NKBM D.D.

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1 30 th August 12 NKBM D.D. Banks LJSE ticker: KBMR Bloomberg: KBMR SV Target price: N.R. Previous target price: 5.6 EUR, BUY ( ) Recommendation: N.R. (TEMPORARELY SUSPENDED COVERAGE) 12 months stock performance in EUR 6.0 Stock data as of 30 th August 12 Market price (EUR) 1.2 Market Cap (EUR) 46.6m 52 week range (EUR) No. of Shares 39.1m Avg. daily trade vol., EUR(k) 14.0 Free float 49% Average daily % of stock traded 0.012% Dividend yield 0% Price performance Multiples: TTM 3 months 12 months P/E neg. price change in % -51.3% -78.1% P/B 0.11 SBI TOP index change in % -7.9% -24.8% relative to SBI TOP in % -47.2% -70.9% Aug 11 Nov 11 Feb 12 May 12 Aug 12 KBMR SBI TOP Key figures (According to International Accounting Standards) Consolidated data in EURm Income statement: Balance sheet: million FY10 FY11 TTM million FY10 FY11 TTM Net int. income Total loans 4, , ,941.0 Net int. margin 2.5% 2.3% Deposits 3, , ,727.2 Other revenue Provisions Growth yoy 54.3% 46.3% Equity CIR Assets 5, , ,749.8 Provisions Loan/Dep Net income ROA 0.2% 0.0% -32.9% Growth yoy 3.3% ROE 2.7% -0.2% -2.1% EPS E/A 6.8% 6.8% 6.4% Investment Thesis: Second largest Slovenian bank. Low P/B ratio. Risks remain high as banking environment remains difficult. Pending capital injection. ALTA Invest, investicijske storitve, d.d. Železna cesta 18 SI-1000 Ljubljana Slovenia phone: invest@alta.si Head of Research: Sašo Stanovnik saso.stanovnik@alta.si Head of Trading: Igor Taljat igor.taljat@alta.si Second largest Slovenian banking institution: Nova kreditna banka Maribor (NKBM) is the second largest banking group in Slovenia which has a 12.0% market share in terms of total banking sector s assets and 12.6% market share in commercial loans. It s especially strong depositary institution as it holds a high 15.4% market share in terms of deposits. Core Banking Business: In the environment of different regulatory changes and restrictions, NKBM Group could be among the beneficiaries. Group s trading portfolio shrank significantly and at the end of the 11 represented less than 0.25% of total assets compared to 5.8% in 05. Due to bankruptcy of financial holdings and seizures of different stocks we could see short-term increase of assets held for trading. However, the management will probably focus on the core banking activity as a long term strategy. Maribor Insurance Company: NKBM group consists of more affiliated financial institutions which are integrated into a combined bank assurance business. The biggest one is Zavarovalnica Maribor (ZM) which is also one of the three largest insurance companies in Slovenia (12.6% market share in 11; 12.9% in non-life). NKBM owns 51% of ZM, with other biggest owner Sava Re having 48.7%. So far situation was split between both owners. Firstly, there was different opinion on appropriate takeover price (one reason that negotiation with Sava RE failed in 10). Secondly, both parties are not in a financial condition to buy the others half. Netprofit in EURm Equityin EURm GWP in EURm ROE in % Emloyees % % % % % 879 Nevertheless NKBM started selling process for its stake as it desperately needs financing. Nonbinding offers are expected until , while binding offers are expected until , but we believe these deadlines could be extended. We believe the value of its stake is worth around EUR 70 to 80m (P/E around 13.9; P/B of 1.7 and P/GWP of 0.56), although adverse conditions in Slovenia could somewhat depress this price. However we must note that ROE of this company is higher than core banking business, so ZM is positively influencing NKBM s results. 1 / 7

2 Serbian market: In January 10 NKBM started to expand its operations on lower developed South-East European markets. In accordance with this more aggressive approach, the Group injected fresh capital into a small Serbian bank Credy banka a.d. NKBM became a 55.1% owner of Credy banka and later on increased its share to 76.6%. Serbian bank which returned to profitability in 11 (net profit of EUR 0.28m) should positively affect Group s profitability in the next few years. Namely we believe Credy banka is well positioned to gain from the rebuilding of the Serbian auto industry. Also its role is to support Slovenian companies present in Serbia, so the control is tighter. Although further capital injections are expected, they are justified by large retail network as greenfield investment would require higher capital expenses. We must however note that a divestment of this Serbian bank is also a possibility. Weak Competition/Alternative Financing Options: Before crisis foreign banks aggressively entered the Slovenian banking market and increased competitiveness among banks in Slovenia. In the process of gaining market share, foreign banks also neglected the risks related to the lending to cyclical Slovenian companies and financing MBOs. Therefore in 09 foreign banks changed their strategy, lowered their aggressiveness and in some cases even decreased their presence on the Slovenian market. However, some foreign banks strengthened its position and are ever more competitive on deposit market, which is problematic in term of net interest margin. Another reason for a positive trend is also the unfavourable position of Slovenian companies which are mostly too small for issuing bonds. In the last two years when bond issuance of western nonfinancial companies increased significantly, only two Slovenian companies successfully taped bond market (Petrol, Telekom Slovenije). Therefore smaller domestic companies have very limited alternative financing options and have to rely on banks. Risks: Sovereign Credit Rating: Downgrades of Slovenian sovereign rating and NKBM continue. Fitch downgraded NKBM in August from BBB/F3 to BBB-/F3. The reason is lower sovereign rating (Awith negative outlook). On the positive note the bank was removed from rating Watch Negative list. In July Moody downgraded the bank from Ba2/Non-Prime/E+ to B3/Non-Prime/E, with negative outlook. The reasons for downgrade is lower capital adequacy ratios due to rising NPL s and statements from government representatives that capital injection from state would significantly increase debt levels of Slovenia. Given current situation, there could be additional downgrades of Slovenian sovereign rating which could result in downgrades of NKBM's rating and further affect bank's ability to borrow funds on foreign markets. Regulatory Risks and Capital adequacy: In the past years NKBM sought high capital adequacy also through issuing hybrid instruments and tier II capital. After the implementation of proposed Basel III regulations banks could be forced to find new capital sources and issuing new capital. In spring 11 it raised EUR 104m of regular equity strengthening its capital but EUR 82.4m of loss in 11 quickly spent this additional equity. With further loss in 1H12, capital adequacy was further weakened. Nova KBM's Core Tier I capital ratio is at 7.45% (drop from 8.06 at the end of 11), total capital adequacy ratio is at 10.92% (drop from 11.47%). Here we note that from the end of June 12 the EBA requires that banks in EU held its core Tier I ratio above 9%. In order to 10.50% 10.00% 9.50% 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% Core Tier I ratio 3Q11 4Q11 1Q12 2Q12 reach this required level, we believe NKBM d.d. will have to increase their capital by additional EUR 76m. Nevertheless that would be the minimum amount. From the growth perspective the level should be a lot higher not only for buffering new provisions but also to increase credit worthiness and increase their chance to step in to the syndicated loan market. Dilution due to capital injection: Since our initial assumptions led to the estimate that NKBM d.d. would need additional EUR 76m capital injection just to meet EBA requirements it is necessary also to look into capital generation. Above mentioned trends indicate that net interest margin is likely to decrease in the next few years whereas NPLs are expected to rise. Accordingly, NKBM is not in a position to rely on capital generation. We made a sensitivity analysis how falling interest 2 / 7

3 margin and rising NPLs could affect pre-tax profit if NKBM's assets in the period remain an current level (EUR 4,764m) and target NPL coverage ratio is 66.5%. Given this assumptions, NKBM d.d. would need additional EUR m also due to weak capital generation. Our conclusion is that necessary capital injection in 12 should be in the amount of at least EUR 170m, with only Zavarovalnica Maribor as a substantial divestment possibility. Firstly this means a substantial dilution of current shareholders is very likely considering current stock price (EUR 1.2) and share count (39.1m). Secondly it means bank is currently in a weak position and since private investors will be hard to find (also due to the lack of credibility of Slovenian state) the bank position will remain problematic and be eventually saved by state funds. Until this is resolved the low P/B ratio is justified and we cannot expect negative sentiment to change. There are just too many uncertainties. Increased risk of defaults: Last financial crisis significantly affected bank s credit portfolio structure. From 06 to second quarter 08 NPLs gross amount to gross total portfolio ratio slowly decreased to 3.36%. After the first half of 08, the trend changed into a negative direction with the ratio hitting 13.35% at the end of the first half 11. NPL coverage ratio also moved in the negative direction. At the mid 09 provisions to gross NPLs ratio was at 129.9%, dropping to 87.1% by the end of 09 and stood at 59.6% in December 10. In 1H11 improved to 61.5% and stood at 60% at the end of 11. The NPL/Gros Total Loans Indicator of receivables among companies Average net interes margin in the period ,9 1,17% 1,27% 1,37% 1,47% 1,57% 1,67% 16,0% -48,3-34,0-19,7-5,4 8,9 23,1 16,5% -61,2-47,0-32,7-18,4-4,1 10,2 17,0% -74,2-59,9-45,6-31,3-17,0-2,7 17,5% -87,1-72,8-58,5-44,2-29,9-15,6 18,0% -100,0-85,7-71,5-57,2-42,9-28,6 18,5% -113,0-98,7-84,4-70,1-55,8-41,5 19,0% -125,9-111,6-97,3-83,0-68,7-54,4 19,5% -138,8-124,5-110,3-96,0-81,7-67,4,0% -151,8-137,5-123,2-108,9-94,6-80,3,5% -164,7-150,4-136,1-121,8-107,5-93,2 21,0% -177,6-163,3-149,0-134,8-1,5-106,2 Underlying trends Indicator of receivables among companies Monthly bancrupcy filings main problem is loans which were given to construction companies that are now victims of frozen real-estate market. Also loans to financial holdings are problematic. Considering the environment and underlying trend (bankruptcy filings, outstanding receivables among Slovenian companies) future NPL/Gross Loans could continue to rise Monthly bancrupcy filings Gross NPL to Gross Loans (%) Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 NPL coverage ratio (%) Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 1H12 showed an acceleration of gross NPL s to total gross loans to 15.9% in March and 19.0% in June. Total amount is EUR 844m. Coverage nevertheless still amount to 60.3%. Lending Stagnation: After strong growth in 05-09, Slovenian banking market started slowing down (average YoY growth exceeded 18% in the period from 05 to 09). In the last year we can also see that deleveraging process is gaining momentum and is likely to continue. We believe this is a result of three underlying trends: a) smaller non-financial companies are reluctant to invest in current environment b) most of the Slovenian banks are not in a position to expand their balance sheet (lack of capital and lack of funds) c) larger companies started issuing bonds and short term fixed income papers to retail and institutional investors. 3 / 7

4 40% 35% 30% 25% % 15% 10% 5% 0% -5% -10% Non-financial corporations (loans growth - YoY) Households (loans growth - YoY) These trends are also indicated from the rates where it is evident that Slovenian lending market remains frozen. Slovenian banks (including NKBM) are not in a position to issue bonds or to get syndicated loan. Their credit worthiness is too low hence rates which they can get are too high to lend money to their clients. Due to higher competition on deposit market also deposit rates are increasing and hence affecting profitability. 6,00 5,00 4,00 3,00 2,00 1,00 0,00 jul.08 Deposit rates on the Slovenian banking market okt.08 jan.09 apr.09 jul.09 ECB rate Long term deposits Short-term deposits okt.09 jan.10 apr.10 jul.10 okt.10 jan.11 apr.11 jul.11 okt.11 jan.12 apr.12 9,00 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 jul.08 okt.08 Rates on the Slovenian banking market jan.09 apr.09 jul.09 okt.09 ECB rate Consumer loans Large company loans jan.10 apr.10 jul.10 okt.10 jan.11 Mortgage loans Smal company loans apr.11 jul.11 okt.11 jan.12 apr.12 2,40% 2,% 2,00% 1,80% 1,60% Net interest/total Assets 4,00% 3,50% 3,00% 2,50% Net interest+net fee/total Assets 1,40% 2,00% 1,% 1,50% 1,00% 1,00% It is also hard to predict when lending contraction will stop. Unfortunately we will first have to get stabilization in the Eurozone and only then we expect that credit markets will open also for smaller Slovenian banks. In the mean time we expect deposit rates to increase and pressure on net interest margin to intensify. We now expect the contraction of lending activity in 12. During 13-16, the Slovenian lending growth will probably stay between 3% and 7%. Latest data show that in case of new crisis, the period of slow growth could extend beyond 16. State ownership: Even though we believe that the present 51% ownership by the Slovenian government (including para-state funds KAD and SOD) can be a benefit in the current time of crisis, it is often seen as a drag in the times of economical expansion due to the non-optimal decision making process and possible political influences regarding the banking business. Also there is the question of strategic visibility and shareholder structure visibility. Both can easily change with the government. The prime example was the last capital increase, where in the last minute government changed its stance and participated in capital increase and with it kept its 50%+ share in NKBM. The Capital Assets Management Agency of the Republic of Slovenia which oversee strategic investments of Republika Slovenia (including NKBM) announced that state share in banking group could decrease to 25%+ share, however, there is no exact timeline when this could happened. We believe that this will not happen in 12. New management team: In the beginning of the year management board of NKBM changed. Namely in march Supervisory Board of Nova KBM appointed Aleš Hauc as President of Nova KBM's Management Board. Although he has some experience from banking sector, he spent last few years as a CEO of Pošta Slovenije (state owned company which operate postal services). Lack of management experiences from the financial sector could be somewhat a handicap given current environment. Also several changes in the bank, some quick, could be interpreted as negative since NKBM operating environment is very difficult. 4 / 7

5 1H12 Results and Recent news Significant rise of NPL s and a big net loss million 1H11 1H12 YoY 2Q11 1Q12 2Q12 QoQ YoY Net int. income % % -12.9% Net int. / Loans 1.6% 1.6% 0.80% 0.82% 0.73% Other revenue % % -34.7% Net income Net margin 1.2% -29.1% -2.3% 0.7% -72.8% Deposits % 3, , , % -2.6% Loans 4, , % 4, , , % -4.9% Declining net interest income and commission income. Higher provisioning. Net loss of EUR 36.6m NPLs still rising, even above expectations. Problematic capital adequacy. In the second quarter 12 NKBM Group generated interest income in the total amount of EUR 59.9m or 7.9% less than in the same period last year. Since interest expenses fell by only 2.6%, net interest income decreased by 12.9% to EUR 28.7m. In line with this negative trend the decrease was seen also in case of fee and commission income which fell by 4.9% to EUR 14.6m. Negative was also other income (investments, FX and other income) where in second quarter 12 NKBM Group generated negative result in total amount of EUR 3.7m versus positive EUR 5.2m in the same period last year. While dividend income (EUR 1.6m) contributed 40% less than in the second quarter last year share of profit of associates more than doubled to EUR 2.5m. Since income side is weakening, the management is trying to lower expenses. In comparison to the 2Q 11 administration costs decreased by 8.6% and amounted to EUR 25.3m. In line with worsening of credit portfolio NKBM Group formed additional NPL provisions which were 75.3% higher than in the same period 11 and amounted to EUR 46.6m. Due to deteriorating macroeconomic conditions in the first six months NKBM Group formed NPL provisions in the total amount of EUR 64.9m (versus EUR 41.8m in 1H 11). In the second quarter NKBM Group generated net loss in total amount of EUR 36.6m, while in the same period last year generated net loss of EUR 1.5m. Negative trend is even more evident on the half year level where NKBM Group reported net loss of EUR 36.2m versus net profit of EUR 1.8m in the first six months of 11. NKBM Group continued with the contraction of balance sheet and lowering RWA. Through the second quarter Group's total assets decreased by 0.6% and stood at EUR 5,749.1m. While the amount of loans in the second quarter fell by 2.4% (EUR 3,712.3m) and AFS decreased by 5.9% (EUR 564.4m) cash and cash balance with central bank increased by 47.8% to EUR 223.9m. At the end of the June gross NPLs totaled EUR 844m or EUR 132.6m more than in March. The level of gross NPLs in gross total loans increased from 15.9% in March to 19.0% in June. Accordingly, NPLs coverage ratio fell from 65.5% to 60.27%. During the second quarter funding sources remained unchanged. At the end of June 12 loans and receivables to banks stood at EUR 745.5m (+0.4% in comparison to end of March) while loans and receivables to non-bank customers through second quarter decreased by 0.2% to EUR 3,727.2m. At the end of the quarter shareholders' equity stood at EUR 2.60% 2.55% 2.50% 2.45% 2.40% 2.35% 2.30% 2.25% 2.% 2.15% 2.10% 2.05% 3Q09 1Q10 3Q10 1Q11 3Q11 1Q Net Interest margin(%) Net income 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q m. In comparison to the end of 11 shareholders' equity decreased by 27.9m. Decrease due to net loss was at least partly offset by positive AFS revaluation during the first quarter 12 (EUR +.5m). Due to pressure on prices of Slovenian government bonds during the second quarter AFS revaluation was once again negative and amounted EUR -8.2m. Although RWA decreased and somewhat offset the decrease of equity, capital adequacy ratios decreased. At the end of the reporting period Core Tier 1 ratio stood at 7.45% and indicated that Group will have to issue new share and increase capital level. 5 / 7

6 Top5 shareholders: Republic of Slovenia 27,7% KDPW - fiduciary 11,9% Pošta Slovenije d.o.o. 6,6% Gen d.o.o. 6,4% KAD 4,8% Brief Company profile Nova Kreditna Banka Maribor Group is one of the leading Slovenian financial institutions with over 3,000 employees, almost 600,000 clients, 278 ATMs and 96 branches all across Slovenia. The predecessor of Nova KBM d.d. was Mestna Hranilnica Maribor (the Maribor City Savings Bank) established in Along with their associated companies they provide comprehensive and broadly accessible banking and financial services not only in the field of traditional banking, but also in insurance, mutual funds and stock brokerage business. Very important parts of the NKBM Group are also partly owned Adria bank AG (since 01), Poštna banka Slovenije (since 04) and insurance company Zavarovalnica Maribor. Since 10 Group includes also Serbian bank Credy banka. Structure of Assets (1H12) Structure of Liabilities (1H12) Other 18% Other 14% Equity 7% Avalable for Sale Assets 10% Cash and balances with CB 4% Loans to banks 4% Loans to Customers 64% Debt securities 1% Loans and receivables to banks 13% Loans and receivables to non-bank customers 65% Disclaimer GENERAL DISCLOSURE The research department of ALTA Invest, investicijske storitve, d.d. (eng. ALTA Invest, investment services, Inc.), is, in order to avoid and deter conflict of interests, a separate organizational part of the company. It is independent in its decisions about selecting, monitoring and updating its investment recommendations of an individual issuer. According to its information policy, ALTA Invest, investicijske storitve, d.d. provides data privacy and strongly defends accessibility to the data bases and other materials of the research department, against any unauthorized personnel. ALTA Invest, investicijske storitve, d.d. may trade with the financial instruments mentioned in this document for its own account and may also engage in securities transactions in a manner inconsistent with this research report as a result of the short term trading suggestions of analysts. The payment of the analyst, who provides monitoring of a certain issuer, is among other factors based also on the profitability of ALTA Invest, investicijske storitve, d.d. and a part of that is also profit arising from ALTA Invest, investicijske storitve, d.d. investment services. ALTA Invest, investicijske storitve, d.d. is supervised by Slovenian security and exchange commission (Agencija za trg vrednostnih papirjev), Poljanski Nasip 6, 1000 Ljubljana, Slovenia. Conflict of interest ALTA Invest, investicijske storitve, d.d. (eng. 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ALTA Invest, investicijske storitve, d.d. and its affiliated entities, its employees and other individuals, which have participated in the formulation of this document, can possess financial instruments arising from this document or can be business partners with its issuers. ALTA Invest, investicijske storitve, d.d. points that any investments in financial instrument, including the financial instruments that are subject to this document, are risky. When investing in financial instruments, it is important to be aware of both systematic and unsystematic risk. Unsystematic risk applies to a certain financial instrument, which does 6 / 7

7 not have the influence on the entire financial market and is independent of the movements on those markets. The effects of the unsystematic risk can be eliminated with portfolio diversification. On the other hand, systematic risk applies to factors that influence the entire financial market and therefore affect the value of investor's portfolio. Furthermore, settlement and custodial risk in emerging markets may be higher than in markets where there is a long established infrastructure. Stock liquidity may be impacted by the number of market participants which may therefore impact upon the reliability of any investments made as a result of acting upon information contained in this document. Further risks not discussed in this document may apply to the discussed security. Investors should always investigate the various risk aspects of any security in any market before making an investment decision. 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BUY: The investment rating reflects the total expected return (the difference between the current price of the stock and estimated price, expressed in %, and the estimated dividend yield) for a potential investment in the 12-month period from the date of the initial rating, which is more than 10%. HOLD: The investment rating reflects the total expected return (the difference between the current price of the stock and estimated price, expressed in %, and the estimated dividend yield) for a potential investment in the 12-month period from the date of the initial rating, which is between 0% and 10%. SELL: The investment rating reflects the total expected return (the difference between the current price of the stock and estimated price, expressed in %, and the estimated dividend yield) for a potential investment in the 12-month period from the date of the initial rating, which is lower than 10%. NO RECCOMMENDATION / EVALUATION: No recommendation can be given on the basis of the data available. In the period between and the structure of all investment research was: Number Share Share of issuers, for which ALTA Invest, investicijske storitve, d.d., has provided investment services regarding financial instruments in last 12 months Buy 42 61% 10% Hold 15 22% 0% Sell 12 17% 0% Recommendations issued by ALTA Invest, investicijske storitve, d.d. Železna cesta 18, 1000 Ljubljana, are valid for 12 months, except in case of previous update of the recommendation. However, ALTA Invest, investicijske storitve, d.d. is not engaged in periodical updating of the recommendations of the issuer under consideration as well as is not obliged to notify readers about any kind of valuation, opinion or forecast changes, which have arisen from the occurrences after the recommendation release. When dealing with its customers, ALTA Invest, investicijske storitve, d.d. is not obliged to act in accordance with opinions and assessments expressed in investment recommendations. Financial analyst, who has prepared the document and other individuals, which are familiar with the time and content of the investment research, did not have any personal transactions or trade with the relevant financial instrument from the investment research or haven't been connected with the financial instruments in time during the preparation of the investment research and one day after. Specific disclosures of the issuer under consideration ALTA Invest, investicijske storitve, d.d. Železna cesta 18, 1000 Ljubljana, Slovenia, and financial analyst responsible for monitoring of the issuer under consideration, guarantee that this document has not been disclosed to the issuer of the financial instrument before it was publicly released. ALTA Invest, investicijske storitve, d.d. and its related legal entities can own shares of the issuer under consideration. A financial analyst responsible for monitoring of the issuer under consideration does not have any significant financial interests concerning the financial instrument. They also do not have any conflict of interest concerning the issuer under consideration. In the last 12 months, ALTA Invest, investicijske storitve, d.d. has performed services concerning financial instruments to the issuer under consideration. NKBM will not be a rated covered company due to investment services performed for NKBM. Coverage is temporarily suspended. ALTA Invest, investicijske storitve, d.d. and related entities could hold securities of the relevant issuer. Statement of a financial analyst ALTA Invest, investicijske storitve, d.d. (eng. ALTA Invest, investment services, Inc.), and the undersigned financial analysts, responsible for monitoring of the issuer under consideration, declare that they have not received any kind of compensation, which could affect the formulation of this recommendation or opinion expressed in this document. The recommendation has not been disclosed to anyone before it was publicly released. Matej Šimnic, Analyst On the day of the public release, the author of the recommendation held securities of the relevant issuer. Sašo Stanovnik, Head of research On the day of the public release, the author of the recommendation held securities of the relevant issuer. First release of the recommendation was performed on Quarterly updates are planned for data, valuation, target price and recommendation. Other information Other information about the services of ALTA Invest, investicijske storitve, d.d. and financial instruments, including general conditions for provision of services, price list and other disclosures can be found at and ALTA Invest, investicijske storitve, d.d., Železna cesta 18, SI-1000 Ljubljana. Registered at the District Court of Ljubljana, Registration Number: , ID for DDV: SI , Share capital: 2.031, EUR. 7 / 7