Íslandsbanki hf. (ISB) Q2 FY2025 Earnings Call Transcript & Summary

Good morning, and welcome to Islandsbanki, it's Friday, where we present the financial results for the second quarter of 2025. I'm Bjarney with the Investor Relations, and I'll be moderating today's session. I'm joined by our CEO, Jón Gudni Omarsson; and CFO, Ellert Hlodversson. Before I hand the session over to them, I want to remind you that as per usual, we will have a Q&A session following the presentation. [Operator Instructions] Now over to you, Jón Gudni.

Thank you, Bjarney, and thank you all for joining in this peak of the summer season summer vacation season. The weekend ahead here in Iceland is Iceland's biggest travel weekend where people flock outside of the cities and towns and seek out festivals across the country and also the Icelandic national sports of following the weather, finding out where is the best weather in Iceland during weekend, which now should be in the Northeast probably. Apart from that, we have had a good tourism season so far this year and, in general, good economic conditions. Now moving to the second quarter earnings of the bank. We had a very robust quarter with very strong growth in the core operating income of the bank and a very healthy return on equity of 13%. The cost/income ratio came in at 41%, mainly on the back of a strong revenue generation. And we obviously remain extremely well capitalized with over capitalization in the amount of around ISK 40 billion. The balance sheet remains very strong, a bit of an uplift in the Stage 2 loans, mainly due to some forbearance measures in the real estate sector where the selling of new apartments has slowed down a bit. So we have had to extend some credit to some of our customers there to give them a bit more time in terms of -- to sell the apartments. But apart from that, a very healthy loan book and overall good quality on the balance sheet. In terms of our targets, obviously, we reached all our targets in the second quarter with return on equity well above our 10% target. We have now noted that the guidance for the year is 10% to 11%. I would say and hope to be rather in the upper end of that range. And this -- the range also assumes that in the second quarter of the year, we have, through the cycle, regular impairment levels. The outlook for impairments is quite good at the moment. So if, obviously, we will have lower impairments, that would have a positive impact on our profitability. The economy is gradually -- as you can see here, gradually lifting off. We expect to see some 2% real growth this year. We got news this morning that the U.S. and Trump have had put tariffs on Iceland at 15% rather than the planned 10% tariffs. And this obviously can have some impact. And then, obviously, we will see what the overall impact of tariffs across different countries will have in the coming weeks and months. For Iceland, it's -- we mainly export seafood and medical equipment to the U.S. And we obviously also see whether there will be some exemptions from the tariffs. But in general, obviously, a bit of a negative news this morning, but hopefully, we will not have a major impact here in Iceland. Like I said, the housing market is slowing down a bit, with a bit more selling time for new apartments. Especially, the older apartments are easier to sell than the new ones, which are at a bit higher prices. And inflation is still a bit stubborn. So we are now actually expecting or rather expecting that we will not see further rate decreases this year. But hopefully, inflation will come down rather quickly, and we will see further rate cuts towards -- or either towards the end of the year or early next year. All the revenue units did very well in the quarter. We're seeing very good growth across all 3 revenue units, both on the balance sheet and in income, and I think I'll cover these a bit more in the following slides. In terms of the main events of the year, we could say that the sale of the government stake, obviously, is the biggest event, which came in, in May this year, and I will cover in the following slides. We launched the partnership with VÍS during the quarter, which is off to a very good start where we are basically selling insurance from VÍS to our customers, and a very healthy and good and strong relationship there from the very start. And we are seeing a very good pickup from our customers. And the main, obviously, target of this was to increase customer happiness and retention of our customers. We have seen a very strong market share in equities and bonds here in Iceland. And like I said, overall, a very good operations business-wise during the quarter. Like I mentioned, the highlight of the quarter was the government sell-down in May, where we saw extremely good [indiscernible] both from institutional clients and especially from the Icelandic retail. And as you probably all know, due to the heavy demand from retail, pretty much everything was allocated to the retail. And we are now seeing retail investors having around 35% stake in the bank. The Iceland pension funds have -- some of them have been increasing the shares -- or the shares owned in the bank as well, and we've been seeing extremely good trading in the stock in the past few weeks. And we are seeing volumes up by 400% year-on-year. It is obviously extremely good for our shareholders to see more liquidity in the stock. The number of shareholders topped at around 35,000 just after the sell down in May, ending at around 31,000 or just under 32,000 at the end of the quarter and moving slightly downwards, but we are seeing much less sell down from the public than we had expected. We had expected maybe 20% to 30% to sell their shares following the event. But as you can see, we still have a large number of shareholders, which is obviously quite enjoyable. Moving along. First, in terms of the investment banking -- or the Corporate Investment Banking unit. We have seen very strong activity there, 2 notable sizable transactions being announced very recently. First, the Samherji land-based salmon farming, and then the merger of Orkan and Samkaup, which is creating a retail giant here in Iceland, you could say, the third retail giant here and a very competitive company and where we are underwriting part of the equity of that transaction. Like I said, we have enjoyed the highest market share in both the debt and equity in the capital markets in terms of brokerage and a very strong market share in foreign currency as well. And we are utilizing our model, as you can see on the bottom right of the graph, where we have full services within this unit, the CIB unit where we can service clients both on the lending front and also in terms of capital markets. In terms of Business Banking, the same there, very healthy activity and good growth in the quarter and seeing many very interesting projects. As you can see on the right here, in terms of the tourism industry, the so-called Forest Lagoon, which is in the North of the country, where the plan is to build up a hotel next to the lagoon. We launched earlier this year a new Internet bank, which has been very successful, and we are seeing a very good increase in the Net Promoter Score from our customers and becoming now well above 0, which is obviously a very healthy sign in terms of the customer service level. And so we are seeing at least a very stable and even increasing market shares. In terms of digital innovation, we have been investing quite heavily there with new web pages and then the -- and the huge investments in the app and the Internet bank, as I mentioned. And this is obviously having a big impact on customer satisfaction. Last but not least, I would like to mention the Icelandic -- the Reykjavík -- Íslandsbanki Reykjavík Marathon, which is the biggest charity event of the year with obviously, where Reykjavik is filled with the runners and a brilliant day here, a company with the Reykjavik Festival, which also, as I said, is a great day to visit Reykjavik and participate. And like I said, the biggest charitable event of the year. So the charities here in Iceland rely quite heavily on this event. And the outlook -- the sign-ups are already in great place, and the fundraising and -- for charities is at a very nice pace compared to last year. I have a long-term goal to be able to run the 10 kilometer in minutes fewer than my own age, which is a very good call because it grows with age. And so now I'm -- I just turned to 49 earlier this year, so the target is obviously to run the 10 kilometer below 49 minutes, and that shouldn't be a problem, but we will see in August. So from the marathon numbers over to the financial numbers. So over to you, Ellert.

Thank you, Jon Gudni. We are quite pleased presenting our results for the quarter here, where we turned a profit of ISK 7.2 billion, that means year-to-date, ISK 12.4 billion. Return on equity, 13% for the quarter, where all revenue streams and items were contributing. Quarterly profits were growing by 37% compared to the previous year. Shifting focus to the net interest income first. The group turned a net interest income of ISK 13.9 billion in the quarter, up by ISK 1.5 billion roughly from the same quarter last year. In terms of NIMs, we turned a 3.3% NIM in the second quarter and 3.2% NIM over the first 2 quarters as a whole. In the quarter, we accounted for 1.50 -- 1.36% of inflation compared to a level of 1.51% in the first quarter. We expect the levels in the third quarter to be around 1.3% and CPI [ dips ] going through our books on a CPI imbalance of ISK 178 billion. The CPI imbalance has been leveling off, in line with our expectations. We guide towards that the next rate decision is being announced at August 20, and I think many analysts assume that rates will be kept unchanged at that point in time, as inflation has been more persistent than previously anticipated. Shifting focus to fees. As in previous quarters, payments is the largest fee income segment, but we saw quite good growth in the investment banking services. Overall, net fee and commissions were growing by 13% year-on-year and 7.5% over the first 2 quarters as a whole. We expect the second part of the year to be a relatively good fee income, driven by the contribution of all fee income streams, really. In terms of NFI, we turned a neutral result following the turbulent first quarter, as we discussed the last time we met. The NFI amounted to ISK 13 million positive for the quarter as a whole as we saw volatility in the capital markets come down and activities come up. It is unclear how the future holds, as always, but we expect to be well positioned from an NFI standpoint. Market risk remains a very small part of our balance sheet as in the previous quarters. In terms of other operating income, we turned a profit of ISK 143 million, mainly driven by gain of sales of property. During the first quarter, we reevaluated the investment property mainly related to the bank's previous headquarters at Kirkjusandur. And the group expects that steps will be taken towards monetizing that asset in the following quarters. Turning to focus. As Jón Gudni mentioned, the cost-to-income ratio was at 41% over the quarter and 44.1% over the first 2 quarters as a whole. We saw a 6.8% growth in salaries, but reduction in other operating expenses, noting, however, that we had an administrative fine in the previous year. Overall, adjusting for the administrative fine, we saw a 3% growth in operating expenses year-over-year. Overall, the store -- this is a strong cost-to-income ratio, driven mainly by revenue increases, but also cost control. Shifting to the balance sheet. The balance sheet closed off at ISK 1,330 million, growing by 2.5% over the quarter or roughly 10% on an annualized basis. As before, the composition of the book is more or less the same, 43% mortgages, and the rest healthily divided between segments. The book is over 94% covered by collateral, where LTVs are modest, currently at 53% across all types of assets and is skewed towards the lower risk classes, as you can see on the bottom right-hand side. This, of course, translates into impairments where we released ISK 400 million over the quarter. Stage 3 loans are both strong and stable, closing off at 1.6% for the portfolio as a whole. We saw a slight increase, as Jón Gudni mentioned, in Stage 2 loans, driven by increased forbearance measures, mainly related to loans in construction as the sale of new housing has slowed down a bit. We also like to draw your attention to the fact that we are not equally weighted when it comes to the economic scenarios, where we are a bit weighted towards the bad scenario in terms of our impairments, as we have been for many, many quarters now. Looking at the mortgage book. We have seen the shift of mortgage products started to normalize, as you can see on the top left-hand side. The book is entirely covered by collateral, averaging at 54% loan-to-value, as seen on the bottom left-hand side, which, of course, is a benefit at the implementation of CRR3, which we expect to be implemented later this year. Asset quality remains high for the mortgage book, where NPLs closed off at 1%, and Stage 2 loans remained flat over the last 2 quarters. On the top right-hand side, we draw your attention to the net interest loan fixed rate imbalance, where over the course of the next 4 quarters, we will have ISK 50 billion of fixed rate mortgages being reset. Those mortgages are customarily or, in general, at quite lower rates than what we're seeing in market rates currently. So as those loans are being refinanced, we will see this fixed rate imbalance we have been discussing in our previous earnings call being alleviated at a quite rapid pace. When it comes to commercial real estate, it is the same story as in previous quarters. The book is well diversified and of good quality. We have seen reduction in Stage 2 loans, down to a level of 2.9% related to a payment of a loan, which was in -- which was classified as Stage 3. The construction book as a whole is over 50% to residential real estate. As for the CRE book, we are seeing quite good diversification, and the CRE entities in Iceland have a natural hedge as the revenues are in the same currency, CPI linked, as the liabilities, and they are funded for a long time, unlike many other geographies where you see those companies predominantly funded with short-term instruments. Shifting the focus to the liability side of things. Deposits are currently around 50% of our liability sides and grew in the second quarter where we reached a 4.4% growth over the year as a whole. We saw good growth in all segments, where we saw over 2.5% growth, for example, from retail deposits, which are over 50% of our deposit base. And obviously, this strong deposit position and strong growth has allowed us to be more flexible when it comes to wholesale funding, where we have a light maturity profile for the remainder of this year and throughout 2026, where maturities are only at ISK 25 billion throughout this year and at ISK 63 billion over the next year as a whole. This allows the bank to be more agile when it comes to wholesale funding needs. We are currently over 50% funded at the wholesale front through ISK, as the senior market has been growing quite rapidly domestically. In line with our capital optimization journey, we expect AT1s and Tier 2 to be issued potentially towards the end of this year or into the next year as capital requirements come closer to -- or as capital position comes closer to capital targets. Liquidity is ample and high. We closed off the reporting period at 185% LCR ratio and 121% for the ISK. Liquid assets are currently at 18% of the balance sheet and fully mark-to-market, as in all previous quarters. All ratios well above requirements and stable throughout time. And maybe lastly on capital. Towards the end of the second quarter, we received the results of the SREP process by the Central Bank of Iceland, which resulted in a reduction of additional capital to a level of 1.4%, which is a 0.4 percentage point reduction from the previous assessment. Following this, the overall capital requirement is now at 19.3% or 15.2% looking at it from a CET1 standpoint. Taking into account a management buffer midpoint of 200 bps, the capital for the CET1 target is currently at 17.2% compared to a level of 18.5% at the end of the reporting period. In addition, we have deducted from the capital base around ISK 16 billion, which have been committed to buybacks, which are yet to be completed. Buybacks were on halt throughout the second quarter, mainly related to the sell-down of the Icelandic government, but were resumed at the beginning of July and are currently ongoing. In our previous earnings calls, we have also discussed the effects of CRR3, which was expected to come into force, I'll say, on the first half of this year, but are currently expected towards the end of this year. Our previous assessment was that the effects of CRR3 would reduce the risk amounts -- or the risk exposure amount by around 4.5% -- 4% to 5%. We are currently -- we are constantly reassessing this and are currently guiding towards a reduction of REA of around 6% to 7%. So taking all of this into account, both the current excess capital on balance sheet, the committed and uncompleted buybacks as well as the anticipated effects of CRR3, our excess capital position is around ISK 40 billion from a CET1 standpoint, down to a capital target of CET1 staying at 17.2%. As before, the bank is open to both internal and external growth and is committed to its capital optimization journey. So overall, the results for the second quarter are very strong, and there's a good underlying momentum in all revenue streams. We turned up -- we turned a return of equity of 13% for the quarter, 11.1% for the first half as a whole. Margins -- or net interest margins are up from the previous year, currently at 3.2% for the first half of the year. And we are also guiding towards, I would say, fluctuations as in previous quarters related to the same effects. We have seen strong growth in net fee and commission income. When it comes to the balance sheet, we saw a healthy loan growth, healthy deposit growth and very strong and stable asset quality, as Stage 3 loans closed off at 1.8%. Loan portfolio is over 94% covered by collateral and skewed towards the risk classes -- lower risk classes. And our capital optimization is an ongoing focal point, where we have around ISK 40 million to be either deployed or returned to shareholders as market conditions allow. Over to you, Jón Gudni.

Thank you. I think we'll move over to Q&A. Bjarney?

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

Actually, no questions on the telco at the moment. [Operator Instructions]

T Thank you. We've received questions from [indiscernible]. She gives her congratulations on a good quarter and poses a couple of questions. I've decided to group them into 2 sessions for you guys. So first of all, what are your guidelines on profit warnings? Q2 earnings are 18% above consensus and pretax earnings of 24% above -- yes, that didn't call for a profit warning. And the other question for this part is previously you expected REA related to development asset, ADC, to increase 60% to CRR3. Now that EPA has proposed changes to the ADC implementation, can you comment on the effect of the proposed changes?

Yes. Maybe starting with, I'd say, the profit warnings. We have internal guidelines, which have not been made public. When we meet those, we issue a profit warning. I would say no questions asked if we pass that threshold. But at the same time, we also take a viewpoint on the composition of the earnings and the composition of the consensus. And as such, in each and every case, if there is a need for, let's call it, an ad hoc profit warning, even if target levels have not been reached. But the levels are undisclosed. With regards to the CRR3, as I said before, we previously assumed that REA would be reduced by 4% to 5%, boosting capital ratios in line with that, but currently are assessing. We are currently, I would say, assessing between 6% and 7%, where multiple factors, including, I would say, the guidelines from EPA are being taken into account. This assessment is constantly being updated and reevaluated, and we will provide updates to the markets as they develop until the acknowledgment of CRR3 into Icelandic law.

Thank you. I'll let -- and I'll continue with the questions from [indiscernible]. On M&A and external growth, now that Kvika has entered into merger talks with Arion Bank, do you have any other specific targets in mind regarding M&A? Is your focus priority on growth in Iceland? Or are you looking abroad? And continuing, in your 2025 guidance, you commit to conclude capital optimization subject to market conditions. Does that assume external growth? Or will you conclude the optimization by returning capital to shareholders only before year-end if there is no external growth? And a follow-up to that one, does the commitment apply to the future excess capital following the implementation of CRR3?

So thank you for that. So firstly, on the M&A, I think we are basically -- domestically, we are open for opportunities. But abroad, we are now more actively seeking opportunities and mapping out what opportunities we can see outside of Iceland. In terms of the capital optimization, that is actually a moving target. As you have seen, the implementation of CRR3 has been delayed, and the impact is actually growing a bit larger. So we can say it's a moving target. But we remain very actively engaged and plan to obviously optimize the capital as soon as possible. But I would expect that they would move at least into next year. But we continue to -- on the buyback program. And like Ellert said, we have already allocated about ISK 16 billion to that program. And with more liquidity in the stock now, we can move a bit faster on that front. So basically, working actively on both sides and remain very committed to the optimization program.

Thank you, Jón Gudni. Do we now have any questions? Are there any online?

No questions on the telco.

Okay. So if there are no further questions, we want to thank you for joining us this morning. We appreciate the questions and the time allocated to tuning in to our webcast. I hope you have a good day and a great weekend.

Thank you, all.

Thank you.