Íslandsbanki hf. (ISB) Earnings Call Transcript & Summary

Good morning, all, and welcome to Íslandsbanki this Friday, we will present the results for our first quarter 2025. I'm Bjarney Anna, I'm with Investor Relations, and I'm joined today by Jon Gudni Omarsson, our CEO; and our CFO, Ellert Hlodversson. Before I hand the session over to them, I want to remind you that after usual, we will have a Q&A session following the presentation. [Operator Instructions] With that being said, I hand the floor over to you, Jón Gudni.

Thank you, Bjarney, and thank you all for joining this call this morning. Iceland -- the Iceland economy continues to be quite robust, and we are quite happy with our underlying core operations in the first quarter of the year where we saw the core offering income of net interest and fees grew almost 6% in the quarter. At the same time, we were affected by the turmoil in the capital markets, where we saw extremely weak net financial income having the impact that the overall return on equity was 9.4%, obviously slightly below our target of 10%. What happens here to the screen. Yes. Here it comes back, sorry. Yes. So the overall return on equity is slightly below our target of 10%, but like I said, we are very happy with our underlying core operations and good growth in the revenue generation. The capital remains extremely strong. We saw a bit of a drop in the first quarter. That was due to the ISK 15 billion that we have set aside for buybacks in the coming few months. But apart from that, obviously, we remain with our capital well above of our targets. Asset quality also remained very strong. And as I said, the Iceland economy is on a good track. And -- for example, we are not seeing any direct impact from the tariffs and the international impact of that. So the asset quality has remained very strong across the board. We have confirmed on guidance for about 10% return on equity for the year as a whole. So in spite of the impact on capital market share and net financial income in the first quarter, we are still confident that we will reach the 10% target for the year as a whole and also to have the cost-to-income ratio below the 45% target. We remain, obviously, with our dividend payout ratio target of 50%. And as I mentioned, we have set aside ISK 15 billion for proposed buybacks in the coming months. In terms of the economy, we are expecting to see growth this year. On the top right, we can see a bit in terms of our exports. On the far right, you can see that obviously, the biggest export partner is Eurozone, but then the U.S. with about 17%. To the left of that, as you can see there, in terms of our exports to the U.S., the bulk come from the seafood and then pharmaceuticals and medical equipment. The proposed tariffs of 10%, obviously, can have some impact, but those are -- the tariff level is a bit lower than we have seen in most of our neighboring and competing countries. And in general, the balance of freight with the U.S. is quite level. So from what we are seeing, we are seeing quite a limited direct impact here on our customers. But obviously, we can expect to see some impact in terms of growth globally and possibly imported inflation. Talking about inflation, the inflation in Iceland has been a bit more sticky than we expected. And our Chief Economist is now expecting to see inflation over this year, slightly below 4%. In terms of the interest rate levels, we are now at [ 7.75 ]% from the Central Bank, and we are expecting to see that coming down quarter-by-quarter and ending up around 6.5% at the end of the year. So like I said, overall, we are seeing a fairly good investment level, quite good activity across the board in terms of new lending. So we are quite optimistic in terms of the economy here in general. As I mentioned, apart from the market turmoil, which impacted our net financial income, our core business units did very well in the quarter. You can see here at the top that all units were well above our 10% target in terms of return on equity, with Business Banking coming the highest of close to 18% in the first quarter. If you look at new lending, we saw the most growth in Business Banking actually at around 3% growth in lending and a very good and robust appetite, we would say across the board. In deposits, we saw good growth in the Personal Banking for individuals where we saw about 1% growth for the quarter, which continues then, basically a very robust growth from last year, even though at a bit slower pace. Overall, very good activity across all the business units. And for example, in Corporate & Investment Banking, we maintained the highest market share in brokerage and are seeing now more activity in corporate finance as well. We continue to invest quite heavily on the data front. And in the first quarter, we are actually extremely happy to both launch a new internet bank and also quite a few big changes to our app. And I firmly believe that we have now the best app in the banking market here in Iceland. The internet bank is basically launched on a new technology, replacing legacy technology. So we are now in a very good shape on that front. It's a so-called soft launch basically where you use this year to add features to the new bank and move our customers, which they still have access to our old internet bank. And so far, this has proven to be very successful. Like I said, we have the [indiscernible] -- now we have made great progress on app, which is in extremely good shape now, and we are now putting more emphasis on financial health of our customers. For example, enabling them to rename accounts pay into on track, for example, the mortgages in app and quite a few more features on that front and plenty more to come on that in terms of the app development over the coming few months. We are -- at the end of January, we noted that we have come to an agreement with insurance company VÍS to incorporate in terms of insurance. And we had extremely, we could say, demanding timeline, and we wanted to have this up and running on the fifth of May. And I can almost say that towards the price, we did exactly that. So earlier this week, we launched the corporation. Our customers can now see insurance in the app. And we are already creating leads on both sides, and I can say that actually the amount of leads far exceeds what we expected in the first few days of the corporation. So we're off to a very good start on that front. Like I mentioned, Business Banking, we have seen a very good growth in the loan portfolio there. And on the far right here, you can see some examples of new lending. And like I said, this is a quite widespread across the board, and we are seeing, like I said, a very distributed and -- across entities basically in terms of Business Banking, lending to SMEs. And I could almost say a bit surprising given the higher interest environment that we are seeing such a good growth on the lending side there. Also note on the left side here, that we're now leading both on the equity side and with the debt side, the financing for Samherji Salmon Garden. As you've heard before, there are quite a few projects now ongoing in Iceland about land-based salmon farming. And that's something that's going to be a big part of the growth here, the economic growth in Iceland in the years ahead. And we are extremely happy to lead the financing for Samherji on this front. On the [ GAAP ] side, we have both the domestic and international banks participating, and the same on the equity side, where we have seen oversubscription and a great interest on taking part in this extremely exciting project. When this will be fully operational, this facility will produce about 30,000 tons of Salmon, which is quite interesting to compare to the overall caught quota in Iceland, which is around 100,000 tons. So this obviously will give us a good boost to the economy and hopefully also to the investors that have taken part in this extremely exciting project. In the first quarter, we issued our inaugural green senior preferred issuance. And we actually issued a longer-dated instrument than we have done in the past 2 years to 5.5 years, expanding a bit the maturity of our borrowings. Having done this now actually we have now finalized most of our borrowing meets throughout this year. And we are extremely happy to see the interest from international investors, where we saw a very slight new issue premium of only 5 basis points and 3.3x over subscription. So very strong issuance there in the first quarter. Now looking at our shareholder base. As you note here, the Icelandic government is still a majority shareholder with about 45% stake. But yesterday, Congress here in Iceland approved legislation, enabling, basically, the Ministry of Finance to make the next steps in terms of the sell-down. And in the government budget, they have had stated their plans to sell about half of the stake this year, and half of the stake next year. And having this bill now being passed through Parliament and the preparations have been made here on our side to enable this and the government has spoken quite openly that they plan to have a fully fledged offering with a prospectus and open to both the general public and obviously to professional investors at the same time. So we are very excited to take part in this process and do our part to obviously present the bank to investors, hopefully seeing new investors coming into our investor base. So exciting times ahead on this point. Now over to you, Ellert, on the financials.

Thank you, Gudni. The bank turned a profit of ISK 5.2 billion in the quarter, assuming a 9.4% return on equity. Taking a look at the composition of income, net interest income, we're showing healthy signs of growth as well as net fee and commission income, but that was offset by financial expenses as Jón Gudni explained, partly due to the capital market development. The composition of income also turned down a high effective tax rate. Should we adjust the return on equity for the effects of capital markets. The adjusted return on equity would be close to 11%, just to give investors some feeling on the effect there, too. But focusing on interest. The bank turned a 3.2% net interest margin in the quarter compared to 3.0% in the same quarter last year and a 2.9% over the year 2024 as a whole. This is due to subsiding imbalances, strategic pricing on both assets and deposits as well as repayment of our pipeline issued -- widely spread euro issuances done in 2023, which were paid back throughout 2024. During the quarter, the bank accounted for 1.04% of inflationary tick and assumes to account for 1.5% in inflationary tick in the second quarter. As before, we guide towards fluctuations month-on-month, while the economy stabilizes in line with the seasonality of inflation, although we note that the CPI imbalance has started to come down in line with our projections. Turning over to fees. Card and payments remain the largest segment of our fee income. Here, we see growth year-on-year. In terms of capital markets, after a strong start beginning of the year, markets started to show volatility in, I would say, mid-Q1, which continued throughout the quarter, affecting both investment banking revenues as well as asset management revenues. We expect this to normalize and lower rate environment to boost both capital markets as well as lending activity as the year progresses. Net fee and commission year-on-year increased by 1.9%. However, as we have stated, there was some euro issuances -- euro issuance this quarter, which fell in Q2 last year. Fees related to that were, therefore, accounted for during this quarter, while fee in Q2 in 2024. Adjusting for that, net fee and commission income reflecting underlying operations have grew by 5.2% year-on-year. The bank turned a loss of close to ISK 1 billion on net financial income due to pressure in capital markets. This relates both to market making operations, losses related to economic hedges as well as Group's own market position. Nevertheless, the equity risk on the balance sheet remains small, closing off from the listed side at 6.3% end of the quarter compared to an overall balance sheet size of over [ ISK 600 million ]. However, we turned a profit of around ISK 500 million for other operating income, mainly related to revaluation of a non-core asset at Kirkjusandur 2, a plot formally residing our old headquarters. Their progress has been made and the bank assumes that steps will be taken in further development and/or sale of the asset as time passes. In terms of the efficiencies. The cost-to-income ratio close to 47.6%. Adjusted for the effect of net financial income, the cost-to-income ratio would have been 44.8% within our financial -- within our financial targets. Salaries grew by 7.7% between years, but we are starting to see headcount coming down from previous year by a number of high FTEs. Although operating expenses decreased by 1.2% between years. We remain committed to our financial targets of being below 45% cost-to-income ratio for the year as a whole as we had in Q4. Turning the focus to the balance sheet. The loan portfolio closed off relatively flat compared to the previous quarter at around ISK 1,300 billion, reflecting a 0.3% growth quarter-over-quarter. As before, the composition is largely unchanged. 44% market share and the rest reflects quite healthy with the Icelandic economy. The loan portfolio continues to be skewed towards the lower risk classes, as shown on the bottom right-hand side, over 93% collateral and LTVs coming down to a position of an average LTV of 53%. This, of course, translates into impairments. Impairments were 0 this year or close to 0, reflecting a 0 percentage point cost of risk. Asset quality, measured in Stage 3 is strong between quarters, closing up at 1.8%, while Stage 3 remains largely flat. Overall, we can state that there are no structural issues within any sector, sizes or geographical concentration in the book as can be seen by the drop in -- of the static decline rather in loans with forbearance. The same goes for the mortgage book and turning the focus to the bottom right-hand side, where asset quality, Stage 3 loans closed at 1% comparable to the, I'd say, to the previous quarter. So asset quality remains well there. Average LTV for the book is at 54%, which is going to be a favorable position with the implementation of [ CRO ] 3. This is expected to come into play mid this year. Fixed rate imbalance, as indicated on the top right-hand side continues to run off in line with projections. This also contributes to our net interest income as this imbalance continues to run up. For the commercial real estate portfolio, that continues to be diversified and of good quality. Addressing first, I would say the increase in Stage 3 on the bottom left-hand side. As we discussed in the last earnings call, the growth between Q3 and Q4 '24 relates to a single exposure being moved to Stage 3, a technical CRE, a traditional propco versus opco structure, not in that sense of traditional CRE. Further growth mainly relates to the reduction of the overall balance. Growth in Stage 2 relates to a single borrower and dispute between that borrower and the municipality, which has since been resolved thus lowering Stage 2 again in April, although this is the stand at Q end. As before, the residential real estate sector in Iceland remains well diversified. Funding for the company is quite long and stable and occupancy ratios are in excess of 95%. So overall, the sector remains healthy. Turning to balance sheet. As we stated before, deposits grew by 1.3% in the first quarter, mainly due to financial institutes and individuals. Retail deposits remain the largest segment of 53% currently growing by 4 percentage points year-on-year. There is no deposit concentration in the book and loans to customer deposit ratios remain stable. This, of course, makes us more flexible with regard to wholesale funds. And during the first quarter, we issued as Jón Gudni stated before, ISK 300 million inaugural, 5.5 years senior preferred bond, green, the longest duration which we have issued in years. We experienced a quite healthy book over subscription. In addition, we issued in SEK and NOK. As a result, the bank has prefunded its operations to a large degree, limiting exposure to current market volatility. We note also that despite high issuances in the foreign capital markets, our wholesale funding remains over 50% in ISK, which is important for the bank as it increases geographical diversification of the investor base. Additional issuances in the year relating to both AT1 and T2 will remain opportunistic as we need it for capital purposes in line with our capital optimization -- with our capital optimization. Liquidity remained strong. Liquid assets are currently 90% of the overall balance sheet and fully mark-to-market. LCR in all currencies closed off at 202% and 110% for the ISK. And lastly, capital. We closed out the quarter at a total capital ratio of 21.6% and CET1 ratio of 18.6. This is compared to a regulatory minimum of overall capital requirement of 19.7% and 15.4% on top of which the bank aims to have 100 to 300 basis point management buffer as before. Within these capital ratios, ISK 16 billion have been allocated to share buybacks, which are not yet completed, but has been deducted from the CET1 capital. As of now, we expect the adaptation of CRR3 to be mid this year and to reduce REA by the amount of 4% to 5%, thus boosting capital ratios by around 1 percentage point. That means that total distribution -- capacity, sorry, including uncompleted buybacks amounts to ISK 37 billion, assuming a fully optimized capital structure and taking into account both the effect of CRR3 expected to be implemented this year. The bank remains committed to its offers to continue to optimize the capital structure, which may go through -- which may be through external growth, organic growth as well as distributions to shareholders. So overall, we are quite happy with the results from underlying core operations. And with that. Gudni, I hand it over to you.

Thank you, both. We now open up for Q&A session. [Operator Instructions] So operator, are there any questions on the line?

The first question come comes to Sofie Peterzens from JPMorgan.

Yes. So just two quick questions. On net interest income, how should we think about net interest income in 2025, given that it has been quite volatile in recent quarters, should we expect the current net interest income to be the run rate going forward? Or how should we think about net interest income volatility in coming quarters? And then my second question would be on capital and excess capital. You mentioned that you will sort of look to -- or you have around ISK 37 billion of distributable capital and you will look at organic growth opportunities and also distribution to shareholders. Could you maybe expand a little bit on this comment what do you think about inorganic growth opportunities that if you kind of be happy to increase your dividend per share, which is -- or a dividend payout from current levels to a higher level? And if you could just talk a little bit about sort of inorganic versus organic growth? And then dividends or the share buybacks and also increasing the total payout?

Thank you, Sofie. I'll start with capital. So on the capital side, as we have talked about before, we remain open for potential external growth. That is obviously something I'd say is a potential, but it depends on obviously availability and price at the same time, but something we remain open to. We have been seeing some growth outside of Iceland as well in terms of taking part in syndicated loans and both to diversify a bit our loan book and also to get more knowledge and experience, for example, in the infrastructure sector. Our loan book outside of Iceland currently is only 2%. So we see some opportunities there. At the same time, we obviously plan to continue the buybacks, and that is our preferred option in terms of returning additional capital to shareholders. And we are hoping that now with the government sell-down that we will see more liquidity in the stock and then potentially more opportunities for buybacks. So we continue to try to optimize the capital stack as much as we can before the end of this year. And then so obviously, looking at these different alternatives. On the net interest income, over to you, Ellert.

Yes, maybe one point to add to the capital. We note also that taking into account, I would say, the buybacks. The payback ratio for 2024 was close to 100% of profits for '23. So buybacks have been quite -- I would say, quite sizable effort in our capital optimization story. But for the net interest income and the NIMs, we have guided before that the NIMs on average through 2025 are going to be close to what we experienced in '24. Then we had 2.9% but quite fluctuating between quarters. Seasonality of inflation domestically is quite a bit. So inflation tends to be higher, I would say, first half of the year and lower in the second half. So we are expecting similar behavior. Overall, we expect to be around the same levels as we did last year.

There are no more questions. I hand the word back to you, Bjarney.

Thank you, Berbard. We've received some questions to the webcast forum and emails so I'll read them out loud. The first one from Alex [indiscernible], starting with, Hi guys, and congrats on the solid quarter. A couple of questions from me. First off, were there any one-offs in the NIM this quarter? It's not should we assume a similar or even stronger next quarter as inflation ticks will likely be higher than in Q1. And then the second one, do you expect to increase your AT1 and/or T2 fronting in the near term? Or will you wait until you return more capital to shareholders?

So thank you very much for that, [indiscernible]. Firstly again on the capital, obviously, to fully optimize our capital stack, we will issue some AT1 and Tier 2. And the timing of that is obviously subject to both the market -- the capital markets and then also how well we progress in terms of the return of core equity 1 to our shareholders. So that's something that we expect to probably see through the course of this year. In terms of the NIMs?

In terms of the NIMs, there are no one-offs on the NIM this quarter, and we usually do not have one-offs. Obviously, the strong NIM performance is, I would say, partly due to reducing imbalances both on the CPI side, but as well as on the fixed rate imbalance side. We however note that during the first quarter last year comparing to the first quarter last year, we had a ISK 300 million issurance issued at quite wide spreads over 400 bps, which was paid off in Q2. So that's -- I would say that's a structural change between the years as such. But there are no one-offs in the NIMs and reiterating what I said before, we expect NIMs overall to be around similar levels for the year as a whole as it was in 2024, while fluctuating the bit due to seasonality of inflation.

Just a lot on inflation, like I mentioned, we have just over 1% in the first quarter and the expectations of close to 1.5% in the second quarter. But like I mentioned, our Chief Economist is expecting about 4% over the year as a whole, which is then similar as to annualized in the first quarter. So obviously, we'll see some fluctuations going forward, but we expect the impact on NIM to be similar to what we saw in the first quarter for the year as a whole.

And then David [indiscernible] has 5 questions. So the first one being to you please elaborate on the increased risk appetite for lending abroad. Infrastructure is mentioned, what type? Any other sectors or type of lending regions? How long do you see this portfolio over a 3- to 5-year horizon? And the next one, given the ongoing capital optimization measures is a potential AT1 transaction this year, still being considered. That market is quite tough given this weak trade for the Swedish online broker, [ Avanza ]. The third one, what is the stable for the possibility in the Icelandic MREL framework to meet the subordination requirement with senior preferred bonds? And the fourth just get to the third. Are there any plans to issue S&P bonds and the fifth, the last one.

What was the word again?

Are there any plans to issue S&P and the fifth, if no S&P bonds are planned to be issued, will you terminate the S&P rating as issue rating that then will remain 1 node below Íslandsbanki and only focus on Moody's similar Arion.

Okay. I'll start with the first one and then give the floor to Ellert. So in terms of our risk appetite abroad, like I said, our current loan book outside of Iceland is only around 2% of the balance sheet, so extremely low. So we're hoping to see a bit of a diversification outside of Iceland. And we are seeing the opportunities on both infrastructure lending and also in leveraged finance, basically syndicated loans. We are mainly looking at Europe, and we are cooperating with some Nordic banks and European players in terms of participating in those loans. We've obviously done that for a long time in the seafood industry with good results, where we have an exposure, especially in North America. But in terms of the growth now, we are more looking at the basically, you could say, Western Europe. In terms of infrastructure, we are looking at across the board infrastructure projects. But our main interest actually is in the infrastructure projects that we expect to see something similar here in Iceland in the coming years. For example, roads, bridges, electricity, good grids. And yes, so something on that front. So I would say that, that's the main focus at the moment. In terms of the potential growth, like I said, it's about 2% now. In the coming years, you could maybe see it growing to 5% to 10% of the loan book, giving us, like I said, a bit of a diversification, but we're not expecting any rapid growth above and beyond that.

Okay. For the AT1 question, we have touched on that before. We remain open to AT1, but that's subject to bulk market conditions as well as our funding needs to optimization of the capital stack. So it's going to depend a bit on how we -- how we propose with the capital authorization. For the S&P questions, I'm going to tackle both so let's say a bit -- to it as one. Obviously, the bank has a subordination requirement set by the -- set by regulators, which came into -- which was set late in October 2024. So we have 3 years to fulfill that. So that comes into effect, I would say, towards the end of '27. So we are in no hurry to issue senior non-preferreds. Our capitalization is quite strong, our liquidity is quite strong and funding is quite strong. So this is not something which we've done doing, I would say, immediately. We note, obviously, that we are on positive outlook with Standard & Poor's, although we note as well that we are on not pick, say, one notch than what we see for the Moody's rating. There have -- there are no decisions on, I would say, either canceling S&P or doing nothing. So that's something which we are constantly evaluating on all fronts. With regards to the market dynamics for senior non-preferreds domestically, we are yet to see the first senior non-preferred being issued here domestically. We have, however, seen the market reacting quite positively to senior preferred. So we are optimistic that once the senior non-preferred market is opened up, it will be accepted in a positive momentum domestically.

We have more questions. So two questions for [indiscernible]. Could you explain the net interest income sensitivity for short-term and long-term market interest rate changes? And could you explain any currency risks which part of assets in ISK and which part of liabilities in ISK and what currently hedging do you have?

First of all, currency rate, we remain FX neutral to a large extent. Obviously, between, I would say, ISK as well as the FX, although there is some -- I'll say some sensitivity between currencies in the international market, we try to eliminate those to a large degree through traditional swaps, but overall, we -- I would say, we view our balance sheet from, I'd say, 2 side, an ISK care balance sheet in a sense and then an asset balance sheet in a sense. So I think that's probably the FX risks. For the sensitivity of net interest income, we view that mainly through lower rate environment. So if the rate environment comes down, we expect returns for a liquidity portfolio to come down with it. On the flip side, we will try to say, maintain and even grow margins, but overall, we are seeing -- we are going to see for the medium term, it's likely that net interest margin will subside as the overall rate environment comes down. However, I would say, the overall target of the bank is based on return on equity. So we will optimize capital to maintain and grow return on equity. For the short term, there are more elements at play. There, we have the imbalances, which would be a runoff by both the CPI imbalance as well as the fixed rate imbalance. Both of them will have a positive effect on net interest income overall. But on the flip side, we are seeing rates coming down in a steady pace, which is, I would say, counteracting from a liquidity portfolio standpoint.

I think that covers it. And if there are no further questions, we want to thank you for attending this morning's webcast. We thank you for the questions, for committing your time joining us and hope you have a good day. Thank you.

Thank you.

Thank you