Arion banki hf.

Good morning all and welcome to this investor webcast of Arion's first quarter results for 2021. My name is Benedikt Gislason, I'm the CEO of Arion and I will be going through this quarter's results along with Stefan Petersson, the CFO. This was a particularly good quarter, our best quarter in four years. And the bank's revised strategy continues to deliver. The return on equity was above 10%. And if we look at our optimized equity, the sort of the target equity that we intend to use in our business, the ROE is much better, around 15%. We continue to deliver on income growth in this quarter, 4.2%. and also a decrease in OPEX of 3% from the same quarter last year. What is impacting this quarter as well are positive impairments, and this is not due to any changes in our IFRS models, but has to do with the fact that our clients are doing better. Many of our companies that bank with us have navigated through this pandemic in a good way and show increased financial strength and that merits improved credit ratings. And also for our kind of troubling loans, we've seen impairments being reversed due to payments on these impaired loans or increase in collateral value. This was a very active quarter in terms of trading in our shares and a really strong performance, outperforming the OMEX Iceland and the large and mid-cap Nordic peers, which was particularly pleasing because in this quarter we saw two of our largest shareholders selling completely out of its holdings. Through this, we saw an increase in number of shareholders from 7,400 to 8,250 or 12%. But majority of shareholders continue to be Swedish investors. In this quarter, we paid out 2.9 billion in dividends and bought back around 11.9 billion of market value of our own shares after having received the permission from the regulator to do so. But we continue to enjoy one of the highest capital ratios of European banks, with leverage ratio which is significantly stronger, and still a 41 billion surplus capital plus another 3 billion of retained earnings that we intend to pay out as dividend. That's from our first quarter results. Now we are seeing the light at the end of the tunnel. And Iceland is now navigating better than ever out of this pandemic. And we now expect all residents 16 years and older to be vaccinated before the 30th of June. And by that time, we will probably see all domestic COVID restrictions lifted. And that is when we will start to see our offices fully return to normal, which will be good for a culture of collaboration and innovation for our firm. The outlook for one of our larger export industry tourism is looking better than people were hoping this spring. Bookings, speaking to our clients, we hear that bookings are up quite a lot. And it's clear that this is going to be driven by vaccinated tourists primarily from the US and UK probably. And so the forecast for this year of 600,000 visitors is actually maybe not that optimistic, but what is important to note as well is that the shift that Iceland took to move into more lucrative tourist activities had already started to happen in 2019 and 2020 on the back of the collapse of Vauer. And this, we think, is set to continue when travel and tourism resumes. So Iceland is moving away from the model of more tourists, the better. to one of the higher expenditures, more nights and premium tourists. And you can see that actually from the hotels that are set to open this year, that these are high-end hotels and tailored to this particular client base. And what is good to see is that the number of airlines have already either announced that they're taking up flights to Iceland or have already started, like Delta, which brought the first U.S. tourists vaccinated to the country last weekend. And this is clearly going to have an impact to the economic recovery of Iceland, and we are probably more optimistic about that now than we were a few months ago. And I think it's fair to assume that we won't see any further reduction in the policy rate, as inflation is now hovering around 4.6%. And it's rather a matter of when we start seeing rates hike. We, however, do not expect the inflation to be long-lived. And we will see if tourism starts really picking up that this is going to probably impact the exchange rate and imported inflation will not be an issue. Now, digital solutions have impacted our customer interactions and sales significantly, and we continue to increase our sales through digital channels. and have also taken up digital interactions in new ways like web video conferencing. So our clients do not have to book meetings at the branches and can book meetings online. But what we're also very focused on now is to optimize the customer journey and service excellence. And we're looking to beef up engagement, improve conversion rates, and process efficiency, and gain better visibility to risks and friction areas. To that strategy, we rolled out two new services. Recently, the pension fund solution and onboarding system, which has already won an award as an outstanding digital solution. But secondly, we have recently rolled out as a minimum viable product, a premium service, which is tailored to the high value core client base that require more personal banking services. And this is something that we see as a major growth opportunity for us. Now, we've also incorporated Vörður into our customer journeys and intend to do more of that going forward. And as you can see from this slide, Vörður is enjoying healthy growth in markets here. It's one of the better performing insurance companies in Iceland. And we believe that we can continue to grow this business. and improve profitability further and make it a tier one operator within the insurance space. In April, we completed one of our largest IT investments so far, which was an upgrade of our core banking system called Sopra. This is a key milestone in supporting open banking journey and reducing IT costs in the long term. And some of the future benefits of this is going to help us in our open banking journey. And this will shorten the development cycles for our digital products. And we see, because we're sunsetting a number of systems against this, our IT architect is gonna be simplified greatly. We see this as an opportunity to reduce operation costs further. and reduce the technical complexity in our operations. This was an investment of 4 billion and will be amortized over the next 10 years. That concludes my section of the presentation, and now I hand over to Stefan Peterson, CFO.

Thank you, Meredith, and good morning, everybody. It's a pleasure to be here. As Ben said, we had a very good quarter. In a way, a quarter where everything worked out nicely. I mean, we saw call returns up 4.2% year on year. We saw OPEX coming down. And we saw other items pretty much all being favorable. And to note on that, we met pretty much all of our financial targets during this quarter. And that is something that we are obviously striving for every day. Our return on equity being 12.5, exceeding the 10% financial target. Our return on equity assuming the 17%. CET1, way higher than our target, at 16%, operating income over REAs at 7%, exceeding the 6.7% target, and then cost to income being at 46.2%, slightly over our 45% target. So, in a nutshell, a very good quarter. If we look at the income statement, then it's just reflected in the statement. We see that net interest income is up from the same quarter last year. We see net commission income being very strong, as is insurance income. The net financial income is in a way transforming itself from the first quarter of last year, obviously when COVID hit us. But we have had both our equity and bond positions have been actively managed and are yielding very good results. So operating income is up some 46% year on year. We have been able to continue to lower our operating costs by some 3%. And we will continue to work on that. Impairments may be as a bit of a surprise. They are positive during the quarter, as Bendix said. It is not because we are changing our models. It's because of activities actually in our loan book where our customers are actually doing better than we would have anticipated, some of them. And we are seeing increased collateral value and payments of loans that were in Stage 2. So earnings before income tax are almost $7.8 billion. Income tax is basically as we would expect. So earnings from continuing operations are just under $6 billion. And we have a substantial change from the last quarters, really, in the... in the discontinued operations line. You may remember that we said after the fourth quarter of last year that we expected this line to sort of turn into neutral to positive this year. And we are very happy to see that this is turning out sort of in line with our expectations during this quarter, meaning that we have net earnings of just over $6 billion. It is not all easy, truth to be told. And we are fighting a defensive battle when it comes to our net interest margin. It drops by 10 basis points from last year. And there is a substantial drop from the fourth quarter of last year. In a way, what is happening is that the extremely low interest rate environment is is sort of really taking effect. And in a way, we were sooner to react on the funding side, and now the lending side is sort of catching up. Obviously, we should also add to that there are changes in our loan book. Firstly, we are seeing an increased portion of mortgages in the loan book. which should weigh on NIMS. But also, we are seeing a shift in the domestic market when it comes to indexation of loans. So our indexation in balance is reducing. And so we are seeing less impact of the inflation from what we saw in sort of the previous quarters. This also feeds into net interest income over REAs. Sorry, over average credit risk, an indicator that we follow very closely. That is slightly down from the previous quarters. And we, in a way, expect to... Our expectation is that whilst we have this super low interest rate environment, we will be sort of in the 2.6 to 2.8 NIM range. Fees on commission and insurance income, they have been improving in line with our strategy. we are improving on pretty much every front when it comes to commission income, with the exception of collection and payment services, where in a way we feel that glass is half full instead of half empty. Clearly sort of tourist-related turnover still has, or we expect that to come into our business when the economy picks up. But we are particularly pleased to see how the merger of corporate banking and investment banking has resulted in increased activity in the merged CIB. And it's interesting to see that we are not seeing growth in the corporate loan book during the quarter. But we are seeing massive growth in sort of corporate loan book activity and capital velocity. And that is feeding into fee income. On the insurance side, the best quarter for Werther ever. Very solid combined ratio for Q1. And we have high hopes for Werther continuing into the year. On the OPEC side, then, we have been hovering around the 45% cost-income ratio during the last few quarters. We continue to reduce the number of FTEs, and we see that continuing. We're always trying and aiming to rationalize. We are also seeing a reduction in other OPEX. IT is still by far the biggest expenditure item, and we hope that the Sopra core system will help us rationalize on that front, and we have aimed for that. But then at the same time, we should acknowledge that there are cost items which are unusually low during or have been during this last year. few quarters due to the pandemic. The balance sheet, as before, is strong and simple. Loans to customers are around 71% of total assets. And as you can see, they are evenly spread between individuals and corporates, and actually the individual side, or the mortgage side more specifically, has been increasing in our portfolio. And as I said before, when we say that mortgage lending is up 3.7% and we say there's a reduction in the corporate loan book, that is not because the corporate activity is low. It's just that we both sell and syndicate our corporate loans. Our liquidity position is strong. The LCR is 192%, 153% in Icelandic kronor. So the bank is in, both from a capital and liquidity perspective, in a very good position, both to distribute capital and to support the Icelandic economy through lending activities. On the liability side, as Bente said, the capital position and the equity position is very strong, leverage ratio of 14.7%. balanced funding profile with sort of deposits increasing in the funding mix. And we have been, during the first quarter, we have been distributing capital, as Bente said, both through dividends and share buybacks. And I think we were the only, I don't know of another bank in the European Economic Area which was allowed to buy back by back on CS during the quarter, and we feel that's a testament of our financial strength that the regulator was willing to allow us to do that. Finally, on capital, the capital ratios are super strong, as ever, 26.9%. Total capital, 22.4% in C81, up 10 pips from the end of the year. And in this, we have already calculated the buybacks that we had left at the end of the quarter and 50% of net earnings for the quarter. And what this means is that we have 41 billion of surplus capital right now, and that comes on top of a very healthy management buffer of 26 billion. And as you may remember, the countercyclical buffer that was lifted, we include that in our management buffer. So where do we stand? We feel that we aimed with a very solid strategic vision. We will strive to build on the positive progress that we have had so far during the last few quarters. We expect the economy to pick up in the third quarter. That will obviously offer a number of opportunities for the bank. And as Bennett said, our expectation for recovery has been, in a way, moving closer rather than further out, which is a very positive thing. When it comes to the development of the loan book mortgages, sort of when it comes to building the loan book, Mortgages will be in focus as well as our increased focus on ESD. But then we will continue our activity on the corporate side, both when it comes to lending as well as managing position for our customers with their interest in mind. We feel that the reduction in economic uncertainty allows us for improved visibility on asset quality. 94 billion or 11.2 billion of 11.2 percent of of our loan book is sort of affected by covet most of that is is has is is is very solidly collateralized and and the risk allowance hasn't hasn't moved during the quarter so so this improved visibility com is is very welcome for us uh We are already committed to our capital release strategy, and hopefully we will continue to work on that. And in a way, we don't see anything prohibiting us from releasing up to 50 billion of capital over the very near term. So having said that, I think I hand the floor over to the moderator.

Thank you. If you wish to ask a question, please dial 01 on your telephone keypad now to enter the queue. Once your name's been announced, you can ask your question. If you find it's been answered before it's your turn to speak, you can dial 02 to cancel. There'll be a brief pause now whilst we register your questions. Our first question comes from the line of Martin Leibkitt of Goldman Sachs. Please go ahead. Your line is open.