Arion banki hf.

Good morning and thank you all for joining us today for the presentation of our quarterly results. Before I begin, I want to acknowledge the absence of our CFO, Olof Huskulsson, who is currently away due to medical reasons. We of course wish him a swift recovery and look forward to his return. In his absence, I will try to provide a comprehensive overview of our performance this quarter, and our chief economist, Erna Björk Sværistóttir, will reflect on the external environment. But first, let's dive into the results. This was a solid start of the year with a return on equity of 12.8%. And the results are underpinned by good momentum in our core earnings. with a strong period in terms of feed generation, a solid net interest margin despite the complicated external rate environment, and in terms of insurance income, we also had one of the best first quarters for that business in what generally is a seasonally low period. Another highlight were key milestones reached in our land development projects. which supported a valuation increase in the quarter with a net impact to our shareholders of 1.1 billion. And in terms of capital, we continue to trend towards our optimized level and in Q2 have launched another 3 billion share buyback program following a 3 billion program concluded in the first quarter. Some key takeaways from the first quarter are The stable net interest margin of 3.1%, despite complicated external rate environment, as I mentioned. And this was also a very strong quarter in feed generation, driven by momentum in our CIB business, with an increase of 35% year over year. And finally, in terms of our funding and liquidity position, the bank continues to be in a very strong position, with funding activity in the fourth quarter and first quarter of this year, effectively pre-funding most of our non-ISK funding plan for the year. And now looking more closely at the income statement. Core income, namely net interest, fee and insurance revenues, 17.7 billion in the quarter, which is up from 15.2 billion in the first quarter of last year, and increased by 15.4%. Net interest income was up by 8.2% between the years, and fees, as I mentioned, up by 35%. Insurance services results are always seasonally low in the first quarter, but again, also improved between years. Financial income, however, was impacted by challenging equity markets, resulting in a loss for our investment businesses, including the investment portfolio of the insurance business and our market-making operations. Other operating income is 3.3 billion related to the valuation uplift of our development assets. The net result is, however, impacted by the minority interest holding in that asset, which reduces the net impact to around 1.1 billion, as I mentioned. Headline operation expenses were then roughly flat between the years, but include some reversed expenses to be explained later in my presentation. Cost of risk in the quarter is 12 basis points, which is somewhat below through the cycle guidance and is impacted by changes in the economic scenarios that I will explain later on. The effective tax rate was then again high at 32%. in the quarter, which mainly relates to negative impact from losses in equity holdings, which are not deductible. I'll explain that better later on in the presentation. And that resulted in a net profit for the quarter of 6.4 billion compared with 4.4 billion in the first quarter of last year. And let's now look more closely at some of the key line items, starting with the net interest income, which is net interest income in the quarter was $12.2 billion, as I mentioned, up from $11.2 billion in the fourth quarter. And the net interest margin as a percentage of interest-bearing assets is 3.1% and continues to hold within our guidance of around 3% area. As discussed previously, one of the key challenges in recent quarters when it comes to managing the margin has been the elevated and volatile real interest rate environment, when a large part of the loan book has been moving into CPI-linked format. As outlined, however, we believe that we have tools to manage this, and the relative stability in the margin is, I believe, evident of that. are turning to net fee and commission income, where we posted up a really strong quarter. We are now presenting this in a segment overview in the accounts for the first time, rather than as classes of fees. And this was another solid quarter in terms of feed generation with total fees of just over 4.5 billion. Most of our feed generating businesses are doing well. And you can see from this graph here that all of our business lines are increasing their feed generation year over year. During the start of the year, we had a few significant transactions closing on the corporate side, which contributed to a good increase from recent quarters. Also, positively, our asset management business continues to grow despite the ongoing external market volatility and assets under management at the end of the quarter worth $1,644 billion. Turning to Vörður, I think it's fair to say that our insurance business has continued from a very strong 2024 with a positive start to 2025, concluding the quarter with a combined ratio of 99.7%. Usually the winter months represent a seasonally high in terms of claims and this business and it is historically not usual to see a combined ratio below 100% for the first quarter, and this is therefore a positive start for the year. Net results for the quarter were however negative by 641 million due to losses on the investment side of the business, which has been a challenging market backdrop, especially in the equity markets. Now let's look at the net financial income and relations to Vörður in particular, where the total investment portfolio of Vörður is 34.2 billion and yielded a loss of 627 million in the quarter, including negative net effects from insurance contracts. I think it's worth mentioning as well that challenging equity markets is usually a bad sign for our effective tax rate, which due to equity derivative transactions with clients that we had on our balance sheet leads to unfavorable tax treatment of hedges versus derivative exposure. Turning to the operating expenses, including those from the insurance business. Total operating expenses in the quarter were $7.5 billion, which is up by 1.5% from the first quarter of last year. There was a one-off positive impact in the salary line of $390 million due to incentive expenses being below the provisioned amount. If we exclude this, salaries were just over 8% up from the first quarter last year, which primarily relates to the increased number of FTEs of 9.4% in the period. the increase being primarily in the insurance business and IT. The salary index in Iceland rose by 8.3% in the period, so our salary expenses are tracking well below the index due to a different mix of employees from a year ago. Now moving to the balance sheet and starting with the loan book, which grew by around 4 billion in the quarter to a nice number of 1,234 billion. As discussed in previous calls, we remain dynamic in the way we manage loan growth with a view on balancing credit strategy and profitable growth opportunities. Recently, we have probably been seeing more interesting opportunities on the corporate side, but we are still actively lending on both sides of the loan book. For example, despite limited growth, we lent out over 27 billion in new markets during the quarter, biggest activity that we've had in the first quarter ever. The pipeline near term reflects this and is strong on the corporate side, with loan commitments and on-drawn loans increasing by 33 billion from year-end 2024, with more stable environment in mortgages, and we probably expect that to be the case until we see policy rates coming down somewhat further. The loan book continues to be well-balanced, with 46% in mortgages, 6% in other loans to customers or individuals, and 48% to corporates. Now looking at our provisioning, as discussed, we had a 378 million impairment in the quarter. The problem loans ratio has trended upward since the start of 2023, and this mainly concentrated on a few single name exposures in the construction sector, which is impacted by elevated funding costs amid a slowing sale of new housing. The problem loans generally have good collateral coverage, as reflected in the state's three coverage ratio of 17.7%. And the increase in problem loans in the first quarter were met with single name provisioning, taking the collateral coverage into account and our previous success in managing this particular exposure. We are, however, not seeing material NPL increases in other parts of our credit portfolio. And with receding inflation and monetary easing, the bank has lowered the pessimistic scenario weight by five percentage points, with corresponding increase to optimistic scenario weight after having had those at 30% and 10%, respectively, for the past two years. The weighting is still tilted towards the pessimistic scenario, which is appropriate in light of trade war uncertainties. The change in weighting resulted in a positive reversal of provisions of around 300 million. Total loss allowance at the end of the quarter is 9.4 billion, or 0.8% of the loan book. Turning to deposits, so deposits continue to grow in the quarter. increasing by just under 30 billion to 885 billion. As we've discussed, our strategy in this area has been to compete especially in more stable categories of deposits. As we have highlighted in the top right chart of this page, all the growth over the past year has been in these categories. Finally, before I summarize my presentation, I want to highlight the CRR3 impacts to our capital. As outlined in previous presentations, we expect some net positive capital impact from the CRR3 implementation later this year, which we now expect to be implemented in Q2 at this time. And subject to ongoing dialogue with the regulator, we anticipate that this could increase surplus capital by 7 to 8 billion. And before I turn over to Erna Björk, I want to end my presentation by highlighting some of the key themes going forward. Firstly, a solid start for the new year, where again, the diversity of our businesses provides support for the overall earnings momentum through the cycle. We continue to cautiously anticipate a continuing complicated external operating environment near term, both in terms of domestic rate development and in terms of the international political landscape. And thirdly, we believe that we are well positioned to navigate this environment and capitalize on profitable growth opportunities as they emerge. And with a robust balance sheet, light near-term funding requirements, and seasoned and profitable business model, we think that our outlook into the year is positive. So this concludes my part of the presentation. I now hand over to our Chief Economist, Erna Björk Søresdottir, to discuss the external environment before we move into the Q&A session, which will be led by our Head of Investor Relations, Theodor Fribergsson.

Thank you, Ben Dicht. Good morning all. It's good to be here today. These are interesting and uncertain times where assumptions shift quickly and economic forecasts change almost daily. I have been cautiously optimistic when it comes to the outlook for the Icelandic economy, sometimes admittedly fearing that our forecast was too good to be true. Therefore, it was reassuring to read the IMF's concluding statement, which was published this week, where it says, and I quote, growth is expected to pick up in 2025 and the medium-term prospects remain favorable. The Icelandic economy is coming out of a pretty challenging year, a year marked by slow economic growth, decline in exports, and tight macroeconomic policies. According to preliminary figures, GDP growth was only 0.5% in 2024, largely due to a cable failure, constraint on energy supply to heavy industry, and subdued consumption growth. Analysts anticipate growth to pick up again this year, with the IMF expecting 1.8% GDP growth in 2025, followed by a 2.4% growth in 2026. Domestic analysts are slightly more conservative, with Aryan Research forecasting 1.3% GDP growth this year, driven by domestic demand, while the contribution of foreign trade remains negative. Now, even though the negative contribution of foreign trade is largely due to imports related to data centers, there is no denying that the export outlook, it has deteriorated over the past couple of months. Tourism is off to a rocky start, with tourist arrivals down 9% between years in the first quarter. The indicators are, however, very mixed, because we're also seeing spending per tourist having increased significantly over the same period, even when adjusted for inflation. Furthermore, according to the Icelandic Airlines, the booking status for the coming months is strong and better than it was at the same time last year. Still, with the Q1 figures, along with challenging operating conditions, have prompted a negative downward revision to the sector's outlook, with area research now anticipating a slight drop in tourist arrivals between years. And these challenges faced by the tourism industry have been reflected in the demand for labor, as jobs within the sector have decreased. labor demand is still increasing in certain sectors. There is a clear sign of slowdown as job growth has lost its pace and registered unemployment has continued to inch upwards, measuring 4.2% in March compared to 3.8% one year ago. According to our latest estimation, unemployment will continue to edge higher and averaging 4.4% over this year. That said, we do not expect increased unemployment to outweigh the key factors supporting private consumption. Consumer confidence is rising. Default rates remain low. Household balance sheets are solid. And there is a significant pool of accumulated savings, which could increasingly be directed into spending as interest rates come slower. More importantly, wage growth has exceeded earlier expectations with real wage growth gaining momentum. So all in all, households are well equipped to handle economic challenges while sustaining a positive consumption growth. And this is certainly comforting as we continue to navigate the turbulent waters of international trade. And again, I would like to refer to the IMF's concluding statement. As it said, The direct impact of escalating global trade tension is projected to be limited. And again, I agree with the IMF. Last year, 22% of Iceland exports went to the U.S. Tourism-related services accounted for the lion's share, and they can't be easily targeted by tariffs. In contrast, just over 12% of total exports of goods were U.S.-bound, mainly marine products and medical products, which are currently exempt from tariffs. As such, the direct impact of a potential trade war on the Icelandic economy is likely to be limited, especially in light of the country's status as a commodity exporter. In our view, one of the primary concerns regarding trade barriers relate to the potential impact of high-growth sectors such as fish farming and especially pharmaceuticals, which is more reliant on the U.S. market. But even though the direct impact of tariffs on the Icelandic economy is likely to be limited, the risk is tilted to the downside as lower global growth could reduce the demand for Icelandic exports, whether it is fish or tourism. The strong corona has also posed challenges for our export industries. Some of the appreciation in the recent months can be traced to movements in the euro-dollar exchange rate, which is of course totally unrelated to Iceland's own fundamentals. However, the larger shift seems to be driven by capital flows, or rather lack of when it comes to the pension funds, which have only bought minimal foreign currency in the first quarter following JPT's acquisition of Maral. According to our latest estimations, the krona is currently a little bit too strong at current levels based on underlying economic fundamentals and the real exchange rate. Interestingly, the central bank appears to share that opinion, at least to some extent, as the bank has recently launched a program of regular foreign currency purchases, even though the strong corona has helped to moderate inflation. And inflation measured 4.2% last April, coming in slightly above expectations. Although analysts anticipate that inflation will continue to subside over the coming months, getting it down to target could prove challenging. And this is something that the governor of the central bank has addressed, and is one of the main reasons why the monetary policy committee is committed to keeping real rates high. Still, the committee has been able to lower interest rates, or nominal interest rates, down to 7.75%, and further rate cuts are expected. So we have to admit that the central bank is very well positioned to support the Icelandic economy through turbulent waters, by easing the monetary stance and even the macroprudential stance, if necessary. So far, the bank has not considered it appropriate to do so, as the economy has been very resilient and households' balance sheets have been solid. This, of course, providing a buffer against economic shocks. And that concludes our presentations here today. I would like to hand over to Q&A and welcome Theodor Fridbergsson, our head of IR, to the stage. Thank you.

Thank you, Erna, and good morning, everyone. First of all, I would like to start reminding participants online you can still submit questions. And as usual, we start with the online questions we have. A few questions from Alexander from . Congrats on a solid quarter. A couple of questions. What is the management thinking in terms of M&A? Is your preferred target, or are you looking at other options? If you are considering other options, would you consider foreign acquisitions?

Yeah, we continuously continue to weigh our external growth opportunities. And when it comes to domestic acquisitions, I think we have a better understanding of the competition constraints after our initiative towards Islas Banki, and we'll continue to kind of analyze our options there. But when it comes to external growth outside of Iceland, I think we're looking at a few options that underpin our Arctic strategy and help us develop that further as we see opportunities to grow there.

How do you feel about current impairment levels? If your customers have managed to get through the last few years without any significant loan losses, should we expect with lower inflation and interest rates some of the impairments would be released?

yeah so the total loss allowance is at 0.8% of the loan book and we've been guiding for a cost of risk of 20 to 25 basis points annually through the cycle on the cost of risk so I think you can draw the conclusion that we're still tilted towards the pessimistic scenario that includes obviously certain assumptions around unemployment and house prices and apply then higher haircuts to collateral of our real estate, sort of collateral in our credit portfolio. So I think it sort of, also reflects the fact that we have had quite restrictive policy rates for a period of time, high real sort of policy rates. And as we see that kind of become less restrictive, I think it's fair to assume that we might see a softer soft landing or sort of

softening of the economy without any kind of major contraction in GDP that we could assume that some of the provisioning could be released and the last question from Alexander can you elaborate on the reversal of incentive scheme payments does it mean that the bank overestimated incentive scheme payments in the past or are you expecting future payments to be lower

Yeah, Eger, do you want to maybe?

Yeah, the bank paid 95% of the maximum incentive payment for the 2024, but had budgeted for 100% in that sense. That's approximately 100 million of the 300 that we stated the reversal of expenses due to impairment in incentive scheme. But there is also, in addition, a reversal of approximately 200 million, following expert advice that the bank should not pay contribution on the pension fund for incentive payments in forms of shares or share options. So that the bank had budgeted for those payments, and therefore there is a reversal. in total of $300 million related to the incentive scheme.

So one is allocation, and it had obviously varies between years. And the other one is sort of salary related expenses to the variable pay, insurance payments, which then will impact payments in the following years. And B, you can assume that those will be lower.

Yeah. Then we have a question from Ali Saidi from Inam. How sustainable is the current level of CFB fees? What does your pipeline look for this segment? And how are your corporate clients reacting to US policy uncertainty?

Yeah, I think, you know, visibility in this business line usually extends into the following quarter and maybe a couple of quarters and the pipeline is quite strong and activity is strong as seen in the kind of the loan commitments and the increase in the loan commitments and undrawn loans. But I don't think, our visibility extends further than maybe a couple of quarters, but still corporate activity is relatively high. We're expecting kind of investments a little bit to, sort of move to the infrastructure focus that the current government has. And there is a backlog of large infrastructure projects that we expect to come on stream. And then it's harnessing of our renewable energy sources and investments in energy intensive industries. I think that will probably drive investment for the next few years. But other sectors are still investing, but obviously we're coming from quite a high level of private investments or corporate investments in Iceland.

And then it was the question about how the corporate clients are reacting to the US policy.

Yeah, I think everyone is assessing. I think there are There are challenges and opportunities in this situation. And obviously, a limited amount of our trade exports or export of goods is through the US. But the service export is considerably higher. And our main concerns, I guess, are with tourist arrivals from the US. But still, the feedback that I get from our clients is that visibility into summer and autumn is good. Bookings are at levels that, you know, where the operators are comfortable about their near-term profitability.

And then the second item from Ali. What is driving up loan defaults in the corporate and markets loan books? And why has your corporate loan book risk assessment deteriorated in Q1, even as your macro risk assessment has improved?

Yeah, as I mentioned in my presentation, the higher non-performing loans ratio is a direct result of this specific sub-sector, the construction industry, where our lending is towards collateral and a meaningful equity contribution from the construction companies. And so the provisioning is on a single limb basis to cases that we know quite well. And as I mentioned, these are not the same cases as two quarters ago, and we've successfully navigated these exposures and feel comfortable with the level of provisioning. As I mentioned in my presentation, This does not apply to the overall corporate book. This trend and the NPLs in our markets book and other consumer financing is quite low from a historical standpoint still. And if you look at our LTV ratios in that book, they continue to trend downwards as house prices have gradually increased and people are repaying the mortgages.

That was the final online question. Any questions from the room? No, then I guess that concludes our session today. So thank you all very much and see you in three months.

Thank you.