Arion banki hf.

Good morning all and welcome to our second quarter and first half investor presentation. It's particularly pleasing to be presenting strong results across the board with particularly strong results in our investment banking operations. This is the third quarter in a row that we meet our financial targets, the ROE targets, and if we put it into a context that we still have ample surplus capital and have not obtained our financial target of 17% Z1 ratio, these ROE numbers are extremely strong. They are, as I said, driven by strong results across the board, with investment banking performing particularly well. We're seeing our core income growing by 10.5% from the same quarter in 2020, and with costs relatively flat from last year, we're seeing an improvement in cost-to-income ratio and obviously profitability. There are some strong operational milestones in the quarter that I will address later on in my presentation. One of them being the sale of Valetor for $100 million, which is now subject to regulatory approval. And it's fair to say that... The buyer has consumed considerable risk and is very engaged and committed to this transaction because if the sale does not complete due to a failure to obtain regulatory approval, the risk of such will be borne by the buyer for the next coming years. And in accordance with IFRS standards, we are not recognizing the profit from the sale until the CPs are all met. Now capital generation has been extremely strong in the last quarters and despite our efforts to release some of the surplus capital to our shareholders, taking in obviously the guidance from the regulator to what extent and the velocity of any capital release, We are still equipped with ample surplus capital, around 42 billion. We have also today are commencing a share buyback program of 8 billion and have retained earnings, half of our earnings for the first half for dividends for next year. So on top of the 42 billion, we effectively have another 15 billion of capital that we are planning to release to shareholders. in the coming months, and when and if the sale of volatile goes through, another 8.5 billion of distributable capital will be on our balance sheet. And it's been very pleasing to have now received two approvals by the regulator for buybacks, which is in itself an acknowledgement of our strong capital position and as well our solid business model. This has all been very well received by the investor community and it's particularly pleasing to see the growth in the number of shareholders which continue to grow in the second quarter and we have now seen 30% growth in the number of shareholders this year and that reflects much stronger interest locally but also in Sweden because this is evenly distributed between the two markets for equity investments. Now, we say that the economic rebound has started, but it's important to note that all economic protections were for economic recovery to fully start next year. So, as you can see from this slide, we are, our economists here in Iceland, we're predicting a slightly, kind of, milder economic recovery this year than for EU average, 3.3% against a 4.4% recovery for the rest of Europe, and the recovery to effectively take place a strong recovery next year. And we say that in our financial accounts for the economic outlook that we provide there, We say that the recent setback with the COVID pandemic is more likely to dampen this economic recovery and probably dampen what was looking like a stronger recovery this year than previously expected, than derail this recovery. And that is driven by Iceland's extensive vaccination programme, which has weakened the link between infection and hospitalisation, and we're already seeing that. in Iceland. And this is all contributing to kind of leading indicators showing us that there is recovery taking place. Central Bank has already hiked the interest rates once and is expected to continue on that path. And inflation seems to be on the downward slope as unemployment rate. Now, I mentioned some sort of key operational milestones in the quarter. And to begin with, I mentioned the increased interest of private investors to invest into local securities, equities, and bonds. And in line with our focus to make financial services more accessible and convenient for clients, We launched a new feature into our Arion app, which is a feature that makes it more easier for our customers to invest into stocks and bonds in the Icelandic market, and also provides a more comprehensive overview of their investment portfolios. And this has been very well received and comes at a good time, because as you can see from the activity in corporate investment banking, there were a number of IPOs that took place in the second quarter, which contributed to this increased interest for private investors. And I would like to mention two IPOs where Arion was leading with the services on the first north listings of FlyPlay and SolidClouds. And it's really good to see how receptive investors are to new listings and the new kind of funding opportunity that is available for companies that are kind of early states in the lifecycle. On top of that, we managed a fairly large bond offering by Alvotech, along with Morgan Stanley, We also managed the first senior unsecured bond issued by a corporate in the local market in more than 10 years by assisting Iceland Seafood to fund itself in the bond market. And finally, we managed the sales process of Liv Salin and AGR Dynamics. And all of these transactions contributed to the strong quarter for investment banking. Now... The final milestone, which was quite a big one because this is a project that we've been working on for more than two years now, was to go live with Sopra, the Sopra core system, which is kind of a payments and deposit system, a new system that will enable us to do some cost savings on the IT side and also enhance our services. For Valotor, I would like to say that this has been an asset held for sale for quite some time. We think that this transaction is a very beneficial transaction for both parties, and it's very good to see A company like Rapid showing an interest in Valetor. They are at the forefront of the fintech industry in Europe and are very committed to building Valetor up as a European player, as seen from statements made by Rapid post the transaction. Now, another operating milestone is that we have effectively commenced an integration process of Vörder with the insurance company, with Arion. And this is driven by a strong trend in the industry where bank insurance is now the fastest growing element of insurance in Europe. And this is... This is very much driven by the fact that there's increased convenience for clients to have their services at one place. This has evolved in such a direction because of new digital services, which make the customer journey experience more seamless than before. But also because we're seeing the brands network changing or conforming from kind of typical service cashier services into value-added services where clients come in and get value-added services for their financial needs on a comprehensive basis For us and Werder, this offers synergies, obviously, cross-synergies, but also cross-selling opportunities and the ability to enhance client bases at both companies. Werder will remain an independent company as it is required legally, but it's going to move into our headquarters and we're going to mix the cultures of the two companies. Now, another milestone that we recently completed at the beginning of July was that we issued our first green bond under a green financing framework. That effectively is a milestone of more than a five-year journey that we've been on, where we sort of... Gradually and prudently been working on our sustainability journey, starting by becoming signatory to a number of sort of sustainability efforts, both locally and internationally. And then focusing on our products, rolling out three green products before setting up this green financing framework. and issuing our first green bond onto that. This is the... It's a... The main kind of eligible assets currently in our portfolio that we use for financing are the green buildings and sustainable fishery and aquaculture. But as you can see from this slide, there are a number of other kind of credit portfolios that offer opportunity to or are eligible to be financed through a green bond issuance. And for us, that is a kind of It's a good tool to have a well-structured framework around what kind of assets are eligible under this green bond framework. And this ESG format provided a clearly visible added value as we saw Ariane Bank's most favorable funding rates of bonds issued under the bank's EMTN program so far. We issued this bond at mid-swap plus 80 basis points, which is considerably below what we've been issuing in the senior and secured market so far. And then sort of concluding on my presentation before I hand over to Stefan Peterson, the CFO, who will go through some of the numbers in the second quarter. I just want to highlight that we are continuing to build on the positive operational progress that we've demonstrated in the last few quarters. And with the improving economy, this offers a number of opportunities for the bank. And we're going to seek markets here and target certain segments that we think are beneficial to our business model. Bank assurance obviously being one of those, and we see great opportunities there with the bank assurance ratio for Vörður being relatively low compared to other efforts in Europe. So there is great opportunity to increase markets here at Vörður and improve services across the board towards our clients. We're well ESG funded, both through green deposits and now through the green bond issuance. And this opens up to opportunities for further advancements in that field. And I think our focus for the next couple of years will be then on the asset side, making real meaning in sort of availing funds to projects that really contribute to the sustainability of our economy. I've spoken about the ample, I would say gross, or grossly overcapitalized position. And we're obviously committed to releasing that capital and have today commenced a share buyback program. And we'll continue to release capital to shareholders while we have that position. And it's kind of a positive problem to have. That our capital generation in every quarter now has become so strong that we're still not kind of making progress on this ample capital. But I'm sure that we will see an acceleration into the autumn and winter for the capital release. And that includes, obviously, the 8 billion buyback, our commitment to paying out 50% of profits, and then releasing some of the surplus capital that is currently in the business and will become available, distributable once we sell Valetor. And with that, I'm going to hand over to Stefan Pedersen.

Thank you, Benedict. Good morning, everybody. It's a pleasure to be here with you to tell you a bit about our performance in Q2. This was, as Bente said, this was a very good quarter, outstanding quarter in a way, where sort of every line item fell for us. I mean, core revenues were up. Other items were favorable. Costs were under control. And as Bende said, we have ample surplus capital. And if we look at our medium-term targets that we met all, then we see that return on equity was 16.3% in the quarter. It is 14.3% during the first half of the year. Are we assuming our target CET1 ratio was actually over 20% or over 21% in the quarter and close to 19% during the first half? operating income over REAs, 8% during the quarter and 7.5% during the first half, again exceeding our target of 6.7%. And finally, the cost-income ratio is sort of hovering around between 42% and 44% during the first two quarters. So the only target where we are in a way missing is our surplus capital, as we have said, both now and in our previous meetings, and obviously that is something that we continue to work on. If you look at the income statement, then as we can see, net earnings amounted to 7.8 billion during the quarter, up 59% year-on-year and up actually from 6 billion in the first quarter. The core income items were favorable, up 10.5%, and when I say core income items, I'm talking about net interest income, net commission income, and net insurance income. But on top of that, net financial income was positive by 2.2 billion, slightly down actually from last year. But as we remember, in Q2 of last year, markets were rebounding after the COVID situation of Q1. So that is quite understandable. So operating income is up 7% year on year. Operating expenses are flat, meaning that operating profits of 8.6 billion are up 13% year on year. The bank levy, as we know, it is in line with budget. But net impairments are positive during this quarter. And actually were positive during the first quarter as well. And what is happening here is basically that mortgages are becoming a bigger part of our loan book, which is positive. And then secondly, our IFRS models are slightly less pessimistic than they have been over the recent past. This means that earnings before income tax is 9 billion, up 41% year-on-year. Our income tax rate is low, it's only 15.5%, attributing to our revenue composition. So net earnings from continuing operations are 7.7 billion, up 55% year-on-year. And then we have a small... revenues or small income from discontinued operations or health for sale assets. But as Bente said, the sale of Valetor, which would go into this line, will not be accounted for until regulatory approvals and all CPs have been met. And obviously we would hope for that to happen before the end of this year. Again, meaning that net earnings are 7.8 billion, up 59 percent year on year. Just a few words about the net interest income. Up 2% from the same period last year. But we are very pleased to see our NIM rebound to 2.9%. Again, in a difficult interest rate environment. And having the surplus liquidity that we have. But it's fair to say that we are quite... In a way, the recent change in the stance from the central bank is positive for the bank. We saw the 25 bps rate hike in May. We were able to work with that a little bit. Clearly, the situation has been for us that a lot of our deposit base has been around zero, meaning that the deposit margin has been very low. With sort of continued rate hikes at the central bank, we can manage our NIMS better. So, again, a positive development for the bank. Net interest income over average credit risk continues at strong levels. And if we look at the slide charts on the bottom part of the graph, sort of the bridge from last year, then we can see that obviously in a lower interest rate environment, we are receiving lower income from credit institutions. Our loans from customers are yielding lower. But that is offset by our performance on the security side, by sort of cost reduction on the deposit side and the borrowing side. meaning that we have been managing our affairs pretty well. But finally, we are seeing a reduced income from inflation from last year. That is not because inflation is low, because inflation has been quite high over the last quarters. The thing is that we have seen a shift in the market from inflation-linked loans over to... fixed or floating rate nominal loans. And this is a shift in the market, meaning that our inflation imbalance has vastly reduced. We talked about fee and commission income. We have had very strong growth in that over the last quarters. The corporate activity has been outstanding. CIB has been very busy on all kinds of transactions. And we see this merger, as we have discussed in the past, this merger of corporate banking and investment banking, we see that as a very positive sort of move on our behalf. Asset management is doing well as well. And in a way, the only commission... The only commission business that still can be improved is retail banking, where we are confident that the increased economic activity will feed into increased commission income going forward. On the insurance business side, Werther is doing extremely well with a combined ratio of 91.5%, which is very competitive in the domestic market. On the OPEC side, as I said, our cost-income ratio has been sort of around or below 45% over the last few quarters. We continue sort of decreasing the number of employees, which are down 7% at the parent company, 5% at the group year on year. Salary costs are relatively stable, though. We do have wage inflation in Iceland, and we've seen a certain shift of the staff composition as well. Other OPEX is stable as well. but unnoticeable changes in the composition thereof. We are seeing a reduction in IT costs, very much according to plan. We're also seeing good progress on the housing cost side, but depreciation is slightly higher than it was in the past. Again, mainly a function of the SOPRA core system. The balance sheet, simple, strong, almost 70% of assets are loaned to customers. It grew by some close to 4% from year end. The liquidity position is very strong. The LCR ratio is 215%. Our ISK liquidity ratio is 195%, meaning that we are well positioned both to work with our customers as well as to distribute capital over the coming months. There has been a noticeable change on our lending side over the last few quarters, where we've seen... Retail mortgages increase relatively strongly, up almost 25% year on year. We have also seen a decrease in the corporate book. And I would like to reiterate that is not because there is not activity on the CIB side. We are seeing that activity on the commission income side where our strategy of capital velocity is actually to maximize the yield on the risk rates that we are putting in on the corporate side. So we are generating a lot of activity. It doesn't all end up on our books. We sell that, syndicate that, and so forth. I also mentioned the indexation imbalance. And on the bottom right-hand side, we are seeing this development. 36% of loans to customers were CPI-linked a year ago. It's down to 27% now. And this is a trend that continues. We feel we are adequately impaired, given our situation with COVID, even the Delta variant. The book value of COVID-19 impaired loans is $91 billion, 6% of the loan book. of which 77 billion are secured with real estate. And the tourist-related loans in the book, they value at 74 billion Icelandic. So an exposure that we feel is fully manageable. On the liability side, again, very strong ratios, CET1 ratio of 22.7%, capital ratio 27.2% and a leverage ratio of 14.6%. The very positive development that we continue to see is the increase in deposits, 8.7% from the same time last year. We have been relatively quiet on the wholesale funding side, both domestically, because we have been very well funded, and also internationally, and the recent change to that is the green bond that we issued the other day and Benedict mentioned. We have also been busy distributing capital internationally. paying a dividend of 2.9 billion and buying back own shares of 14.9 during the first half of the year. Regardless of that capital distribution, our capital ratios are very, very strong. As I said, 27.2% of capital, 22.7% of CET1, somewhat enhanced by changes that were made with CRR2, the SME supporting factor, counterparty credit risk, and also sort of treatment of software assets. But what this really means is that we do have surplus capital of 42 billion now. In addition to that, we have the foreseeable buybacks and the profits for the first half of the year amounting to some 14.9 billion. And on top of that, we will have capital release when Valetor is sold or the sale of Valetor is finalized, meaning that we have ample capital to distribute. And the challenge is to do that in a way faster than we are generating capital. So again, a positive problem and something that we will be working on diligently over the coming months. So having said that, I will hand it over to the moderator for questions. Again, middle of the summer, the weather is good. I'm not necessarily expecting a lot of questions, but we'll see. Thank you.

Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There'll be a brief pause while any questions are being registered. There are no questions at this time, so I'll hand back over to the speakers.

Since there are very few here in the auditorium, I expect no questions from here. I think we just end the session. I fully understand people are on vacation. Sønder Channing, I wish you a good rest of summer vacation and see you next time. Thank you.