Arion banki hf.

Good morning, dear guests, and welcome to this webcast presentation of Ariane's fourth quarter and full year 2020 results. Thanks for tuning in. We will be here today going through the investor presentation of our fourth quarter results and 2020 results. And I'm joined with Stefan Pedersen, CFO, and Ege Klitson, the Deputy CFO here. And collectively, we will go through this together. Now, the fourth quarter was the third quarter in a row where we saw a meaningful improvement in core operations of the bank. And indeed, this was the best quarter in over three years, with return on equity above 10% target and actually closer to 15% on the optimized equity, which is the equity that we intend to use in our business. And this gives us great comfort to come here today and provide an updated guidance on financial targets for the next few years, where we are raising the bar a bit, and also providing a strong guidance on further capital release on top of the 18 billion that we are announcing as well. This is driven by a solid income growth of 8.2%. in a quarter, but also a tight control on costs and the measures that we took in 2019 are paying off. So there is an improved operating efficiency across the group, which is demonstrated in the cost-income ratio. We're also benefiting from the fact that we have a really diversified income stream from different financial services. and have invested heavily into distribution channels, which are paying off in terms of cost, in terms of ability to service clients, and to deal with the situation like we had last year, where we had our branches closed for 19 out of 52 weeks. I mentioned the capital release, so the board yesterday, when it approved the financial accounts for last year, They are proposing for the AGM a 3 billion dividend payment, and also approved a 15 billion share buyback programme, which we expect to initiate in the coming days. And this is on the back of the regulator approving such a measure. Despite the 18 billion of capital releases, we still have one of the highest CET1 ratios in Europe. There is a 40 billion surplus capital on top of a pretty sort of substantial management buffer at the moment. And that gives us, alongside with much stronger capital generation in our core operations, great comfort to guide for a further 50 billion capital release in the coming years. We have obviously been sort of in our journey benefiting from the fact that we have a pretty sort of diversified shareholder base and strong access to capital markets and last year we used that to issue the additional tier one instrument and have now completely normalized our capital structure in a way that we have the optimal structure going forward the only issue now is to release some of the surplus capital that we still have I mentioned the organizational changes in 2019, which are the main contributor for this improvement in performance. And we have taken that further by revising our strategy a bit, which was approved by the board of directors in December. It builds on a journey that the bank has been taking in recent years. It builds on our culture and values and the shifts in focus which were introduced in September 2019. And the positioning is such to excel by offering smart and reliable financial solutions which create future value for our customers, shareholders and the society as a whole. Built on three key pillars where we are really focusing on being a solutions-oriented and performance-driven entity. And we have already begun to implement the strategy, as you saw from a recent announcement on the newly introduced variable remuneration scheme. And this will shape our business and services over the coming years. Now, Iceland has in many ways been successfully dealing with the COVID-19. And I'm sure that you're all following sort of the coloring of countries in Europe, where Iceland is currently the only green country with a really low new incidence ratio or rate. But apart from that, sort of the social fabrics and the resilience of households, corporates, and the public sector as well. has enabled the country to deal with the downturn, economic downturn, in a pretty strong way. One of the sort of fiscal measures that were taken was the massive reduction in policy rates, which is now paying off in terms of markets refinancing, where market refinancing is at all-time high. And in some instances, borrowers are reducing their borrowing costs by more than 30% by refinancing. So that is really helping with disposable income. It's interesting to see the traffic data, which demonstrates that there was, apart from the complete lockdown in March, April of last year, things have been quite normal. And if you look at the consumer goods imports, they're actually up 5% between 2020 and 2019. So whilst Icelanders are unable to travel abroad, they are definitely consuming. And this is supported by strong fiscal measure and monetary measures which are holding up the disposable income. And that's why we are pretty confident that, combined with obviously the vaccination programme that we are following, sort of where we basically are following the route of other European countries, is that we will see a rebound in our economy in the second half, and on the back of significant monetary and fiscal measures. And as you can see from the general government's cross-step position, that there is still meaningful room to add to fiscal measures, which have, in international comparison, been sort of somewhere in the middle range. And there is definitely room to do more if the economic recovery sort of falters. Now I mentioned our digital services, which really navigated us through the COVID lockdowns. And there we claim that we have a leading financial service platform with considerable future potential. We've invested heavily into these distribution channels last few years. As you can see from the development of digital sales, they are on the rise. And we have a recent Finasta survey which puts us among the best performing banks globally in terms of digital sales. And it's interesting to see the number of interactions being 42 million last year, 99% of those were through digital channels. That means that we interacted with our clients on average one time per day. Some interesting statistics. And this is also our sort of focus here on digital development or digital solutions is very much supported by or helped by Iceland's strong digital focus in the public sector. And we saw, for example, last year a lot of new measures taken on the public sector side to facilitate banking services during closure of branches. Now, last year, we sought to expand our range of green products. We launched a new deposit account called Green Deposits, which has been used to finance the bank's green car loans. And we also started offering mortgages with special interest rates, green mortgages. And our thinking there is by providing green markets, our primary objective is to encourage individuals, construction companies and real estate companies to build more environmental friendly housing. So here our approach is very much sort of business driven. Now before handing over to Stefan, I would like to go through two slides, basically the bridge of the earnings, the earnings from continued operations. I did not mention the discontinued operations, which were quite a drag on our operations last year. And we aim to change that and have positive contribution from the discontinued operations, the assets held for sale this year. And if we get that, We can easily meet some of our financial targets, given sort of where we are in terms of our core operations. And as you can see here, if we look at the full year, we increased our revenues, core revenues, by some 2.8 billion, and at the same time reduced our operating expenses by 2.4 billion. And that is the main kind of driver for improvement in core operations. And if you look at sort of where this revenue generation is coming from, it's interesting to see that we were able to hold on to our net interest income despite a much lower interest rate environment. But the real contribution is really coming from our policy or business strategy of focusing on capital velocity and on the corporate banking side. where we are almost doubling fees from lending and guarantees between year. A meaningful sort of fee pool and doubling it was quite an achievement. I mentioned sort of this third quarter of improved operating or core operating earnings, giving a reason for revising financial targets. and we've indeed revised three of them now, presenting that today. Our biggest change is obviously that we have now reduced the cost-income ratio from 50% down to 45%, and that effectively represents a really strong focus on expenses, and we have internal kind of targets which we are not putting out, which will help us achieve this target, but this also represents the fact that we think that there is room to grow the revenue side as well. And that's why we actually increased the revenue on risk exposure amounts from 6.5% to 6.7%, which is a new kind of financial target that we introduced during the Capital Markets Day to represent exactly the new business strategy of focusing on capital velocity. And coming to that, the third change that we make is on loan growth, where we had previously been guiding for a reduction in the corporate book on the back of this strategy, where we now are saying it will probably develop in line with economic growth, but we still anticipate the mortgage book to grow at a slightly faster pace. And with that, I hand over to Stefan Peterson, the CFO.

Good morning, ladies and gentlemen. This was a very good quarter for the bank. It wasn't perfect, but it was very good. If we look at the targets, at the bottom of the page, we met all our financial targets for the quarter, with ROE of 11.8%, operating income over REAs at 8%, and cost income ratio at 44.9%. So as we see, a solid quarter, obviously led, as Bente said, by increasing core revenues, NII over credit risk improved year on year, and OPEX is under control. And then on top of that, other sort of things, in a way, developed very positively. Balance sheet is very, very strong. regardless of the capital release that we have forthcoming. And we still have 40 billion of surplus capital that we want to distribute to shareholders over the near term. If we look at the income statement for the fourth quarter, as I said, then we see solid growth in core income of 8.2%. But we also see a solid improvement in net financial income where equities, holdings and trading were doing extremely well. And other operating income is also up massively. Here we are finally seeing the benefit of both sale of assets but more importantly by sale and fair value increases in investment properties that the bank holds. which are mainly sort of residential development lots in the Reykjavik area. So operating income is up some 25 percent. Costs are under control. Even if they remain a target, they are up 3 percent. Bank levy is relatively stable from last year. And in the quarter, the impairments were negligible. They were basically positive by 74 million. We have improved our modeling. We have done extensive impairments throughout the year. So impairments were not a factor in the fourth quarter, bringing earnings from before income tax up by 29% year-on-year. Income tax expense was positive due to the composition of our earnings. So earnings from continuing operations were up from 56% at 8.1 billion, But as Bente said, and when I said the quarter wasn't perfect, we still have a drag from our health for sale assets, something that we aim to reduce and turn around. So the net earnings for the quarter were 5.7 billion, up from a loss in the previous year. Looking at the full year, it is in a way more of the same story, positive core income, positive both financial and other income, so operating income is up 6% year on year. Expenses are coming down by 9%. We should keep in mind that we had one-offs due to a reorganization and layoffs in September of last year, but still very good trends on the OPEC side. The bank levy has been reduced finally from 37.6 basis points down to 14.5 basis points. And we are obviously noticing that in our results. So all the way down to net impairments, we are seeing a very positive story. But then obviously for the year, we have substantial net impairments due to the COVID-19 pandemic, just over 5 billion. But regardless of that, net earnings before income taxes is up 12 percent year on year, and net earnings from continuing operations is up some 19 percent. Again, 4.2 billion in negative from health for sale assets is something we are extremely unhappy with and aim to change going forward. As Ben just said, the net interest income is showing very positive signs, sort of given where we are in terms of base rates. I mean, we are at record low interest rates from the central bank, but regardless of that, we maintain NIM at 2.9%. I think that shows, well, it is demonstrated there in the bottom part of this slide, so the barge, the bridge, that we see what is happening. Basically, we are getting less interest revenue from our customers and from our liquid assets, but that is more than offset by reduction in the cost of deposits and the cost of other funding for the bank. Inflation and the inflation imbalance that has often been pretty important for us in the bank, so that importance is reducing. because the inflation imbalance is reducing mainly with the refinancing of retail mortgages. And as I said before, our income on net interest income over credit risk remains relatively stable, and this is a performance target that we look at very closely. Commissions are trending very much in the right direction, and in a way, this slide doesn't show the full picture. I mean, clearly, as we know, some of the volume-related fees are down given COVID, so that's mainly on the retail side. But on the lending side, in lending and guarantees, we are seeing a very positive development, and it is up, as Bente said, almost 100%. year on year, sort of full year to full year. And this is something where we feel that our strategy of capital velocity is really kicking in. The insurance company, Vörður, or the insurance arm of Arjen Bank is doing very well. The combined ratio there is very competitive in the domestic market, and this is a very good addition to our business. Cost is and will continue to be a focus. We continue to reduce our number of employees. They are down 6% at the parent company year on year. Other OPEX is relatively stable year on year. We are seeing an increase in IT costs. We did sort of capitalize less than we did last year of of certain set of development. But we are focusing very heavily on IT costs and with the aim to bring those down. We are also seeing an increase in housing cost that is temporary. We are investing in housing. Sort of the reduction in the number of staff has allowed us to close certain facilities and consolidate our operations. So we are hoping to see that trending positively going forward. The balance sheet, as before, is very strong. It's very simple. 70% of our assets are loaned to customers. There was a sort of modest 8.4% balance sheet growth for the year of 2020. And that was led by mortgage lending and increase in liquid assets. And looking at our liquidity, it is very strong, with LCR being at 188%. And ISK LCR, which is often or can be a limiting factor in our business, that is 144%. So the bank is fully able to both support customers and distribute capital to shareholders. Looking along to customers, then it's really interesting to see how sort of low cost of risk and capital like retail mortgages have been leading the way in 2020. Mortgage lending is up some 21.8%. At the same time, both SME and corporate lending is sort of relatively stable. Corporate lending obviously very affected by the capital velocity strategy that we have undertaken. We have a good mix. Now individual lending is exceeding corporate lending as a percentage. And we do have a good sector split in the book. Around 12% of our loan book is affected by COVID. 7% of the book is in tourism or is tourist related. And that has all been either put into stage two or alternatively stage three. And our calculated cost of risk is 71 basis point, of which 24.2 are due to changes in economic scenarios in our IFRS 9 models. We have been working a lot on those models during the year, perfecting them, hopefully. 24.2 bps are due to specific impairment, that is stage 3. Then we have 16.2 pips due to tourism exposure in the credit risk, and then 6.4 basis point due to other exposures. We should also note that REAs from loans to customers are relatively the same as it was last year, even if loans to customers have increased by 6.3%. On the liability side, then we can see that our equity position is very strong, leverage ratio is 15.1%, which is obviously super strong. We are very pleased with the development of deposits, where we saw core deposits rise by 14% during the course of the year, and deposits are playing more of a role in our funding mix. But on top of deposits, we also have both covered bond funding in the domestic market where we were relatively inactive last year because we were so liquid. And then we do senior borrowing in the international markets, and there basically we issued one public bond and used that to buy back in a tender offer part of proceeds from a bond which is maturing next year. The capital adequacy is also massive. As we see there on the right-hand part of the slide, our capital adequacy is 27.0%, and the CET1 ratio is 22.3%. On the right-hand side, we are just showing the effect of our capital release of 18 billion, which now has been put into our calculations, and if it weren't for those, our capital ratio would have been at 29.4%. But looking to the left, it's also interesting to see that we do have a capital buffer of ISK 40 billion that we aim to distribute. And that buffer is on top of a very, I would say, hefty management buffer, which is now 26 billion and consists both of our own management buffer and the vacated counter-cyclical buffer that was in a way released at the beginning of COVID. So going forward, then we are actually pretty excited to continue on our positive operational journey, sort of armed with an updated strategic vision. As Bente said, we see continued growth in mortgage lending. We see continued activity in ESG-related both lending and funding. The corporate loans will grow, but the bank will focus on return on REAs, as we have been doing, and the best execution for corporate clients. It's not all about lending. It's about servicing the customer, meeting their needs. We feel that economic uncertainty has declined or reduced somewhat. and we feel we have more visibility on our asset quality. I think our impairments are in line with what we've seen in Scandinavia, and hopefully that will be sufficient going into next years. We are obviously committed on our capital release strategy. I mean, based on the guidance from the central bank, we are paying 3 billion in dividends post our ADM, and we are buying back 15 billion of our own shares. And we think it's actually a very positive sign for the bank and the banking sector that the central bank has allowed us to buy back our own shares regardless of that the the board actually might might call an extraordinary service meeting in the fall to discuss discuss further distributions but that obviously is somewhat linked to the to the development of of covet as ben they said we aim to distribute more than 50 billion of capital over the next two years. And as we have said before, sort of given the economic situation, we don't rule out internal or external growth. But obviously, the opportunities, they need to show themselves, and that hasn't happened so far. So with that, I give the word to the moderator. to go into Q&A. Thank you.

Thank you. If you wish to ask an audio question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Once again, please press 01 on your telephone keypad if you wish to ask an audio question. There will be a brief pause after the questions to be registered. Our first question comes from Maria Saminka from Citi. Please go ahead.