Arion banki hf.

And welcome to this presentation for the fourth quarter and full year results of 2025 for the Arion Group. My name is Benedikt Gislason. I'm the CEO of Arion. Today's agenda is as follows. I'll start by walking you through the key highlights. Then our chief economist, Erna Björk Sverre Stottir, will provide an update on the Icelandic economy. After that, our deputy CFO, Egert Theitsson, will dive deeper into the numbers and share our outlook going forward. Before I start the presentation, I would like to remind our participants online that you can submit questions throughout the presentation. through the message board located below the video feed. We will, of course, provide answers to your questions in the Q&A session at the end of the webcast. And now to the results. It was a strong year, 2025, for the Arian Group, demonstrating the strength and resilience in our core operations. We delivered the return equity of 14.9%. comfortably above our medium-term financial target of 13%, and reflecting broad-based earnings momentum across the group. A key highlight this year is the growth in core income, which increased 12.3% year-on-year and was driven by higher net interest income, resilient fee income, and insurance service results. And again, demonstrating the importance of diversification and quality of our revenue base. Our cost-to-core income ratio improved to 42.3%, showing continued cost discipline even as activity levels remained high. And Werther delivered a combined ratio below 90% for the second consecutive year, reflecting sound underwriting and disciplined risk management. Our capital position continues to be a key strength, and we are currently at 308 basis points above the regulatory requirements, ensuring strong resilience and ample strategic flexibility. And this capital ratio takes into account the proposed 50% dividend payout, which is in line with our guidance, or 11.5 kronas per year. and the 5 billion buyback program that was initiated in January. And now to the key milestones of the year. As I said, a strong operating delivery 2025, commercial momentum and strategic progress across the entire group. These milestones demonstrate the breadth of our services and strength of our group heading into 2026. Our markets division delivered one of the best performances to date with 22% year-on-year increase in assets under management and supervision. Total assets under management and supervision at markets and Stepnir moved closer to the 2,000 billion mark, reflecting both positive market conditions and increased customer participation. Stepney Funds also had a standout year. Stepney continued to build momentum, supported by customer-friendly fee reductions, improved digital accessibility, and the removal of minimum investment amounts. As a result, the number of clients grew, monthly subscriptions increased sharply, and today around 89% of all fund transactions are fully automated. At the same time, corporate and investment banking delivered a great performance, generating a record $6.8 billion in fees driven by high demand for advisory services and continued strength in corporate lending, which grew by close to 17% during the year. Customer engagement in retail banking reached new highs. The area and rewards program continued to exceed expectation, with more than half of our active retail clients, customers, joining in a period under 10 months. This directly supported close to 15% growth in household deposits. and the launch of our rewards savings account with weekly paid competitive interest saw strong early adaptation and contributed meaningfully to the deposit growth that I mentioned. Insurance sales through the rewards program also increased significantly, further strengthening cross-sell opportunities across the group. Our insurance subsidiary, Verder, also delivered a strong contribution. Despite the challenging environment for investment income, Verder produced a net earnings of around 2 billion and delivered a combined ratio below 90%, as I mentioned, for the second consecutive year. Bank assurance penetration increased across both individuals and corporates, supporting deeper customer relationships and higher product engagement. We also made progress on several strategic initiatives. And on the portfolio side, we completed the sale of Artaland development asset, marking another positive step in simplifying and optimizing our development asset footprint. And I'll touch on the remaining development project later on. And finally, to the merger discussions with Quirka, where we in recent years have highlighted the importance of structural reforms in the Icelandic financial market, strengthening the system and making it more efficient for the benefit of shareholders and customers. And with that in mind, we sought to enter merger negotiations with Quirka, which is the country's fourth largest bank. We continue to make steady progress. In the proposed merger with Quika during the year, the pre-notification discussions continued to advance with Icelandic Competition Authority, which remains on track. And we are expected to conclude those discussions in the first or early second quarter of this year. If these steps progress positively, the next phase includes signing the merger agreement, notifying regulators, and seeking approvals from shareholders. Only after those steps would new Aryan shares be issued to Quirka shareholders. Although this process is advancing constructively, the final decision will depend on regulatory outcomes. And now to our Arctic strategy. The Arctic region continues to present strong strategic potential for the bank and the group as a whole. Our presence is expanding through corporate finance advisory and syndicated lending, enabling us to support clients operating in the region of growing economic and geopolitical importance. The Arctic loan book outside Iceland has grown around 24% annually since 2020, making it the largest part of our foreign credit exposure. Our largest exposure today is in the Faroe Islands, where development remains positive. The pipeline is also robust with new opportunities emerging in Greenland and continued growth expected in key industries such as fisheries, transport, tourism, and services. And specifically on the blue economy, a new 100 million euro blue economy credit facility that we signed this week with the European Investment Bank enables us to continue to promote sustainable fisheries, land-based agriculture and other marine industries in the Arctic region. agreement marks European Investment Bank's first financing of its kind in this region and the first blue economy only facility for them as well. And now to our development assets, where we have a remaining considerably large development asset, .. And in recent years, we've been working on this development, as we have with ,, which we finalized the sale of last year. And this is done in close collaboration with the local authorities. The goal has been to create attractive neighborhoods that strengthen the surrounding community with strong connections to the nearby natural areas. And one of these projects, the Ardalan project, was completed during the year, as I mentioned. And the detailed land use plan for the first phase of Blikkastadir or Blikkastadland is now in the consultation process with the local municipality. And we, late last year, or early this year actually, signed a new development agreement with Mosøsberg, the local municipality, that will strengthen the financial foundation of the project and accelerate delivery of key infrastructure, such as schools and preschools. And the first phase comprising of 1,250 homes, new homes, has been submitted to the planning committee and is under open consultation. And we're hoping to get the necessary approvals later this year. Our long-term strategic initiative, Women Invest, has yielded great results in the first two years of its sort of program. And since launch, more than 8,000 women have participated in 95 seminars. giving them practical tools and confidence to make informed financial decisions. And the impact, as you see from this slide, has been significant. Women's fund subscriptions increased by 67% in the two-year period. Fund transactions rose by over 45%. And assets on brokerage accounts increased by 27%. We held an investment competition which drew strong interest, the highest number recorded, and this program remains a cornerstone of our effort to promote financial inclusion and empower new investors. And finally, before I hand over to my colleagues on the ESG side, sustainability remains a central focus of our strategy as before. And by year end, the bank had more than $170 billion in committed sustainable finance across categories such as green buildings, affordable housing. and clean transportation. These areas continue to grow as more clients transition towards sustainable operations. And we also continued reducing our own environmental footprint. And this is all recognized externally through ESG ratings as seen in this slide. And now I would like to welcome our chief economist, Erna Björk Sværestóttir, which will give an update on the economic environment.

Thank you, Benedikt. Good morning, all. It's good to be here today. We Icelanders have a saying that we learned from a very young age, that everything will work out. And this spirit was certainly visible in the fourth quarter when all of our largest export sectors faced significant challenges. Yet at the same time, Icelanders have never spent so much money before. payment card turnover up by 6.9% between years. Furthermore, if you think that Icelanders let a reduction in flight capacity to the country hold them back, think again. This was the busiest December for travel since measurements began. We don't yet have the national accounts figures for the fourth quarter, but it's safe to say that the pattern will mirror Q3, when private consumption drove economic growth, increasing by 4.2% between years, exceeding expectations by a mile. Investment growth slowed significantly, but business investment remained resilient, rising 11.3% in the third quarter. Despite strong domestic demand, GDP only increased by 1.2% between years, largely due to a negative contribution from foreign trade. While imports grew by 8.6%, largely driven by imports related to data centers and Icelanders' travels abroad, exports of goods declined. Service exports, on the other hand, rose by 3.9%, supported by an exceptionally strong high season for tourism, with more people visiting than ever before, longer stays, higher spending, and strong hotel occupancy rates. In the past months, tourist arrivals have declined, which was expected regardless of place bankruptcy. The winter will likely remain challenging with a continued decline in tourist arrivals, but The outlook for the second half has improved, with broadly positive booking indicators, both for flights and for accommodation, especially in connection with the solar eclipse in August. These are not the only positive developments we have had in the scene in recent weeks, as improved prospects for capelin fisheries are expected to offset the contraction in mackerel and blue whiting catches. Exports are therefore projected to increase by 0.2%, according to the central bank's latest economic forecast, despite significantly reduced aluminium production, owing to an electrical equipment failure at the northern smelter. Thus, the economic outlook has slightly improved. The central bank now anticipates a 2% GDP growth this year, largely driven by private consumption and a positive contribution of foreign trade. And this is kind of interesting, because private consumption is expected to be the main driver of economic growth at the same time as unemployment is rising. On one hand, it reflects household resilience and strong financial position, as purchasing power has continued to increase, debt levels are moderate, and debt servicing burdens remain manageable, as evidenced by low default rates. But on the other hand, it indicates a structural shift taking place in the economy. Although it's too soon to draw firm conclusions, we are seeing signs of shifts in how the economy adjusts, with a greater share of adjustment now occurring through the labor market, rather than through a weaker currency, higher inflation, and reduced purchasing power. However, such a shift implies higher level of unemployment than otherwise. And the labor market is already showing signs of moderation. Job growth has been weak in the past year. Total hours worked and job vacancies have dropped in numbers. And the latest Gallup settlement survey indicates that employment outlook has continued to deteriorate, with hiring plans dropping sharply. especially among export-oriented firms. So unemployment is projected to continue rising. It currently stands at 4.9%, up from 4.2% a year ago, and is expected to go over 5% in the first quarter. Even though the labor market has softened, wages have risen significantly, boosting purchasing power and supporting private consumption. Although the increase in purchasing power has strengthened household resilience, the steep wage rises have had a clear impact on the domestic portion of inflation, while the relatively strong krona has suppressed imported inflation. Therefore, headline inflation has remained persistent. It jumped to 5.2% in January, And although the increase was largely due to hikes in public levies, it was a bad print overall. We saw underlying inflation increase as well to 4.5%. It's higher since December 24. Headline inflation is expected to remain around 5% in the first quarter before gradually easing. But the inflation target is not in sight, and inflation expectations are still way too high. Therefore, it is unlikely that the MPC will lower rates in the near term, although it is not entirely ruled out, because despite rising inflation, the MPC's forward guidance has remained the same. That is, further decisions to lower interest rates will depend on clear evidence that inflation is falling back to the bank's 2.5% inflation target. We haven't gotten an answer from the committee on when the evidence will outweigh headline inflation, But in this context, the committee is focused on the labor market and the housing market, which has fueled inflation in recent years. But that appears to be changing. House price inflation has subsided markedly since July 24, as the supply of new housing continues to accumulate, and the average time to sale for a newly built home has grown significantly longer. Still, we are not seeing any signs of distressed sales, and nominal prices have continued to increase, and market activity has partly normalized following the Supreme Court ruling in October. In the ruling's wake, the Financial Stability Committee decided to ease its borrow-based measures, and the MPC decided to cut rates by 25 basis points. Even so, the loan supply is more limited than before, and interest rates on new index mortgages are generally higher than they were before the ruling. And this could keep the housing market down, hopefully feeding through to lower domestic inflation. We have a challenging task ahead of us, but we are no strangers to high inflation or high interest rate. More importantly, households and firms remain in a strong financial position, supported by solid economic fundamentals and generally healthy balance sheets. That being said, I would like to welcome our Deputy CFO to the stage to go over the financials. Thank you.

Thank you, Erna, and good morning, everybody. Bear with me that I will repeat a lot of numbers that Bendit went through at the beginning, as we are so proud of our results for the year. But we will start with some of the key highlights for the fourth quarter and for 2025. It was a solid quarter with an ROE of 11.6%. and ROE for the year of 14.9%. Q4 is now, as in prior years, affected by a provision for the incentive scheme compared to prior quarters in 2025. But it's fair to say that the diversified operation of the group supports the earning momentum through the cycle. Secondly, the results in the core income are primarily reason for strong earnings. This quarter, it was lower net interest margin, with inflation having less impact compared to prior quarters. But solid income from our fee generation and the insurance business helped us with good numbers. Robust growth in the corporate lending, if you look at the loan book, which was supported by growth in the stable deposits. but impairments in the quarter were above longer term guidance, which is primarily due to single name exposure. And finally, our liquidity funding and capital positions remains very strong, with capital positions of CD1 18.4%, including dividend proposal of 15.3, and our ongoing buyback program of $5 billion. and the bank is in very strong position for further growth or continuing buybacks. We have already pre-funded our senior preferred issuance with maturity in May 26, and growth in stable deposits have also been strong, supporting our very strong liquidity position. And on to the income statement for the quarter. Core income, which includes interest, fees, and insurance business, excluding expenses, we were up 7.3 percent from the same quarter last year, so strong development. And net interest income was up by 9.8 percent between years, where fees were slightly down by 2 percent. Insurance services results are stronger than in the same quarter last year, and combined ratio remains strong, or 92.1%. The insurance revenue increased by 7.5%, while expense claims cost increased by 7.3%. Financial income was impacted by stronger equity markets than in previous quarters, and rather strong income from the debt instruments. This resulted in a 1.3 billion income, including the investment portfolio of the insurance business and our market making. Other operating income amounted to 0.8 billion during the quarter as a result of a profit from the sale of 51% holding in the subsidiary Ardaland, which holds the large development plot in Gardapær. Operating expenses increased by 1.8% between years, but at the same time, inflation was just under 4%. We will go into more detail regarding the expenses later. Net impairments in the quarter calculates at 51 basis point of the loan book on annualized basis, where the year calculates at 24 basis points, which is in line with our guidance for the credit loss in 2025. The main reason for this high impairment in the fourth quarter is a single name exposure and thus does not reflect the quality of the loan book in general. We can expect a slight rise in the expected loss in the near term due to a challenging economic environment, but we remain confident of the overall quality of our loan book. Effective tax rate was 22.6% in the quarter, mainly due to favorable equity markets. This gives us a net profit for a quarter of 6.2 billion compared to 8.3 billion for the fourth quarter last year, with the main difference in net financial income and impairments. As we now have the full year 2025, take a quick look at the performance compared to last 2024. It's marked by strong growth in core income, or 12.3 percent, stable cost base, and a good income from sale of development plots, which results in a 14.9 percent ROE compared to 13.2 percent in 24. In general, strong comparison, diversified revenue streams, and a solid operation. We will now look at some of the line items and start with net interest income, which of course is the largest one and probably the most important. Net interest income in the quarter was 12.4 billion, or up from 11.2 in the fourth quarter last year, but down from 13.8 from last quarter. The net interest margin as a percentage of interest-bearing assets is 2.9% and is in line with our guidance of around 3%. The key driver changes in NIM from prior quarters in 2025 are mainly the CPI imbalance which has increased and the fluctuation in the NIM and the net interest income is significant. Low inflation in this quarter has considerable effect compared to last quarter and is on the same level as in fourth quarter last year, as stated in the picture at the bottom of the slide. The cost of funding has decreased from the same quarter last year, connected to lower central bank rates in Iceland, dropping from 8.25 at the end of 2024 to 7.25 at the end of 2025. Additionally, the cost of borrowings has decreased compared to last year, especially in funding in FX. However, as can be seen on the bridge at the bottom of the slide, the cost of deposits and borrowings increased in Q4-25, mainly with increased deposits and pre-funding of borrowings. Latest measurement in the inflation We will see higher NIM in Q1 this year, and with our big CPI imbalance, the fluctuation will be significant going forward. And with increased corporate lending, it's worth mentioning, the net interest margin is likely to trend slightly above 3% going forward. However, the relative growth of mortgages versus corporate lending, along with CPI developments, will be the key drivers in the near term. Now, looking at our fee and commission income. This was a good quarter in terms of fee generation, with total fees above $4 billion. Worth noting that every quarter of the year was above 4 billion stable income from fee and commissions. We have stated that in recent quarters the fee generating business are performing well. CIP fee generation is volatile between quarters as income from large investment banking projects can affect total numbers significantly. Demand for new lending was strong in the corporate space during the quarter, with loans to corporates increasing by 35 billion, or 5.4%. Our asset management operation continues to grow with stable fee base. Asset management increased by 74 billion during the quarter, with new funds, strong equity markets, and increased activity. Fee income from retail banking activities have been under pressure due to automation, intense competition, and change in regulation regarding foreign payments, which results in a slight decrease between years. Now, on to our insurance. It has continued to develop well over the last few years. There are fluctuations in this operation between quarters, as can be seen in the combined ratio. But in general, the trend has been quite favorable. For 2025, the total combined ratio was 89.9%, and is well above the 95% target. Net earnings for Werther were $2 billion in 2025 compared to $3.7 billion in 2024, mainly due to lower income from investments. This results in ROE of 13.7% in 2025 compared to 30.8% in 2024. Now into the operating expenses, including those from the insurance business. Total operating expenses in the fourth quarter were $9.9 billion, which is up by 2.5% from the same quarter last year. The fourth quarter is affected by the accrual related to the incentive scheme, which is estimated to be $1.3 billion. This is lower than last year due to a revised approach to deferred payments. One-off cost is approximately $250 million in the quarter, primarily due to costs related to the merger negotiations with Quika. Cost base is relatively stable between years, despite increasing number of FTEs, which increased by 1.5% from the same time last year, mainly related to IT, internal controls, and growth in subsidiaries. Now onto our balance sheet and starting with loans to customers. The loan book grew by 2% or 27 billion during the quarter to 1,329 billion. The growth is largely related to new lending in the corporate space. We continue to be dynamic in the way we manage loan growth with a view of balancing credit strategy and profitability in growth opportunities. Recently, we have been seeing more feasible opportunities on the corporate side, and the turnover in the loan book has also been significant. Due to uncertainty following Supreme Court ruling regarding variable rates on mortgages, the housing loan market has been somewhat subdued Although the uncertainty surrounding mortgages has clearly decreased, the supply of loans has changed, but it's hoped that that clearer picture will emerge soon. The loan book continues to be very well balanced, 43% mortgages, 5% other loans to individuals, and 52% to corporates. And closely connected to the loan book, there is profile. This quarter we had 1.7 billion impairment, and this is mainly due to, as we have stated before, a single name exposure, not the result of a more challenging economic conditions. Non-performing loans has increased since year 22, but has been stable through the last three quarters. The non-performing loan ratio is associated with change in the policy rate, and its further development may be influenced by speedy monetary easing. The loss allowance at the end of the year is 12.1 billion, or 95 basis points, of the loan book, which is higher than in recent quarters, primarily due to those single-name exposures. Onto the deposits, which increased slightly during the quarter to 921 billion. Normally, deposits decrease in Q4, especially from corporates due to payment of income tax to the state, but in the fourth quarter, there was an increased deposits from individuals. Our strategy in this area has been to compete, especially in more stable categories of deposits. We have stated that the bank must be selective regarding paying higher interest to selected customers. And in that regard, Arion Bank did launch a new savings account for members of the Arion Rewards Program to great success, as can be seen on the picture regarding deposits from individuals, which rose by 25 billion during the quarter. We have stated before that the funding profile remains robust and the Bank maintains a conservative approach regarding the refinancing of market funding. Payment of senior Euro 300 million bond with maturity in May 26 was pre-funded with issue in August 25. We had a successful issuance of green bonds in Swedish and Norwegian krona in January, and the focus of funding in 26 will mainly be on refinancing in Q4 Euro 500 million covered bond maturity. Arion Bank long-term issuer rating from Moody's was affirmed at A3 and at A1 as a covered bond issuer with stable outlook. Now looking at the capital, our position, as stated before, continues to be very strong, with CET1 of 18.4%, or 388 basis points above regulatory requirements, and still above our 150 to 250 basis point target, including the management buffer. This is taking into account the proposed dividend and ongoing buyback program, as mentioned earlier. The implementation of CRR3 resulted in a risk exposure amount decreased of around 55 billion, which was partly offset by loan growth in the quarter by 27 billion. And before we go to the Q&A, I want to again highlight some of the key themes going forward. We expect to see a strong operating performance for this year, with core business providing good earnings, and we are very proud of the diversity of our business, which provides support for the overall earnings momentum through the cycle. We also continue to cautiously anticipate that continuing complicated external operating environment in the near term, both in terms of domestic rate development and in terms of the international political landscape. And finally, as Benedikt mentioned, the proposed merger with FICA is on track. This merger is expected to provide many opportunities to further strengthen our operation and service to our clients. And now we will move into the Q&A, and Theodor Philperson in Western Relations will come to the stage and lead the questions. Thank you.

Good morning, everyone. Last but certainly not least, the Q&A. And as usual, I think we should start with questions from the online participants. And we have a few already. You can still submit questions. But we'll start with questions from Alexander . Question number one, you disclosed 250 million merger related costs in Q4. What was the total merger related expense for the full year 25 and what is your best estimate for 2026 costs assuming the ICA pre-notification discussions conclude in Q1 or early Q2?

yeah as we state in the in the presentation that it's uh the one of cost was total of 250 million as as in the he mentioned in the question and but it's not all related to the to the merger with quicka total cost for 25 related to the merger is approximately 200 million there's some additional one of cost other the total cost for the

Yeah, maybe. It's not considerable cost in addition to what has already occurred. Most of the advisory cost is, I would say, another $200 million probably.

And you referenced a revised approach for the share-based incentive scheme that lowered Q4 expenses by 400 million. But what was offset by headcount through salary increases? Can you explain what specifically changed in the scheme design and how we should think about the incentive line going forward?

Yes, this is related to the deferred part of the incentive scheme, which is approximately 15% to 20% of the total expense each year. It's a legal requirement. Yeah, legal requirement. And it's deferred over four to five years. And this deferred cost will now be distributed over this period. We can say this is not a, you're distributing then 15 to 20% of the total expense over this period. So it's not a, you can say it's not a material amount each year.

And we lower time sort of account also have the same impact as a full provision.

Given that we have the payment every year.

Yeah, yeah.

And last question from Alexander. Stage three provisions on the corporate loan book increased by 1.6 billion during Q4, while net impairment was 1.7 billion for a quarter. How much of that increase attributable to the single name exposure in the reference? Which sector is it in? And is the exposure now considered fully provisioned, or should we anticipate further charges?

The majority of the provision comes from the single name exposure, which is a non-construction related. It's in another industry. Anything else?

No, I think there is no further regarding this exposure.

It's fully provisioned for.

Fully provisioned for, yeah.

Losses have been crystallized.

That concludes the questions from Akkur. Moving on to Segla, Rabnat Segla. Have you assessed the potential impact of the revised general guidelines and methodology regarding SREP or financial institutions on the Pillar 2 capital requirements as presented in circular from the Central Bank of Iceland? Particular attention is drawn to the guidelines concerning the ownership of an insurance company.

Yeah, these guidelines are still, I think, under consideration and the latest status that we've on this change indicates that this will have minimum impact on capital requirements for our insurance holding or holding an insurance company. But it's still under review, so it remains to be seen. But earlier indications were of higher requirements, which seems to be, the position seems to have changed on that. And other impact is minimal.

Looks like that concludes the questions from the online participants. So are there any questions from the auditorium? All clear? All right. I think that concludes the session of the day. Thank you very much for your participation, and see you in Q1.