Hello, welcome to LHV Group's second quarter 2026 results overview. My name is Mihkel Torim, and together with me I have, as usual, also our group CFO, Meelis Paakspuu.
Hello.
Also commenting the first half results from the LHV Bank side in Estonia, Erki Kilu.
Good morning.
All right. Starting off with some of the group level highlights. As our first quarter was relatively difficult, some trends in second quarter were already quite positive. Effectively, quarter-over-quarter, our net profit increased by 25%. It's still 20% below the second quarter of 2025. If we're looking at the profit prior to provisions, that actually has picked up. Basically, in comparison, Estonia, we reversed some provisions in the second quarter of 2025, but we made those in the quarter that just ended. That's the main impact of the difference. On the positive side, clearly, the group net interest income has increased 5% quarter-over-quarter and 8% year-over-year. On the Estonian bank side, the net income has actually increased by 15% quarter-over-quarter and 10% year-over-year, which is definitely a good sign.
On the U.K. Bank side, the profit was EUR 1.4 million, effectively the loan portfolio has grown by 66%, reaching EUR 945 million at this point. We are quite close to the EUR 1 billion mark on the U.K. side. On the asset management, basically the assets increased to EUR 1.79 billion, and the results were in line with the expectations. On the insurance side, it was definitely a much better quarter compared to the last one. Significantly less losses and the gross premiums grew as well. They were profitable and basically all our subsidiaries were profitable. ROE on the group level 13.1%, which is not at the target level that we aim for, but the dynamics are clearly positive. As mentioned on the net income side, positive trends on the loan portfolio growth has increased also.
When we are looking at the second quarter, compared to the first quarter, maybe some other elements to highlight. The total expenses were somewhat lower than the first quarter. That's a positive sign since there were quite many one-offs in the first quarter, which were not reflected in the quarter that just ended. Overall, if we look at the quarter-over-quarter trends, both the income increased and the net profit increased. Also, as you can see on the table below, the net interest income increased by 20 basis points as well to 2.6%, and ROE trend was positive. It's definitely not at the level where we expect to see, we expect the supporting trends to continue during the next few quarters as well.
As already mentioned in the beginning, compared to 2025, second quarter on the income side grew, mainly driven by the net interest income. Fee income was pretty much flat compared to the last year. When it comes to the bottom line, there was impact when it comes to impairment losses. Earnings before impairment was better, and as already mentioned before, when last year we reversed some of the provisions which supported the bottom line, this year the impairments were higher. Loan portfolio growth in second quarter overall was strong, much stronger than it was in the first quarter, and this time it was primarily led by LHV Bank in Estonia, both on the retail and corporate side as well. Effectively, cost income ratio is, I would say that not that far compared to the second quarter of 2025.
Yes, effectively you can see that year-over-year also, the net interest margin is now the same as it was then. Then I will hand over to Meelis, who will go through further financial figures on the group level.
Starting from net interest income side, as Mihkel was finalizing that angle, when we are looking quarter-to-quarter net interest margins, this has increased from 2.4% to 2.6%. This is the most critical item in financial institution P&L station. This means that our net interest income has increased. It is better than we have been expected. This angle is much better. When we are looking at the forecast, things are going in the right direction. When we look at year-to-year P&L, the P&L has decreased. When we are looking at the compositions. Yes, there has been slightly more personnel expense. Maybe slightly less people, some changes in different parts of our organization, there is still inflation in salary sides, there are slightly higher salaries, costs are up, slightly increased.
The other side is that in this year, we have had one-off costs regarding purchasing in certain consultancies, but we did not have last year, and one of the largest gaps is impairments. When last year in first half, we did not have negative impairments, actually had even slightly positive ones. Now, we have made provisions against specific clients. The client portfolio is still strong, but we have just made some provisions. All in all, picture is getting much better when we are looking at quarter-to-quarter results. Looking at balance sheets, the principle of keeping very simple balance sheet remains, we are deliberately keeping it simple. We do not want to have high volatilities in the books. We do not want to have complexity in our assets liability side.
In asset side, there has been one difference compared to the previous quarters, we have been increasing our bond portfolio. This liquid bond portfolio, where we have switched from keeping funds only in ECB also to government papers. These are up to two years long papers. Yes, they are generating slight volatility in P&L as well, but the more important is they are yielding better than ECB rates. It is one additional revenue stream for the group. On the liability side, we have reduced more expensive deposits. We have reduced platform deposits. This has been one of the items, balance sheet structure on liability side has remained more or less the same. Loan portfolio side, its most two important facts are the Stage 3 loans and share of Stage 3 loans, this has dropped from 1.6% to 1.4%.
We are seeing a good development in the lending portfolio quality side. When we are looking at the only table in the presentation, uncovered part of Stage 3 loans is just EUR 4.4 million. Everything that is in Stage 3 is actually covered with collaterals. We do not expect there is something negative popping up from there. On capital side, capitalization has more or less stable. Of course, every quarter, there are some changes in understandings of regulations, we end up with similar capitalization levels, we are above all of the risk appetite limits. Clearly, the limiting factor is MREL side. MREL side here is actually even shown slightly below the ratio, it does not include Q2 profits, will be included backwards after we are receiving ECB permission, will most probably be second half this week.
In Q3, we are planning to do an MREL issue. The size and timing not decided yet, but it is planned to be in Q3. Liquidity-wise, picture is very solid. LCR and SREP are way above internal targets and also when I look at especially LCR ratio, this is including all financial intermediaries deposits at 171% level. If we would take these ones off, we are close to 300% level. It is almost twice as high as European banking average. Numbers are liquidity-wise, very solid, and this has been also the reason why we have been able to lower more expensive deposit base, especially platform deposits in Estonia. Putting things together and comparing with financial plan, we are slightly behind, but this slightly is just some of the items what was in Q1.
At the same time, we are seeing that we are clearly moving in the right directions, and we are able to fulfill all of the financial plan targets within 2026 based on the current knowledge. Loans are slightly ahead, deposits slightly behind, but it is controlled. Asset under management, again, markets have performed well, so they are ahead. When we are comparing payments of payment intermediary side, much higher. This also shows the strength behind the numbers that things are moving in the right directions. Now giving it over to Erki, who is covering the bank.
Okay. Yes, just repeating what Meelis already said, that we worked a lot in the second quarter with interest income part. Of course, Euribor has started to increase, and that has also supported our interest income side. At the same time, we started with liquidity portfolio, and that is earning some extra income for us already. The other side, the loan portfolio has also grown, which is a good sign. Most of that EUR 114 million is coming from the mortgages, but also the corporate and business lending is growing quite nicely. The loan book is still growing well. What we have been doing on the both sides of the balance sheet is that we have tried to reprice some of the corporate loans. That, of course, has resulted to some clients leaving, but that has allowed us to increase the NIM.
At the same time also with the deposits, we have tried to optimize the deposit book as much as we can. Mainly it means that we have not been that active on the deposit platforms anymore because these are the term deposits and the most expensive ones for us. From the both sides, we have managed to lift the NIM to 2.6% in the second quarter. Regarding the loan book quality, the overall quality is good. You can see that in the first two months of this quarter, we didn't have high provisions at all, and most of that came from the last month. I can say that a bit more than EUR 3 million came from one client who has been with us for more than 10 years, and the loan has always worked well.
The loan just moved from Stage 1 to Stage 2 because of some other parameters. Some key activities that we completed in the last quarter. One of the biggest achievements is definitely moving our core banking systems to the Amazon Cloud system. That took nearly two years, and it's a big effort from hundreds of our people, so big thanks to them. We will continue with this project. There are some smaller parts which also need to be updated, and we are constantly refactoring our systems as well. We are doing a lot of work not to have legacy systems at LHV. In the beginning of the quarter, we announced also the changes in the organizational structure. We are moving more to product-led management, which means that instead of retail banking, we now have different product areas.
Not all these changes have been completed yet, but most of the work has been done and the rest will be done in this quarter. We received also the MiCA license in Q2, and that was the first license issued to a bank in Estonia. That will allow us to start offering some additional crypto services in this quarter or in the next quarter. We were again recognized as a top employer in the Estonian financial sector. That has been for quite some many years already. Today, we announced also two small news. We have decided to change the company name from LHV Pank to LHV Bank as bank just sounds better in other markets, especially in Europe, for the clients, for the partners, for the supervisors.
That's quite a natural change for LHV when we think about going to other markets as well in Europe. We have started passporting our license to other European countries. There are different reasons for that. One, and probably the most urgent one, is actually coming from the banking services side, because the so-called product-embedded banking is something that our clients are asking for, and in this case, the agreement is signed between us, our banking services client, and the end customer, which means that we need to have passported licenses in other countries as well. It also supports our retail banking ambitions to grow in other markets in longer term. From this slide, it's very clearly seen the work, what has been done with the deposits in the last two quarters of this year.
The deposit base has decreased by 5% in the last 12 months, but at the same time, it is now much more efficient. It helps us to save some of the interest expenses. Compared to the market, its structure is the same. Most of deposits are coming from private retail banking customers, and the rest is coming from the businesses and corporate clients. In our case, the share of banking services customers is also larger than in the market in general. The loan book is growing with the same speed as the market is growing. That's nearly 10%. The structure of the loan book is very, very similar to the whole market, where half is mainly private mortgages and the other half is coming from corporates and businesses. As mentioned, we have done a lot of work with interest income in the last two quarters.
The net fee income has been very, very stable, but this is now the second part that needs attention in our income side and that we'll get it in the next quarters. Expenses are slightly higher than in Q1 or Q4 last year, but this is mainly coming from higher personnel expenses, and these are related to the changes in the work structure, changes in the management, reducing the number of people and just the benefits that has been paid out when people are leaving. The number of people is even smaller than it was at the end of the year. The expenses have been higher. All in all, what to bring out from these numbers, definitely business volumes, loans are ahead of our financial plan and deposits have been optimized as much as possible.
The underlying business is doing well, and when we took a look into income, then we have EUR 1.7 million from the negative revaluation of swaps made between the U.K. bank and the Estonian bank. That's the reason why the total income is slightly lower than the financial plan was, and that has also affected the net profit line. When we take that away, then more or less, let's say broadly, we are in line with financial plan. Thank you.
Okay. I will take the opportunity to run quickly through the LHV Bank's results as well in the second quarter in the U.K.. Pretty much the volumes were in line. The loan portfolio growth in the second quarter was a bit slower than we anticipated, but we do anticipate the growth to pick up in the third quarter. The deposit volumes were also stable, but at the same time, the direct customer deposits increased from 16%-24% of the total funding. We are gradually increasing the share of the direct customers that are banking with us and saving with us. Also, the costs were in line with what we planned. In fact, they were 0.9% below the year-to-date plan.
Having said that, there were quite significant investments into branding campaigns and also in product development and basically developing the tools that we aim to use for the retail banking purposes as well. Digging more into the loans and deposits. Year-over-year, the growth has been quite significant. Yes, we are quite close to reaching EUR 1 billion in loans in euro terms. Also what I would like to point out is that the pipeline that we have on the SME lending side, that has also increased from GBP 124 million to GBP 176 million. The rationale why we expect that the third quarter will be stronger in terms of conversion. The number of direct retail customers increased roughly to 10,000. The average balance that they have is also quite high, so it's GBP 28,000 on average per client.
Yeah, as our share of direct depositors is increasing, the reliance on the aggregator is also reduced. You can see quite significant change from first quarter into second, and obviously even more so from the number last year, where we just got started. Net interest income is really the main driver for us in the U.K. business for the time being. It was positive to see that net interest income increased quarter-over-quarter. Yeah, when it comes to the banking services fee income, that was a bit under pressure in the previous quarter as well. Expenses, well controlled, moving in line with the budget and by the end of the first half of the year, they were even somewhat below what we planned for, which is good despite the investments into marketing and other costs that are running through the various cost lines.
Yes, I think pretty much all has been already said. Positive dynamics from first quarter to second quarter. Just to, again, point out that the costs in the second quarter when it comes to marketing were quite high, that's also reflected there. Otherwise, pretty much as planned. As I said, in third quarter, we expect more higher loan volumes basically to go out. When it comes to asset management, pretty much moving according to the financial plan. If in the first quarter, there was a net loss that was just driven by the dividend payment and income tax related to that, then second quarter was profitable, and it was moving a little bit ahead of the actual plan.
When it comes to the funds results, if first quarter was very strong for our actively managed fund, then second quarter was strong for indices, primarily driven by AI-related stocks, the chip industry as well. The dynamic has a little bit reversed, but overall, the assets under management for our funds has increased and also the fund performance has been good. Yes, net profit in second quarter was almost EUR 400,000. Compared to the financial plan, we are moving slightly ahead of the budget. All according to the expectations. Last but not least, on the insurance business that we have in Estonia. First quarter was a difficult one, second quarter was already basically back into the budget. We had significantly improved net loss ratio compared to the first quarter. Gross premiums grew, customer base grew as well.
Overall, when it comes to net incurred losses, as you can see also on the chart below, it was relatively low, especially contrasting to the first quarter. Then the contract premiums were also increasing, that helped to produce the result, which was almost EUR 800,000 in net profit. That helped to erase the loss that was generated in the first quarter. Basically, the business is at the end of the first half of the year back in profit, and also the overall market dynamics seem to be improving as well. To sum it up, the group net profit quarter-to-quarter improved quite significantly, but we do admit that the first quarter was exceptionally tough. As Erki already mentioned, and as Meelis has mentioned as well, there's been a lot of work going into improving the net interest income level.
In the second quarter, the lending volumes grew quite a bit more compared to the first quarter. These are definitely the positive trends. LHV Bank pretty much moving in line, so we're expecting additional loan volumes to come into our books in the next quarter. When it comes to the asset management and insurance also, it was a decent quarter. I'll stop here, we are opening for questions. Thank you.
Yes. Thank you, Mihkel, Meelis and Erki. As mentioned, let's jump now to the Q&A section, as we have quite a few comments or questions there as well. First one, loan impairment charges of EUR 5.6 million were recognized in the quarter, reflecting a limited number of individual cases and higher forward-looking model provisions. Could you provide a bit more color, please?
Well, this is exactly what I mentioned also before, that over EUR 3 million of that came from one single client and from a corporate loan. That's one side, the rest came from modeling.
Yes. Modeling side is always forward-looking. When the basis is not moving or getting better, in this case, things are changing very rapidly here in both sides, that's because the starting point is the geopolitical situation and also the price of energy sector. If there is in Middle East, and the tankers are not moving, this affects energy prices in Europe, this affects the riskiness of the clients. Models are showing higher risk, and we are increasing our provisions. That will it be actually realizing anywhere, hopefully not. Models are showing a slightly more conservative picture.
Net interest margin improved to 2.6% in Q2, with further gradual improvement expected. Could you please guide us a bit here about the magnitude for improvement?
The magnitude is coming from the structure of the balance sheet. When you look at the deposit side, then we had a slide showing that 22% of Estonian deposits are term deposits. 78% of the deposits are current accounts. Yes, not all of them are with very low interest rates, but a sizable portion of this more or less acts as a fixed interest rates. That if market interest rates are going up, then the loan portfolio and ECB are repricing, same time, liability side not in. Another key cornerstone here is that ECB changed interest rates, but they are valid only from 13th of June. That in Q2, effectively, there are very limited amount in repricing of liquidity portfolio, that we are keeping more than EUR 2.5 billion in ECB, but now is yielding slightly higher.
LHV Bank had 32,000 customers in Q1 and 30,000 customers in Q2. Could you please help us understand what caused the drop quarter-on-quarter?
I can explain that.
Okay.
This 30,000 includes both the customers from the deposit platforms, which is nearly 20,000, and direct customers, which is a bit more than 10,000. The number of direct customers increased by hundreds, the number of deposit platform customers just decreased by a few thousand.
Effectively, we have more customers who are direct, as the gradual decrease of the deposit platforms keeps going, that's the impact. I think it's important to sort of distinguish the number you see as direct customers and the total.
Next question is a bit longer one, I will take it in different parts. U.K. loan portfolio is more than 15% of the total loan portfolio now. If you can, please comment the U.K. loan portfolio, the composition of the loan portfolio by loan products, including amortization versus interest-only loans and typical collateral.
I can start somewhere. We offer three types of loan in the U.K.: commercial real estate, bridging loan and buy-to-let loans. By today, the portfolio is quite equally divided between these three product types. All the loans are having very strong collateral, strong LTVs. We don't do anything which is not having real estate as a collateral. I think the loan book is quite well diversified between the loan products and also diversified geographically. It's not only London-based, we have another office in Manchester, the loan book is quite well diversified between South and North England as well.
Following that, could you elaborate on interest rate type and the portfolio split between fixed and floating rate loans? Can you also comment a bit on the credit quality and the share of overdue loans?
I think roughly 1/3 , which is the buy-to-let loan, is with fixed rate, and 2/3 is with floating rate.
There was a question about the geographical split, but I think you covered that. The only question maybe from that is what's the appetite for commercial real estate in London?
I think it's not only about London, but it's the overall commercial real estate in England. As we do only a very conservative part of that, then I think it has worked well, and it's still working very well for us.
Maybe just to add, this is public as well. There are, let's say, more efforts when it comes to geographical diversification as well. We are also sort of looking further north into some parts of Scotland as well, to grow the exposure there.
The final question is about their own portfolio in the U.K. Can you comment the ROI, risk-weighted assets, asset density, retail versus corporate claims, and what future plans concerning new credit products in the U.K. are in the plans, including mortgages, consumer finance, et cetera?
I think RWAs are quite similar to the overall levers, what we have.
In the Group, i n RWA side, U.K. is not specific. That's U.K. risk-weighted assets are ending up very similar to the ones what are in Estonia. That's in some specific cases, slightly lower. In some angles, slightly higher. We are talking about the same ballgame.
About the future products, we have discussed about these options on the board level. We have decided not to launch any new products this year. Let's see whether we'll make a decision to launch something in the next year. It's quite clear that, yes, we need to have more products. The question is just about the timing.
A question about funding in the U.K. Can you provide an update on deposits acquired through own channels? What is the share of total deposits and the relative pricing to the platform deposits?
We are sort of close to one quarter when it comes to direct deposits. I would say that the pricing is quite similar, I think, to what we have on the platforms. For us, going forward, it's really more about adding customers directly, sort of building the recognition and also adding more products to the retail customers as well, so that we can gradually decrease the cost.
What additional crypto services are you planning to introduce?
We are thinking about some additional features, like staking, for example. We have been also thinking about offering or making available stablecoins for our customers.
When do you expect to be able to announce specific expansion plans to Europe? Can we expect news till end of 2027 or most likely later? Please provide some color on when should this be expected.
I would say that within 2027, there will definitely be more specific news regarding to that. I think it's important that what Erki already has mentioned when it comes to the name change, when it comes to the form or possibility of doing the right steps, starting with the passporting, that we would have the sort of availability or the readiness to go ahead with certain steps. It's also important when it comes to the sort of changes within the organization, when it comes to the sort of more product-based retail banking model, that we have to sort of make quite many steps when it comes to our ability and product offering that we're actually in a good position, vis-a-vis the competition to make those steps.
This year it's a lot about changes and preparation, but it's also not just preparation regarding other markets, but it's also making sure that we have a strong product offering here as well. With that product offering, we can also jointly support the U.K. retail growth. Long story short, I think somewhere within the next year we can be more clear. Before that, it's really about making sure that the sequence is right and that we are preparing in a right way.
The question similar to that topic, does five-year financial plan include any costs related to future expansion plans, or these will come in addition to regular business costs?
Partially yes, is the answer. These costs, what we are carrying through our own employees who are currently already on the payroll, these costs are already incorporated. If there will be additional costs, but then it is already related to specific country, specific product lists, then these are not there as we do not have a single penny of income included into the financial plan.
Any initial thoughts on what OTP owning Luminor could mean for competition in Estonia?
Too early to call. I think first of all, it will take some time. It is difficult to say whether that time will be short or long before all the relevant approvals are received that they can basically start operating Luminor's existing platform. Let's see. OTP is a very different bank or banking group compared to the competitors that we are used to on the market. It has a very strong Eastern European footprint, has activities in Russia as well, in addition to Eastern Europe.
Let's see. I think in the short term, not much will change. When it comes to LHV, we have been, at least when it comes to Estonia, we are used to regional competitors, we are used to Nordic competitors. I think our competition has been strong both when Luminor was under Blackstone, before when the banks were owned by Nordea and DNB. We welcome the competition, but it is too early to say how this will actually impact the Baltic market.
LHV has talked a lot about migrating to clouds, MiCA license, stablecoins, et cetera. It look like LHV is migrating from a classical bank business model. Could you please name a few institutional names which business models are somewhat similar to what LHV is trying to achieve? Revolut, Nubank, Plata. Please provide some hints on how to better understand where exactly LHV is turning its business.
I think the question is not so much about the business, but it is about the technology. Every technology becomes legacy at one point. We try to avoid that. There are not too many banks who are actually having so good cloud infrastructure what we are already having. There are only a few new banks mentioned by you before. It is more about the technology and having the options for the future. Business-wise, I wouldn't say that it is something strategically different what we are doing at the moment.
Yeah, maybe just to add to Erki's comment, I think it is important to distinguish that what's the technological platform that the bank is really running on and what are really the sort of options that it enables for future development, whether it's for the existing customers, whether it's for new customers as well. It is important to distinguish what are the products that the banks are offering and what's the platform. I think we have come really a long way when it comes to the platform, but when it comes to the actual product offering and the client base, we have to really trust our own experience and gut feeling on where the opportunities could be for us, both on the existing markets and how we want to develop further.
I wouldn't really say that it's a comparison against specific neobanks on what they're offering, but it's really the platform that's enabling us to do things that might be quite restrictive for quite a lot of the existing banks. When it comes to the technological platform, I think we're closer to Revolut and N26 and a few other players. When it comes to the offering, we're obviously looking more like a universal bank, when it comes to offering, it shouldn't be one or the other. I think we are finding our own way, but the platform is really the big enabler for us going further.
Five-year financial plan does include some costs related to future expansion plans, does the plan include also any revenues from this expansion?
No.
No.
The U.K. bank's return on equity is well below the internal target. Are you satisfied of this performance, how do you plan to close the gap?
Of course, we are not satisfied. Our target is return on equity of 20%, and target is that every single business line will deliver it. At the same time, also we need to understand what it means to set up a licensed bank in one of the large old European countries. This actually generates a cost base against which you minimally have to have EUR 700 million-EUR 800 million worth of loan portfolio. That's just to be break even. We have reached that point. We are now moving beyond this, and every single penny that we are giving loans out in U.K. is increasing return on equity as well. It is about volumes and keeping the bank efficient. If we are delivering the volumes, we end up reaching the required return on equity as well.
Yeah, just additional comment. One thing is reaching 1 billion when it comes to loan volumes, but it's a different situation when you're reaching 2 billion, and at the same time, we're basically building a new platform. When it comes to scaling, when it comes to operational costs, the hypothesis is that we can be in a much better position. Basically, that's also part of the plan, that we will be growing more efficient, and we've had this sort of liberty of having fresh platform onto which to build on. It is really about some time and effort that goes into, first of all, the funding costs, when it comes to the recognition, when it comes to the scale.
It is really now more about the sort of controlled growth, because when it comes to growing too quickly on the lending side as well, it has its own risks. We are on track with our plan.
Regarding the U.K. bank, what is the share of Stage 3 loans from total portfolio?
These numbers were one or two loans in total. In my head, I have not even calculated the ratio, but we are talking about one, two cases only.
Okay, it seems that there are no further questions. I think we can wrap up our call for today. Thank you, Mihkel, Meelis, and Erki. Thank you for all of the participants, Hope to see you soon in the near future.
Thank you very much. See you next time.
Thank you.
Thank you.