Íslandsbanki hf. ($ISB)

Good morning, everybody, and welcome to Islandsbanki Q1 Results Call. My name is Jon Omarsson, CEO of Islandsbanki. And with me here today is Ellert Hlodversson, our CFO. We will go through the earnings. And then at the end of the call, you will have an opportunity to submit verbal questions. If you have any questions during the call, you can submit those in writing also to [email protected]. Now let's move over to the results. We are presenting a very strong set of results for the first quarter, with a return on equity of 13.6% and the cost-to-income ratio also well below our target, sitting at 38.5% for the first quarter. This is heavily impacted by high inflation numbers in the first quarter. As we have noted earlier in our investor calls, we are quite long inflation with an inflation balance of around ISK 200 billion. And therefore, we expect to see fluctuations during the next 2 quarters based on how inflation comes into play. In the first quarter, we had about 250 basis points of inflation, meaning then about 10% annualized inflation numbers and obviously having had a big impact on the results. At the same time, we are seeing a growth of 27% in our core operating income, again, obviously heavily impacted by net interest income and from inflation, but also seeing good growth in net fee and commission income. Our capital remains very strong and well above our targets. And as Ellert will take you through later on, we have had ample means, obviously, to continue buybacks and still expect to optimize the capital structure before the end of this year. In terms of our targets, as noted, obviously, we are well above our ROE targets for the quarter as well as below the cost income target. We do, however, retain the guidance for the year of 12% return on equity as we are seeing some pickup in impairments in the loan book. And obviously, in terms of inflation, it's uncertain how much inflation we will have throughout the year and impacting net interest income. The economy is slowing down. The Central Bank has maintained very high rates, having some impact on some of our borrowers. And like I said, therefore, we do expect that we can see some impairments during the year and retain the guidance of 12%. But I would, however, have to say that based on the first quarter numbers, you could say that the risk is more on the upside in terms of the ROE for the year. In terms of the economy, we are expecting slow growth this year. Again, the Central Bank has maintained very high rates to try to get activity down in the economy to tackle inflation. The Icelandic Central Bank has a very clear mandate to fight inflation and get that to the target levels. Following that, we expect to see good growth in 2027 and 2028 and we have ample means, for example, very strong liquidity in the system. We at Islandsbanki have seen about 30% increase in deposits over the past 2 years. So when rates start coming down, we have plenty of liquidity in the system to support further growth. The housing market remains fairly resilient in terms of the pricing, but sale of especially new apartments has slowed down. And therefore, we are seeing some difficulties with some of the contractors that have been building apartments over the past 2 years and have some remaining stock. So that will obviously take a few months to feed through the system. Inflation has been persistent, as noted, obviously, quite high inflation in the first quarter. Based on the first 2 months of the second quarter, we are also seeing relatively high inflation, but hopefully, that will recede later in the year. And due to this, we expect that the interest rate levels will remain quite high and even move higher in the next few months before we expect to see them stabilizing and then hopefully coming down towards the end of the year or early next year. In terms of our revenue units, we had a good quarter on all fronts, Personal banking, especially in terms of the ROE. There, we also saw very strong growth in both loans and deposits. And even in credit cards, we are seeing or maintaining our market share and even growing that a little bit during the quarter. So a very strong quarter for Personal Banking. Same for business banking, where we have seen good return on equity, even though it's a bit below the average. And they are seeing good growth in the loan book and obviously, we retain a very high market share there. Corporate Investment Banking, a bit lower in terms of the ROE, but good inflow in assets under management, and we continue to build up our international lending book. I'd like to note here that we -- to basically enhance our emphasis, we have changed the Icelanding names of business banking and corporate investment banking, calling them [Foreign Language]. There, we are putting a clear emphasis that the business banking, which is servicing SMEs is focusing on the traditional banking services for companies. And then we have [Foreign Language] Investment Banking, which is servicing investors and the largest corporates in Iceland, which utilize the capital markets to a larger degree. A bit more on the operational side. We had a good quarter in terms of issuance, both for the bank and our customers, quite a few names that have been taking advantage of the strong capital markets here in Iceland. We have now become a principal member of the Mastercard, which is something that we can utilize in the future. And for example, for our credit card acquiring business, which we are just starting now and have been ramping up in the past few weeks and couple of months and are seeing new clients coming on board there. And so that's something that we are seeing both in offense and also in defense in terms of making sure that we have the full suite of products for our customers. And it's great to see the Icelandic Islandsbanki red logo on some of the terminals at retailers across the town here. We have also introduced a new loyalty service and with new products. And a bit more on that on the next slide. So it's a loyalty service, obviously, where we are encouraging our customers to use more products from the bank. And we have already about almost 40,000 customers that have signed up for the service. And we are seeing very nice movement there where people are adding services, the most popular ones being monthly savings. So savings in the form of securities, mainly on the bond side and also more in terms of sale of pensions, private pensions. Both of these obviously are very good for the financial health of our customers. So we are very happy to see that this is picking up. And obviously, we are offering great terms for our customers that join this loyalty club. So yes, so -- and then maybe one thing to mention also on the fun side, you can see the sweater at the model here, Rurik, one of our most famous footballers is wearing. And this has caused quite a stir in the knitting community here in Iceland. So for example, the knitting club of the bank used to have usually around 15 people. It's now up to 60, I believe. And the knitting clubs around the country are getting the recipe for the sweater. And we'll see plenty of that during the summer in the parties and people vacationing throughout Iceland. So a bit of a fun side. We had -- last week, we announced some changes to our corporate structure, which had the -- we are basically simplifying our management layer, reducing the number of executives by some 15% across the board and 20% for executive directors and some 20% or 15%, 20% also in the Management Board. Alongside this, we are expecting a 7% reduction of FTEs during the course of this year, partly comes from the actions that we took place last week. But also, we are utilizing that we are seeing an increased number of retirees during the course of this year, partly due to the program that we ended last year and had already taken into our accounts in the fourth quarter of last year. So through all this, we are expecting to see obviously, efficiency gains and reducing the overall number of employees by some 7% during the course of this year. We also, you could say, simplifying our corporate structure. We have a new unit called strategy and culture led by Rakel Asgeirsdottir, which has then HR, legal, marketing and also strategy and sustainability, combining that into one strong supporting unit. And you can see our new organizational chart here on the right side. A bit on AI, we have obviously been very focused on technology throughout the past 20, 30 years here at the bank, and AI is no exception there. You can see at the bottom here in terms of the time line, we have been quite focused there for the past 3 years since 2023, when we formed our new data strategy to support more rapid technology development. And over the past 3 years, we have been investing quite heavily on this front and seeing already utilizing models, for example, decision-making in terms of new lending for customers. We have now adopted the Copilot here across the bank, and we can see that we are among the highest in terms of the Nordic banks in terms of utilization rates, where over 80% of our FTEs or our employees are using it on a weekly basis. We have a clear AI governance framework in place and empowering our employees, obviously, through training. It has been mainly general trading over the past year or so, but we will be now focusing more on specific training for the different tasks that people perform in their daily jobs. We are also encouraging innovation throughout the bank and then have formed actually a special subsidiary, which we call [ Bakbank ], which is going to help us to further speed things along in terms of development and using AI as a tool. Obviously, developing within the bank is quite difficult due to heavy regulation. And so having a special subsidiary where we can move faster and try different things is quite helpful. And then obviously, we see results from that, we can then at the end through obviously the proper processes to bring those technologies into the bank. So we continue to see further efficiency gains on this front and huge opportunities ahead in the technology space. Having said that, I'm going to give the mic over to my colleague, Ellert, to go through the financials. Over to you.

Thank you, Jon Guoni. As Jon Guoni stated, we are turning a profit of close to ISK 7.5 billion in the quarter, a very strong result. Return on equity, 13.6%, driven by high core operating income growing 27% year-on-year, primarily driven by higher inflation, but also growth in fees, offset partly by additional impairments. We note as well that during the quarter, we accounted for a variable incentive scheme as well as stock option scheme, which were not present in our remuneration policy in 1Q '25. So on a like-for-like basis, based on the composition of salaries as they were in Q1 '25, return on equity would have been closer to 14% aside those facts. But focusing firstly on interest rates. The group turned a ISK 17.1 billion NII in the quarter, representing a 3.9% margin, mainly on the back of the fact that the inflationary takes accounted for in the quarter were close to 2.5% compared to 104 bps in the previous quarter, where margins were close to 3.2%. Overall, the margin increase amounts to 73 bps, of which 66 bps are attributable to higher inflation. This, of course, means that 7 bps are attributable to other things related mainly to the runoff of the fixed rate imbalance, which we have been discussing for a few quarters and has now fully run off the books. The CPI balance has been quite stable in the last year or so, around ISK 200 million -- ISK 200 billion, sorry. But we note that the maturity of CPI 26 was actually yesterday, which is expected to bring the CPI imbalance a bit upward. Over the course of the second quarter, we assume that we will account 146 bps of inflation should the macro forecast realize. Fees were growing 6.6% on a year-to-year basis. As before, payments are the larger part of our fee income stream and quite stable compared to the previous year. Volumes on capital markets have been coming down, and you can say that the capital market development has been similar in 1Q '26 as to 1Q '25. So as a result, the IEP revenues as well as asset management revenues are comparable to the previous year. However, we are seeing strong growth in lending and guarantees on the back of increased balance sheet activities, both domestically, but also related to the expansion on international grounds as we have discussed before. As in previous quarters, market risk remains a very small part of our balance sheet. Listed equity closed off at around ISK 3 billion end of the quarter, comparable to previous quarters. NFI turned a loss of ISK 213 million, mostly related to equities and related derivatives. We note that other operating income coming down quite a lot, as you can see on the bottom left-hand side from the previous quarter, mostly relates to revaluation of Norourturn, the office building in Islandsbanki headquarters recycling, which was done in Q4 and it's done periodically either at the 6 or the 12-month period, explaining the lion's share of difference between Q4 '25 and Q1 '26. And focusing on cost. Cost to income closed off at 38.5% within our targets, as you can see on the top right-hand side and quite healthily within those targets. Composition of cost is comparable as in previous quarters, around 60% salaries and 40% other operating expenses. We note that during the first quarter, we expensed ISK 247 million related to employee variable compensation plan as well as ISK 58 million related to employee share-based incentive scheme, which came into play this quarter. Organizational changes, as Jon Guoni stated, were approved in April, resulting in a reduction of FTEs by over 7% over the year. That includes both redundancies done in the quarter as well as the effect of dismantling the early retirement scheme we discussed for the full year '25 earnings call. We expect redundancies to be accounted for in second quarter amounting to ISK 260 million, and the overall changes are expected to turn a savings around ISK 1 billion fully materialized in 2027. So focusing on the balance sheet. As before, it's a simple balance sheet consisting of liquid assets around 20% and loan book of around 80%. Composition of the funding side remains comparable deposits, 57% and stable funding around 40%. Zooming in on the loan portfolio. The group closed the loan portfolio at ISK 1,401 billion, representing over 10% annual growth quarter-on-quarter. We are seeing growth across all business segments and the portfolio remains comparable in composition with around 43% are in mortgages, additional 5% to other -- to individuals of other nature. And then the rest the segment is in line with the Iceland economy. Around 94% of the loan book is covered by collateral. LTVs remain low, closed off at around 51% compared to a level of 52% year-end '25. And the credit quality continues to be robust based on disciplined lending policies. Focusing on the mortgage portfolio itself, we saw good growth there. But the real news is that we are starting to see growth in nominal rates. So the composition of the book is turning a bit more healthy. As before, the mortgage book is well secured. LTVs are around 56% close of the period. In terms of asset quality, we saw quite a lot of impairments during the quarter of around ISK 1.2 billion, where annualized cost of risk was around 35 bps, same as or similar to 4Q '25. We still guide towards the fact that the normalized cost of risk through the cycle is assumed 20 to 25 bps Stage 3 loans closed off at 2% compared to a level of 1.5% year-end '25. However, Stage 3 loans were dropping and the Stage 2 increase relates to a movement from Stage 2 to Stage 3. We do note that sale of residential real estate is -- continues to be slow. So a few construction projects have been classified in Stage 2, as you can see on the bottom left-hand side and was done so in 4Q '25. We are seeing clear indication that prolonged high interest rate and inflationary environment is starting to have an impact, although we are still seeing borrower-specific circumstances materialize and no structural issues within the book. So focusing on the liability side of things. As in previous quarters, the composition remains to a large degree, comparable. We are seeing overall deposits growing by over 4% in the quarter and individuals growing by over 8% in the quarter on an annualized basis. Composition of book with regards to term deposits is comparable and the overall, I would say, coverage by a deposit guarantee scheme as well. This, of course, turns into liquidity position where 20%, as I said before, of the balance sheet is in liquid assets. LCR closed off at 177% for all currencies and 141% for ISK. And as before, the entire security portfolio is mark-to-market either through P&L or OCI. This, of course, allows the banks to be quite flexible when it comes to wholesale funding. And following a quite active 4Q '25, we are now fully MREL funded throughout the year. As before, diversification of funding sources through products and maturities as well as types of investor, types of locations is the key here. And on the top right-hand side, you can see the maturity profile of the bank, where maturities for '26 are quite low and even lower today than at the reporting date as the ISK 33 billion on the bottom towards the left were paid off, the CPI 26, which was paid off actually yesterday. Next year, we expect similar maturities aside from an FX or a euro-denominated covered bond, which is a bit different market than you would see on the senior market internationally. In terms of spreads, spreads have been very, I would say, very stable throughout the periods of market turmoil, as you can see on the top or bottom right-hand side. We note that there is a call date on AT1 this September, and we expect that to be called subject to refinancing in geographies and currencies as well as timing based on capital needs at the time. And lastly, in terms of capital, the bank closed off the capital ratio at 22.5% compared to a target of 21.1% and CET1 ratio of 18.6% compared to a target of 17%. As you can see on the bottom right-hand side, we saw further reduction of REA ratio from a position of 59.8% down to a 58.7% on the back of further adaptation of options related to implementation of CRR3. We continue to be committed to our capital optimization journey. During the first quarter, the bank distributed close to ISK 20 billion, ISK 12.6 billion through dividends and close to ISK 8 billion in other distributions, mainly buybacks. As at 31 March, the distribution capacity, including uncompleted buybacks as well as the portion of profits in 1Q '26 amounts to ISK 29 billion, assuming a fully optimized capital structure. So in essence, a very strong result, return on equity, 13.6% for the quarter, a very sound excess capital distribution or excess capital position where distribution or growth capacity amounts to NOK 29.2 billion from a CET1 standpoint and changes as well as implementation of products through the first quarter provide proven strategic execution, everything from strategy through execution and then impact, as we have stated on the cost side related to organizational changes in -- or throughout 2027. So with that, we turn the floor to questions and ask the operator if there are any questions on the line.

[Operator Instructions] But it seems to be no questions. So I hand the word back for written questions.

Good. Thank you. Are there any written questions?

We have a couple of questions. First, beyond the 7% headcount reductions by year-end 2026, do you expect further reductions? Or is the aim to hold flat from 2027?

Yes. So the question is regarding our announced changes to corporate structure this year and 7% reduction in the number of FTEs that we will see further reductions going forward. I think with the new technologies, we will see further efficiency gains, both to support then the fewer employees and also new services across the board. So I think we will see some impact on both sides, but we have not put down any numbers in terms of that going forward.

Another question. Once the loyalty services are fully ramped, can you quantify the cumulative BPS impact on the group's NIM from the preferential rates on mortgages and deposits?

We have stated at a more normalized level where policy rates and inflation comes out to what we can say is a long-term view. We expect NIMs to be around 3%. We still expect that to be the case.

What is the average ticket size in the international loan book? And how diversified is it across borrowers and geographies?

So the average ticket size is probably around EUR 25 million roughly, ranging from some ISK 10 million up to ISK 50 million. And so the whole book consists of probably around 15 borrowers. So the largest one being probably around 10% of the international book. It's -- we have in the seafood space, it's mainly in North America, both in the U.S. and Canada. And then in terms of the leveraged loans and infrastructure, that's mainly in the Nordics and some exposures also into Mainland Europe.

Can you provide further information on your visibility of the loan book growth over the next few quarters? And how is that growth expected to develop within different business segments?

Yes. So on the loan book growth going forward, that obviously moves quite a bit between quarters based on the appetite. We do expect relatively slow growth throughout this year in terms of the loan book as obviously, interest rates are quite high and the Central Bank is trying to cool down the economy. Having said that, we saw a very strong growth in the first quarter in mortgages. So from what I've seen so far, we can expect fairly good growth there throughout the next few months at least. It's mainly on the large corporate side, I would say, where we have seen relatively slow growth in the first quarter. And -- but we are seeing some actually signs of pickup there as well. But overall, I would expect growth in loans to be below GDP growth throughout the rest of this year. And then obviously, through the business cycle, we expect loans to grow in line with normal GDP growth going forward.

Yes. If I can add to that, I think we will see the domestic part growing in low single digits while the portfolio as a whole, offset partly by international growth probably towards middle single digits.

You are congratulated on a good result and asked to provide more insight into the company-specific impairment. In what sector is the company, and do you expect more borrower-specific cases in the near term?

So the impairments relate to probably 3 to 4 borrower-specific cases. We classify them as borrower specific as they do not -- as they reflect on borrower issues rather than structural sector issues, if you will. Those are in various indices. There is an exposure in the construction sector. There is within commerce. There's also within industry. So no real -- I would say, no real common denominator between those. But we do note, obviously, that we are still in a high rate and high inflation environment. So that is expected to have an impact. We also note that the borrower-specific impairments have been impaired to a level we deem suitable for those borrower-specific cases. So for those cases, assuming all other equal, they are impaired to a level we deem suitable for those borrowers.

There are no further questions on the chat.

Thank you. Operator, any further questions online?

No questions from the telco.

All right. Well, then I thank you all for participating in this call. As noted, we are quite happy with the Q1 results. And at the same time, we are seeing a lot of activity on the operational side. So thank you again, and we wish you a great day. Thank you.