LHV Group’s Q1 2025 Results: Navigating Growth Amid Profit Headwinds

LHV Group, a Baltic-based financial services provider, released its unaudited Q1 2025 results on April 22, 2025, revealing a complex picture of growth in core business lines offset by challenges to profitability. Despite strong loan portfolio expansion and strategic progress in its UK operations, the Group faced headwinds from lower interest rates, rising impairments, and deposit outflows. Here’s an in-depth look at the numbers and their implications for investors.

Key Financial Highlights

LHV’s consolidated net profit for Q1 2025 fell to €29.2 million, a 20% drop from Q4 2024 (€35.1 million) and a 28% decline year-on-year (€40.7 million in Q1 2024). The decline was driven by:
- Lower interest rates: Net interest income dropped 7% quarter-on-quarter to €62.0 million.
- Impairment spikes: Provision losses surged to €5.7 million, double the level of Q1 2024, due to two non-performing UK clients.
- Deposit outflows: Total deposits fell 4% quarter-on-quarter to €6.6 billion, though annual growth remained strong at 11%.

Revenue also contracted, falling 6% to €79.4 million, with declines in both net interest and fee/commission income. However, operating expenses were trimmed by 8% sequentially to €37.5 million, reflecting cost discipline.

Subsidiary Performance: Strengths and Weaknesses

LHV’s subsidiaries provided a mixed performance, with standout gains in loan growth but uneven profitability:

1. LHV Pank (Estonia):
2. Net profit: €25.2 million, a 26% drop year-on-year.
3. Loan growth: Retail loans expanded by €81 million, with home loans surpassing €1.5 billion.

4. Deposit challenges: Client deposits fell €309 million, driven by financial intermediaries and platform outflows.

5. LHV Bank (UK):

6. Net profit: €2.1 million, up from €0.9 million in Q2 2024.
7. Loan portfolio: Grew 43% to €490 million, with €167 million in approved but undrawn loans.

8. Digital progress: Testing of a retail banking app began, signaling future scalability.

9. LHV Varahaldus (Pension Funds):

10. Net profit: €103 thousand, down from €0.6 million in Q3 2024.

11. Fund performance: Aggressive funds (e.g., M, L, XL) returned 3.0%–4.5%, while index-linked funds slumped 4.1%–5.2%.

12. LHV Kindlustus (Insurance):

13. Net profit: €665 thousand.
14. Growth: Active policies rose to 266,000, with strong sales in travel and home insurance.

Strategic Progress and Challenges

• UK Expansion: LHV Bank’s rapid loan growth underscores its success in capturing the UK market. With a share capital boost of €12 million in March, the subsidiary is well-positioned to scale further.
• Digital Innovation: The UK mobile app’s test launch highlights LHV’s focus on modernizing customer experience—a critical factor for long-term competitiveness.
• Capital Strength: The Group maintained robust capitalization (€706.8 million in equity), meeting all regulatory requirements with a buffer.

However, two key risks remain:
1. Deposit Management: The €306 million quarterly decline in deposits (driven by financial intermediaries) signals a need to diversify funding sources.
2. Impairment Risks: While management expects to reverse part of the €5.7 million impairment in the next two quarters, further defaults could strain margins.

Outlook and Valuation Considerations

LHV Group reaffirmed its five-year plan, targeting a 12% annual growth rate in net profit to reach €269 million by 2029. This relies on:
- Loan growth: A 1.9x increase over five years, leveraging strong demand in Estonia and the UK.
- Deposit diversification: Reducing reliance on volatile financial intermediaries.
- Cost optimization: Maintaining expense discipline amid rising operational complexity.

Investors should monitor:
- UK loan pipeline: The €167 million undrawn loan book offers upside potential.
- Interest rate trends: Rising rates could reverse the drag on net interest income.
- Deposit retention: Strategies to stabilize retail and platform deposits will be critical.

Conclusion

LHV Group’s Q1 2025 results reflect a company balancing ambitious growth with short-term profitability challenges. While net profit declined, the Group’s loan portfolio expanded 30% annually, and its UK expansion—driven by LHV Bank’s strong performance—points to long-term potential. The impairments and deposit outflows are cause for caution, but the core business fundamentals remain solid.

With a conservative capital structure and clear strategic priorities, LHV is positioned to weather current headwinds. Investors seeking exposure to a financially resilient Baltic institution with UK growth potential may find the stock attractive, provided they factor in near-term profit pressures. The ex-dividend date on April 8, 2025, and the 9 cents per share dividend paid in April 2025 further support income-oriented investors.

In summary, LHV Group’s Q1 results underscore a story of resilience amid turbulence, with its long-term growth trajectory intact—if management can successfully navigate its current challenges.

Data sources: LHV Group Q1 2025 Interim Report, Investor Relations Materials, and Management Disclosures.