating of provisions, re-registering of guarantees and other one-off costs
must be taken into account at the beginning. The regular effect without one-off
factors of the portfolio to be acquired will be revealed on the income statement
in 18 months, also increasing the return on equity of the whole bank compared to
the current financial plan," said Erki Kilu, Chairman of the Management Board of
LHV Pank.

"After the transaction is finalised, we will certainly invite new loan clients
to use all other LHV services as well. We can serve the new clients in the best
possible way: we offer all banking services, the best service in Estonia, a
network of ATMs across Estonia, and an extremely comfortable internet and mobile
bank," said Kilu.


LHV Group is the largest domestic financial group and capital provider in
Estonia. LHV Group's key subsidiaries are LHV Pank and LHV Varahaldus. LHV
employs over 400 people. LHV's banking services are used by 174,000 clients, and
pension funds managed by LHV have more than 177,000 active clients.


Priit Rum
LHV Communication Manager
Phone: +372 502 0786
Email: [email protected] (mailto:[email protected])