Hello. Good day to everybody who is participating. This time it is myself and Meelis.
Hello.
Giving you an overview of our third quarter results. We had the strongest quarter to date. Our net profit in the full quarter was EUR 37.5 million, up significantly on quarter-to-quarter basis and also year-over-year. If we unpack that a little bit, the net income side increased 10%, loan portfolio grew 14%, and deposits grew by 4% year-over-year as well. The third quarter return on equity for the group was 19.3%, cost income at 54.2%. Something that we need to highlight right away is that fundamentally, third quarter was strong already, pretty much as we anticipated, moving according to plan. But there was also a significant positive one-off. It was a large release of provisions in Estonia, related to one client. On the other hand, there were some smaller provisions that we did in U.K.
Overall, that led to approximately EUR 9.1 million release of provisions on the group level. On LHV Bank side in U.K., the loan portfolio crossed EUR 1 billion, so that is 56% year-over-year growth, and net profit was EUR 1.4 million. Assets under management in Varahaldus grew 12%, and then insurance premiums grew 20% year-over-year. We continue to be in a soft market in insurance in Estonia, but we see also some positive trends there. Main growth driver, clearly was net interest income. If we look at where we started in first quarter and where we are now, we are now seeing significant growth based on our lending portfolio, and also there is a lot of work that has been done both on the assets and liability side to optimize the performance, but we will go through the details as we go through the slides.
On quarter and quarter comparison, visible increase in the net interest income. Also, third quarter was relatively strong on the fee side, where we have been lagging during the first and second quarter, but there continues to be a lot of things that we can still do concerning product development overall. A lot of long-term work is going into that line, so to say. On the other income row, you can see there is a -5.5, so this is related to our liquidity portfolio. But I will not stop there. Meelis will cover this and talk about it in detail. Short summary is that this is basically mark-to-market fluctuation, and we have no intention to see that as a sort of a realized loss. This will kind of work itself out during the next quarter.
It is just volatility, but again, Meelis will go through that in more detail. Overall, net income growth was 1% quarter to quarter. But I would still like to emphasize the growth in the interest income and on the fee income side. Then on the expenses, they were flat compared to the last quarter. Then you can see here there is a significant release of provisions under the impairment losses row, EUR 8.9 million altogether. Overall, we managed to generate EUR 37.5 million net profit, and in September specifically, EUR 18.1 million. Some of it is not recurring, but on the other hand, I think the underlying business is also doing quite well. But we will go through them one by one. Loan portfolio growth 3% over quarter, deposits pretty much growing in the similar amount. Slight decrease in assets under management on the LHV Varahaldus side.
Number of customers growing pretty much according to growth rates that we have seen so far. I would say that in third quarter, the client growth was even a bit higher, which can be seasonal, but at the same time, I think it is a good trend. ROE, given the impact of the provision as well, was 19.3%, and net interest income margin 2.8%, which is a strong level. Now if we look at the year-on-year comparison, it is also becoming more and more evident that in third quarter 2025, we already started to witness the impact of the interest rate environment in a negative way. Now on year-over-year comparison, we see obviously this trend reversing. So we can witness quite significant growth on the interest income, and in third quarter also on the fee income side.
Also highlighting the fact that year over year, I think all of our portfolio growth metrics, customer metrics are quite favorable. Yes, we will go through the details of the subsidiaries as we go along. Then I will turn over to Meelis for a while to talk about the asset liability side and some effects on the profitability.
Well, from my side as well, covering first the profitability and when we are looking at year-on-year changes, the biggest item here is clearly the interest income side. As of total, interest income side has been almost EUR 15 million better. Same time, when we look at the related items next to it, there is an other net income expense what is containing the revaluation of liquidity portfolio. What we did and what we have done this year differently is that end of first quarter, beginning of second quarter, we shifted EUR 700 million worth of liquid assets from central bank accounts to liquidity portfolio. What is measured in mark-to-market level. This EUR 700 million, actually all of this is only government bonds, European level. The maximum duration is two years when we now measure the portfolios, and it is around 1.5 years duration.
When interest rates get up or increase, then the outcome is that we are getting immediate revaluation loss from this portfolio. Same time, when interest rates are going up, then our loan portfolio is yielding higher, interest what we are earning from central bank are yielding higher. Yes, deposits rates are increasing as well. But all in all, there is a sizable structural position in LHV that LHV is gaining when interest rates are increasing and losing when interest rates are falling. This is partially the reason when we were looking how tough the year 2025 was and beginning of 2026 as well. That now we are in the positive cycle, that we are gaining. But in short term, this revaluation is netting partially the positive trend out.
But in long term, we are certainly earning from that side as well, a couple of additional millions versus keeping the funds in central bank. Looking other factors in the profitability, net fee income is more or less flat year-to-year. Would like to be slightly higher, but mostly there is less fees in banking service side. And last year, some of items are again related to comparisons that last year there were some larger positive transactions in the picture, but this year are not there. Overall, fee income is moving in the right direction. Personnel expenses, widely covered topic. As the business has been growing, then there are slightly more people. This shows clearly negative impact on the P&L as well.
IT expenses and other operating expenses, partially we could label it in this space that when LHV moved to cloud in first half this year, and also some of items are still from the old systems in place by the contracts. So there is some double cost base inside 2026. In 2027, these have all disappeared. The bank is a fully Amazon cloud-based bank. So there are very small amount of databases what are still kept locally. And yep, that's regarding the profitability, that overall profitability more or less the same as nine months last year. And when we are looking forwards, then hopefully we will be able to beat last year results.
Balance sheet-wise, here in asset side, you are seeing one item what has changed, and it is brownish colors are in the middle of the graph, and this is a liquidity portfolio that we have been building up over the last seven, eight months. This is generating some volatility, but we are happy with the volatility that at the end of the day, what matters is the total P&L, and we are earning more on this portfolio than keeping the liquidity only in central bank. On liability side, when you compare year-on-year numbers, then almost everything is the same. Only item that has changed is platform deposits in Estonian side has been decreased, but same time on group level, this is not seen anyway. Loan portfolio side, what you don't see here is that the Stage 3 ratio has not decreased yet.
The reason is that, yes, we have released the provisions. We have a positive solution for one large corporate, but the loan is still out. Until the loan is still out, then the loan is still kept in Stage 3, so the Stage 3 percentage-wise is still on this 1.5% level. At the same time, this also appears in Stage 3 collateral shortfalls that compare to the last quarter, that there is almost 10% drop in collateral covered side.
This is all related to this one specific case that we do not need to have collateral and on the loan where we know that it is coming back, it is coming through the bankruptcy case back and the deposit is already sitting in our bank, but it is not linked to the specific loans that we just know that it will be covered, will be covered in Q4 or paid back in Q4, hopefully. Maybe it is in Q1 next year. When we are looking at sector base, still picture is very much the same as last quarter, that private individuals are still exactly at the same 36% and more or less same percentages in real estate. The rest is this kind of well-diversified portfolio as in most of the larger banks in Estonia. Capital side.
Every time we have discussed about this, that the numbers are not final because there is an ECB approval needed to include Q3 profits into capital adequacy. So we added a column with this one. This shows that we have enough capital. Our capital ratios, MREL ratios are on the proper level, so we are able to fulfill all the requirements. But liquidity, there is a slight drop in liquidity-wise, in LCR and NSFR, but still we are talking about way higher levels than regulatory ones, plus also higher than our own internal ones, and the ratios are still compared to our competitors on the high end. Why there is a drop is deliberate letting go platform deposits in Estonia. So helps to save some costs, and we do not need for any other ratio anymore even.
Taking year-to-date numbers and comparing with financial plan, then interest income clearly ahead, net fee income, yes, it is behind. Other income here was volatility from liquidity portfolio is clearly behind, but this is something that is disappearing, not this year, but our less interests are coming down very quickly. Certainly next year, that will be a positive number. All in all, our profitability is such that our net profit is ahead of financial plan, and we see that there is a very high likelihood that we will be able to fulfill our financial plan this year. So that is return on equity is getting better, cost income is going down. So, numbers are moving in the right directions, not in just one angle, but throughout the balance sheet, throughout the business activities.
Covering Estonian bank as well, partially it is repeating story because Estonian banking entity is so large part of group. Most of the comments that we made on the group level are actually coming from Estonian banking entity. First of all, net profits go up quarter-to-quarter by EUR 39 million. That's all in all, earning EUR 33 million profit per quarter. It is not the highest, but it is one of the highest quarters in LHV Bank's history. Return on equity 21.6%. So, solid number. It is something that we would like to see more or less on regular quarters. Yes, we had gotten some one-offs in positive side, but same time we had one-offs also negative side. I am more looking at this outcome as such. Cost income 46%, still slightly high.
Would like to get it lower, and we have the plans how to get them there. Things are moving in the right direction, and customer base has been increasing by 8.8 thousand to 517,000. So shows that the client base is growing. The business is moving in the right direction.
I will just take over for this slide. For first half of the year, we have worked quite a lot on the retail side and on the retail product development in Estonia. Here we just wanted to highlight a few outcomes that are already live and on the market and introduced to our client base in Estonia. First highlight is the, so to say, soft launch or beta launch of LHV.ai. Effectively, as far as I know, LHV was the first bank in European Union to launch the MCP-based AI integration, so customers can use their own preferred AI tooling to connect to their accounts and basically get the information out of them. It is not a two-way street, so it is a one-way street. But what we see is that the number of customers who have adopted this, who are using this day to day, are very engaged.
We have also a lot of insight, a lot of ideas, and a lot of understanding on how do entrepreneurs and how do retail customers use AI tooling, and how they really sort of get benefits from the effect of the accounts being integrated, so that you wouldn't just need to copy-paste information out of the account information. With that, we are learning quite a lot. We are also learning how we can build better tools within our own bank's perimeter, our own apps, and our own channels. This is very, I would say, interesting trends. As I said, the users are very active, and they also are sharing a lot of feedback and ideas on how we can develop this further.
Another thing which is, I would say, we have been owing this to our clients for already too long, is a proper planning tool, a categorization tool for your income, for your costs, for your savings. We have launched this, and also the launch and the adoption rate showed that this was clearly something that clients wanted, expected, and in that it has also performed much better than we anticipated. When it comes to the depth of the service that we provide to our retail customers, usability, we think this is super important to retain our competitive edge. We want to be ahead of the others, provide better solutions. These are just one of the few items that we have released. There will be several more coming out during the next months and quarters.
I am really happy that our product development speed has picked up substantially compared to what it was before. Last but not least, we were also recognized as the best bank in Estonia, by Euromoney. Together with new product releases and the sort of innovation that we hope we are providing to our customer, it is also good to see the recognition from Euromoney as well. Then I will hand back to Meelis again.
Looking at deposit sides, the picture is actually misleading. The picture states that within last 12 months, LHV has lost 3% of deposits. Now when we are getting closer to the numbers, then when you look at the item called platform or platform deposits, this has disappeared from the picture. A year ago, we had around EUR 500 million of platform deposits. We decided to pay this back in Q2 2026, and last month, we paid back in Q3. As of now, we have from platforms less than EUR 10 million of deposits in Estonia. If we are adjusting the picture and taking these platform deposits out, then the statement is that our regular customer deposit base has been growing more around 5%, 6%. It is slightly faster than the Estonian deposit market dynamics in total.
Even more important is the fact of the share of term deposits, where the money is coming, is it coming from the term deposits or is it coming from the current accounts? Term deposits are always more expensive than current accounts. We have been managing to reduce term deposits from 26%- 22%. It has a sizable impact in the P&L. This is what we have been clearly pushing for, that our profitability is getting better from that side. But same time, we have to say that deposits and competition regarding deposits are very much in focus in all of the banks. Estonian deposit markets has been growing only 4% over the last 12 months. Lending market, on next slide, has been growing 10% year-on-year.
Yes, partially, the gap between these two growths can be covered from covered bonds, through capital, through MREL type of bonds, in some banks case also borrowings from the parents, but in general, the system itself has to fund locally, so that in long term, loan market and deposit markets should grow more or less with the same speed. There we see that the Estonian loan market has been growing faster than we actually anticipated, that we anticipated that it is below 10% this year. This is also that when we look at our own lending growth, that year-on-year it is around 7% level, that we expected that we would be able to slightly beat market. Yes, competition in the lending side is heavy as well, especially on the corporate side, and we are not ready to do very low profitability transactions.
This means that we are not there for just taking some market share. We are looking for the specific loans what are fitting to our portfolio. Net fees and net interest, both are growing in the right direction and with pretty fast pace, that net interest income has been growing by 22%, fees by 15%. Same time, when we look at absolute numbers and fee income is still 45x smaller than interest income, that something that we would like that it would be higher. Is it easy to be done? No, it is not. It is a tough work to increase fee income because this is about product offerings. This is about channels. This is about specific products, most convenient products, and that is a work where we are spending huge amount of time and investments. Target is to increase fee income hopefully a lot.
Expenses, around 13% growth. Some of them are slightly one-offs, but as I mentioned earlier, that on other P&L side, I tend to ignore one-offs. I would ignore these ones here as well. Just looking at the numbers of Q2 versus Q3, that it gives a false feeling that Q3 cost base has been significantly lower. It is more about this, that the cost base is not lower, but people had a vacation in Q3. Based on Estonian accounting logic, you accumulate reserves throughout the year, and then these reserves are used when people are actually taking a vacation, that on these months where people are on vacation, that the costs on the bank level or entity level is lower. Taking this one off out, we are more or less on the same level as in Q2.
Total quarter-to-quarter and year-on-year, that P&L wise, picture looks very decent, that our profitability is more or less exactly on the same level as it used to be a year ago. When comparing with our financial plans, we are a couple of million ahead, and we plan to be ahead by the end of the year. Business volume wise, loans are clearly ahead. Deposits, as we decided to decrease these deposits or let platform deposits out within this year than compared to financial plan, it shows a negative number, but in reality, liquidity is decent. So, no need for adding deposit base. Cost income, return on equity already on the level where, what we would like to have. So numbers are moving in the right directions. Business is showing clearly that the full bank is starting to deliver positive results.
Giving it over to Mihkel, who is covering other subsidiaries.
Yes. Thank you very much for the overview, Meelis. We go to U.K. Regarding LHV Bank's third quarter results there, net income was growing by 31%, profit increased by 38%, loan portfolio exceeded EUR 1 billion, and that has been a 56% growth year-over-year, while we had a similar growth in deposits as well. On the ROE and cost income level, I wish we could show the same numbers as we just showed on the Estonian bank, but this is investment. We are growing our business, and we have a good understanding on how we reach, hopefully quite soon, increased levels of profitability and return as well, which is obviously our aim with the bank in U.K. Specifically, regarding on some of the costs, in fact, third quarter, we took on a bit more costs than we planned.
But this was to some degree, investments as well. It was branding related, marketing, and there were also AI toolings that were introduced, including also agentic AI that we have launched for the retail customer support. Issue being that our retail bank is small, and if we want to scale our customer base and improve the quality of the customer service, we have to do it with, I would say modern methods and ways so that we wouldn't need to increase the headcount too much. We have introduced tools that we are now trialing and also the initial results are very promising. Visually, we can see also here the loan growth, the deposit growth. In the last month, I would say probably in September, the lending growth has been a bit slower, but it's month-to-month, it's still patchy.
We expect that in the fourth quarter it will pick up. Our targets should be reachable for the end of the year, presumably. Having said that, we had bit higher provisions in September than was written in the plan, EUR 1.5 million worth. But again, these are managed loans. These are well collateralized loans. If we just recently discussed a larger release, then we obviously are working with each and every single item and loans that we have provisioned on. Again, as we grow the portfolio, the provisions, there will be cost to risk and sort of month-to-month, this can be patchy as well. But overall, we don't see any significant issues. It's just part of the growth trajectory, also on the portfolio level. On the deposit side, we grew. This time, we also took on more deposits from the platforms.
The interesting thing with U.K. market is that there are quite a few platform deposits that we are working with, and then also we have the direct retail deposits. Based on the growth trajectory of the portfolio, based on the funding cost, we are making day-to-day decisions, whether we are increasing the direct retail part or we are increasing the platform part. But overall, it is good to see that all of that is functioning. Again, on the retail side, our average deposit is also reasonably high. That is definitely a good signal. When it comes to retail, as I mentioned before, the developments that we are doing on the customer side. The more depth that we add to our U.K. retail service, the better it gets. This will effectively start to bring down the cost of the funding as well. But this takes time, investments, and yeah.
It is part of the long-term plan. Net interest income, substantial growth. This has been the biggest driver of LHV Bank this year. Also related fee income that we have generated on that side. On the other hand, where we are lagging behind is banking services. While we are growing the volumes with our customers, it is a very competitive market. The fee levels that we have received this year are below our expectations. But this is something that we work on. This is something where we have a good understanding what needs to be done. We are definitely developing the product offering, focusing on some of the clients where we can add more value. We think we can get through this cycle as well and effectively grow the fee income related to banking services in the future.
But at the moment, it has been declining, and we admit that. On the operational expenses, it was a bit higher in Q3. But as mentioned before, there were some marketing costs, and there were some investments that are really there to help us scale in the future with a smaller OpEx increase down the road. This is just to summarize what we have already discussed. On the interest income side, ahead of the plan, the line that says net fee sharing, that is behind. So that is the banking services part. Then also we had the impairment losses, which were higher than we originally anticipated, but nothing significant in the bigger picture. Overall, yeah, we are lagging behind the financial plan. But on the other hand, year-over-year, we are showing growth.
We continue to see and believe that the scale that we are achieving will be the biggest enabler for increased profitability going forward. Okay. On the asset management, asset management is pretty much delivering according to what they have planned. Slight growth in income. Net profit is lower, but this is primarily because of the higher dividend payment that was made to the group based on last year's results. The funds are increasing, both the second and third pillar funds are increasing year-over-year. Fund performance has been strong throughout the product offering. Also in Q3, the customer number has pretty much remained stable. We are not happy about the fact that it is where it is. We hope that it will start to grow.
We are also making steps in that regard on how to improve the sales process throughout the asset management products. Bottom line is slightly ahead of the plan, steady as she goes. No big deviations overall. Insurance. Q1 was tough. Q2 was according to plan. In Q3, we had two good months, which was basically September and August, and then July was a tough one as well on the loss ratio. It is clear that we will not be recouping the original plan, as we will be lagging behind on the insurance side. I think our biggest task now is to make sure that going into Q4 as well, that we deliver the plan for that one, and we do not fall further behind. On the positive note, however, the market seems to be improving. The market overall has been tough.
The prices have gone down quite a lot, but we see improvement in that regard. Hopefully, this will increase the profitability level going forward as well. Overall, premiums written has grown. Losses have been patchy, so Q1 was relatively high, Q3 as well. Q2 was lower, so probably Q4 will be seasonally relatively high. On the other hand also, we see that the top line is improving. Hopefully, it will go according to the original plan. That you can see on the results as well. Q3, we had a small profit. Q2 was much stronger. If you compare it to the last year, it is a big deviation. Again, mostly it is due to market conditions, and at the same time our customer base is growing.
We should be going into Q4, going into the next year, we believe that we are on a good path from here on. Overall, strong quarter. Obviously, the one-off on the positive side from LHV Pank in Estonia was a significant contributor. Having said that, the underlying trends on the net interest income side are solid. On the fee side as well, we are making improvements, but these are long-term processes. Our product development speed is picking up. On the U.K. side, landmark of reaching EUR 1 billion of outstanding loans. Clearly on the ROE and profitability side, we have a way to go, but we also have a path. Just to highlight once more that we also just recently released news on appointing the new CEO to LHV UK.
We are very happy that we found a very experienced person with a strong banking and fintech background. That fits well with our plans to increase the presence on the U.K. market, and also somebody who can take everything that we are doing and make it work and grow even better. Asset management, steady results, and insurance, reasonably good quarter, and hopefully there will be more stability from here on. Thank you very much, and we are open to questions.
Yeah. Thank you, Mihkel and Meelis. There are a few questions. Let's go through these. First of all, congrats on stronger results. Could you please elaborate a bit more on that one large customer provision release in third quarter? I understand that the provision in the amount of EUR 3 million related to that client was made in second quarter. What made you release it now? Was it client-specific changes or model parameters?
I can cover it. Estonian news and the Estonian investor base is already knowing it, the customer even by the name, because it is a public news. This customer is a large [tele industry related customer, where we had made sizable provisions over several years. Then this customer went through the bankruptcy process. The collateral was sold in the collateral process, but it was sold with much higher value than we expected. The outcome of that is that these payments to the bankruptcy estate is already done. The deposits are sitting in LHV Bank, so we actually see them. We know that these are used for paying first bank back to the banks, that we will receive, based on today's information, understanding absolutely everything back, including all the impairments what we made in the past.
Second question, I don't recall such large mark-to-market value changes during the previous interest rate cycle. Has there been structural change in strategy on how you approach the liquidity management, change in proportions between cash at central bank deposits versus short duration government bonds? If that is so, then why?
Yes, we changed approach. Over the last approximately 10 years, we have kept the liquidity in central bank. The reason why we have started looking at it is that when I look at Western European government bonds and ECB rate difference, then there is a positive gap. The positive gap is also from zero days to up, let's say that yield curve is slightly upward curve most of the times, that there is a positive gain also when you are moving slightly further in the interest curve. This was the reason why we started looking at it, and then also looking at it at the end of the day is helping us to earn a couple of million euros of additional income.
Yes, it is bringing in short-term volatility, but all in all, as the duration is only two years, and the volatility is disappearing from this book very quickly. We end up with earning just a couple of million in addition compared to the previous approach.
The average duration is at the moment like a year and a-
A year and a half is average duration maximum, and I stated clearly that maximum is two, that we are not going beyond two years in this portfolio.
The U.K. bank's cost income ratio of around 80% is clearly too high. Approximately what loan portfolio size would the U.K. bank need to reach its cost income ratio and ROE targets?
Quick mathematics states that you need to have EUR 750 million of loan portfolio to be in break even. There is only a couple of hundred million what has been delivering profit. To reach, and this is ceteris paribus, that we do not know what the future brings and where the margins are moving. But if we are just forecasting our lines with the current margins, then we would almost have to increase it to EUR 2.5 billion-EUR 2.7 billion, then it would be delivering the return and equity we would expect.
Yeah, and at the same time, it's like Meelis said, one thing is you sort of fix the parameters and grow the portfolio. The other is, what can we really do when it comes to cost of funding as we grow? At what stage we can do some securitization, at what stage we can lower the funding cost from the retail side? Can we potentially add more products on the SME customer side, and sort of day-to-day banking as well? So it's a more complex formula, and also coming back to the appointment that we made as well. So we want to make sure that we have the best experience really in-house to take the platform that we have, and then grow it to the next level while really being aware of what we can do.
Also the investments that we are making on better scaling of both the portfolio of the retail banking management. So we hope that these will be the strong enablers, that we will not just take the profitability to a market level, but we can obviously improve it. And because our shareholders still have a clear expectation when it comes to ROE, but it's really management tasks to find the best way and the best path to reach that.
Could you give some insights on how successful the U.K. retail deposits campaign has been, and any color on the stickiness and rollover price of those deposits?
We had once a slide that showed the U.K. bank deposits, and there was one number of 21%. 21% of deposit base is our own deposits. At the same time, when we're looking at how sticky they are, then we have just acquired these deposits. Most of them are term deposits, so it's like rollover time is not yet there. But yes, there are some customers who have been rolling over, but this is not enough to make statistics. We can answer this question properly around mid next year. Before that, it is guessing.
Yeah, at the same time, the question on what's the focus customer, what's the total product offering. We have also clearly stated that we want to be the best digital offering when it comes to savings-related services. The best signals we really have is that we have also recently won awards, which have recognized the offering. Last year that the same award went to one of the biggest platforms that took on deposits. It's a continuous iteration of product development, sort of figuring out what the clients need. We'll be updating that with each quarter as it passes.
Next question is in two parts. Firstly, about net interest margin outlook and rate sensitivity. Net interest margin increased sharply by 25 bps quarter-on-quarter to 2.8%. What net interest margin level should we expect in fourth quarter and 2027? Could you quantify the sensitivity of annual net interest income to a 25 bps or 100 bps increase in market rates? How quickly would this feed through to earnings, and how much would be offset by higher funding costs?
Both are actually pretty tricky questions. I'm starting from the second side of it. When we look at interest income and the sensitivity, then all Estonian banks and actually Baltic banks tend to have almost all the assets are floating interest based. Liabilities are not. Lending portfolio tends to be six months EURIBOR based, so the new interest rate is kicking in within six months. Liquidity tends to be effectively functional. ECB rate, DFR rate changes are mostly kicking in within three weeks. That's three to four weeks, depending on how they're making decisions. Asset side is kicking in very, let's say we can calculate, we can clearly see when the changes are happening. On liability side, the function is much more complicated. We have term deposits, but longer than six months. For those, when interest rates are going up, then the effect is kicking in with delays.
At the same time, we have shorter term deposits and also overnight type of deposits, where you have to adjust based on the market rates. Then you have current accounts where the pricing is depending on very much what is the current market offering on the other banks, so that it is competition based. Sometimes you have to make sizable up, not because of that general EURIBOR is going up, but the competition is higher. You have long-term bonds, but most of the banks keep fixed, but some of even Estonian banks who are issuing some, they tend to convert some floating. So all of them are part of the function. Unluckily, the outcome of the function is not linear. We can say that there is a positive result when we are looking year on year or longer term.
That 100 basis points is delivering us approximately EUR 50 million of additional income, but it is not coming directly. We can't say that if there is a change of 100 basis points today, then next month we have EUR 5 million of additional income. No, it's not that. It is not coming in linear function into the P&L. That's only when everything is repriced, then we can see this.
The next part of the question is about U.K. strategy and the new CEO. Following the appointment of Damian Thompson as CEO from January 2027, should we expect any changes to LHV Bank UK's growth strategy? Have the midterm ambitions for loan growth, profitability and returns changed? When should we expect the U.K. business to become a meaningful contributor to group earnings?
Good question. It's true that if you look at the relevance on the asset side, it's already meaningful. But on one hand, it's going back to what Meelis already covered, answering to one of the previous questions. It's really the direction. So we need to have the volume growth to cover the costs to increase the profitability. But when it comes to Damian's appointment, so when Erki Kilu left, the plan was that we want to find a local CEO who's well-connected with the local market, who has the relevant experience, who knows SME, who knows FinTech, somebody who's been working with Starling for quite some time in the early days. So what you can see from the track record is fast growth.
What we are thinking is fine, we have reached this EUR 1 billion and probably we will reach much higher profitability compared to where we are if we, let's say, take this from one to two. But how would the ambition look like when we want to drive it much further, when it working with potential portfolio acquisitions, working with different ways how to fund this, and then also improving the retail banking side. I do not want to rush ahead when it comes to change in plans or strategy, but clearly the intention is to have higher ambition, but also making sure that we reach that ambition in a way that is supporting the group's profitability targets as well. We will keep you updated, and once Damian is fully on board, we will definitely give a longer update together with him as well on the plan and next steps.
In Estonian banking, which corporate client segment do you consider the riskiest in current economic environment, if any?
The picture regarding deposits and Estonian banking system deposit growth of around 4% year-on-year, and lending growth around 10% year-on-year, this actually gives hints that clearly deposits are not growing fast with the same speed. Deposits from corporate entities are not growing with the same speed. We see that there is weaknesses in real estate side that this is already seen. We see that there is weaknesses in some of the production sides that what could be or should be actually turned vice versa because over the last years, our clients have been, not our clients, but corporates have invested less than should, and now they have lost certain amount of competitive edge that now they need to invest and compensate for this undone investments from the previous periods. I do not see that there is losses coming from there because new money should go in.
Also that clearly as the deposit base is not growing fast enough, then when I look at everything what is servicing retail, let us start from restaurants, that it is clearly tougher days in these sectors than they used to be.
Yeah, just to add, I think, on the macro context. Structurally, when we think about Estonia, we seem to be in a more solid footing. On the other hand, when it comes to fuel prices, when it comes to how it affects the input prices, going into the end of this year, going into the beginning of next year, there's a lot of additional inflationary pressure which is coming from the supply side. I would say that the macro is still quite fluid.
But I think when it comes to the specific sectors, yeah, I think it's more like one thing is sector, the other thing is every project our lending team looks at individually, and that's, I would say, much more important in the end of the day than the sector, because real estate as well, there can be different outcomes depending on the quality, depending on the developer or buyer and so on. So I would say that yeah, so it's more complicated than just picking one or two sectors, especially in Estonia, which is such a small economy.
Has anything changed in your dividend policy outlook recently, and can investors still expect dividend payout ratio in spring closer to 50% from your policy range 25%-50%?
We have the policy that states 25%-50%. The final decision will be made by the shareholders in March. But based on the management knowledge and discussions with supervisor board members that we are still continuing the same approach, that we are expecting to make the dividend payout on the high end of the buffer.
Okay, and this was the last question for today. We have already gone three minutes past 12:00 o'clock Tallinn time, so I think we can draw the line here. Thank you for all of the participants and for your questions. Thank you, Mihkel and Meelis.
Thank you very much.
See you in future meetings.
Until next time. Thank you.