Arion banki hf.

So good morning and welcome to Arjen Brank's presentation for the first quarter results 2026. My name is Oliver Høskundsson, CFO of Arjen Brank. For this morning's agenda, I will start by walking you through the key financials of the quarter. Then our CEO, Benedikt Gislason, will cover the key operational highlights in the quarter, as well as looking at the outlook going forward. Then our chief economist, Erna Björk-Tvedersdóttir, will provide a brief update on the Icelandic economy. Before I start the presentation, I would, as usual, like to remind participants online that you can submit questions throughout the presentation through the message board, which is located below the video feed. We will then provide answers to your questions in the Q&A session at the end of the webcast. So, starting as usual with the key highlights from the quarter. First, a solid start to the year, which continues the good momentum from the recent years in Iron Bank's operations. Second, from my perspective, of course, a highlight in this quarter is related to the net interest margin. In the past couple of quarters, we have had some short-term fluctuations in the margin. We have, of course, to an extent, expected this and continue to guide for this in previous earnings calls. This quarter, for example, saw the Icelandic annualized CPI print measure at around 10% level, which increased from a very low sub-1% level in the fourth quarter last year. This means that while the net interest margin was at the lower end in Q4, it is high this quarter. As, of course, with most things in our business, the underlying products driving these fluctuations, namely the CPI-linked mortgages, are clearly not priced for a three-month period. And we look for a longer-term view of real interest rates when managing these products. It is, of course, important to keep that in mind when putting these numbers into perspective. Another clear highlight from my perspective for the quarter relates to balance sheet growth. Despite the economy in Iceland generally slowing down in response to the high policy rates, we have continued to find good and solid profitable growth opportunities, both on the corporate and retail sides. And importantly, in parallel, we have continued to grow deposits, stable deposits in line with that loan growth. And finally, and of course very importantly, given the global external market backdrop, We continue to maintain a very robust capital position and liquidity position. And with most of our upcoming bond maturities pre-funded early, we can be opportunistic in the funding markets. And actually, we are this morning in the market with a Euro 300 million three-year senior issue. So now looking more closely at the income statement, net profit in the quarter was $7.3 billion compared to $6.4 billion for the first quarter last year. Core income, namely net interest, fees, and insurance revenues, were $21 billion, which is up from $17.5 billion for this quarter last year, or up by 20%. So I will cover the key line items in more detail on the following pages, but just looking at some of the other line items. Financial income was again challenged this quarter as equity markets in Iceland were again depressed. And this, of course, impacts our insurance business investment portfolio and also our market-making business on the banking side. In addition, this quarter we have a markdown of unlisted equity holdings of around 800 million. These are mainly two holdings in the tax sector where we have taken a conservative view based on broader market backdrop in that market. These, however, remain very interesting prospects and close partners with the bank going forward. Because of the losses on the equity holdings, the effective tax rate is again high this quarter at close to 34%. Cost of risk is then 12 basis points in the quarter. So now looking more closely at some of the key line items. And starting with net interest income, where as discussed, of course, we have a somewhat unusual period. Net interest in the quarter was $16.3 billion, up from $12.4 billion in the fourth quarter. The annualized net interest margin as a percentage of interest-bearing assets was therefore 3.8% compared to 2.9% in the fourth quarter. As we have discussed and guided for, there is, of course, an inherent enhanced volatility in the short-term margin with the increased CPI-linked mortgage lending that we've seen over the past few years. Especially, of course, as mentioned, in the past couple of quarters, we've seen significant moves in the monthly CPI prints, which does increase the fluctuations in the margin. Again, these products are not priced based on three-month real interest rates, and we tend to look through these short-term movements when managing these products. We continue to guide investors for a margin over the mid-term above the 3% level. We do, however, continue to see some or expect some fluctuations in the margin in the near term, in the coming quarters. But we also expect that to be reduced when our clients move more into the non-CPI linked mortgage format. And we are starting to see signs of this this quarter. And the CPI imbalance seems to have peaked, at least for the time being. How this then, of course, develops over the coming quarters is highly correlated with the level of inflation in Iceland and in turn the policy rates and how they developed in the near term. One additional point that I want to mention on the net interest margin is that this month we have a maturity of an expensive €300 million senior bond that was issued in 2021 at spreads above 400 basis points. So, of course, refinancing this, and we're in the market this morning. We'll see how that ends up. This will be a clear good tailwind for the NIM from Q2. So now looking at fees and commissions, another solid quarter in terms of fee generation with total fees of just under 3.9 billion. In general, fee-generating businesses are doing well and demonstrating strong stability through the cycle. Where we do see some fluctuations is in the GIP business, which is to be expected. These fees are generally more transactional and lumpy than the other areas. In this quarter, for example, last year, we had some sizable transactions closing, and we had less so this quarter. But again, this is, of course, a three-month period, very short, and we are very happy with the way this business is doing and very positive. confident in the long-term trajectory of the business, and feed generation of the group going forward. So now moving on to the insurance business, Vörder. The growth momentum continues very strong in that business. Growth was 7.2% from the first quarter of last year, and a combined ratio of just above 100%. As you, of course, see on the slide, and we've talked about in previous earnings calls, this is a seasonal business. and the combined ratio tends to move around quite significantly between quarters. The winter moss represents generally a high point in terms of claims, and the combined ratio is usually around the 100% level at this time of the year. As we have seen in recent quarters, however, there has been a positive trend in the claims ratio, and we continue to see that this quarter with the claims ratio is at around 77%, which is down from 79% from this quarter last year. So net results for Werder, including investment income, was a loss of just above 60 million in the quarter compared to 640 million loss for this quarter last year. And the improvement is largely on the investment side. In general, we continue to be very positive and see strong momentum in this business in terms of growth and profitability and significant further scope for this business to become a key profit contributor to the group, especially with improved conditions on the investment side. So now looking at the operating expenses, including those from the insurance business. Total operating expenses in the quarter were $8.4 billion, which is up by just under $1 billion from this quarter last year. The headline number is impacted by some one-off items which we outlined on the slide, which makes the comparison slightly cumbersome. But just take it through it step by step. So looking at salaries, for example, it's increased by $754 million between years. Last year, we had a one-off 320 million reversed expense due to the incentive scheme. And this year, we have 120 million expense related again to the incentive scheme due to the change in accounting methodology. So if we exclude these items, effectively salaries were increasing by 300 million or around 6.9% between years. Just for putting that into context, over the past year, the number of employees in the group increased by 4%. And at the start of the year, we had the 3.5% general wage increase related to the collective wage, union wage negotiations coming into effect from January this year. And in terms of other expenses, we have around 200 million increase between years. And just under half of that is related to the Kveika merger process. you could say also is a one-off. So just moving on to the balance sheet and starting with the loan book, which grew by 23 billion in the quarter and takes the loan book to 1,352 billion. The growth in the quarter was relatively evenly split between corporates and retail and mortgages, while around 9 billion of the growth is related to the CPI-linked loans for inflation impact on the loan book. As discussed in previous calls, we remain dynamic in the way we manage balance sheet and loan growth, balancing credit strategy and profitable growth opportunities. The loan book continues to be very well balanced, 43% mortgages, 5% other loans to individuals, and 52% to corporates. In terms of provisioning, as discussed, we had a 391 million impairment in the quarter or 12 basis points. That takes the total loss allowance at the end of the quarter to 12.4 billion, or 0.9% of the loan book. In general, the story is very similar to what I've described in recent quarters. The non-performing loans ratio has increased somewhat on the past few quarters. This is, of course, to be expected given the rate environment that we have in Iceland. Credit quality indicators remain, however, very robust. And we retain a conservative provisioning position based around comprehensive stress testing, which we have been doing for the past few years. Just for an example, we have conducted a stress test of our construction loan book, which is an area that we have seen a somewhat high NPLs recently. The result of that stress test suggests that these projects are very well positioned to endure a prolonged period of market stagnation and price depreciation without creating additional credit losses. These stress scenarios, just to give context, assumed a real estate price decrease of around 40%. So we'll get deposits, which continue to grow in the quarter, increasing by just under 10 billion to 932 billion. As we have discussed, we have a clear strategy in this area, which is to grow, especially in the more stable categories of deposits. And as we have continued to highlight in the top right chart of this page, the growth continues to be in these areas, in these categories. For example, the recent product development related to our group's loyalty program further aims to support this strategy and has been very successful, as Benedict will probably go into in more detail later. So now looking at capital, our precision continues to be very strong, common equity ratio of 18.5% or 318 basis points above our regulatory requirements and still above our 150 to 250 basis points target. We are, as before, committed to our median term capital target and expect to move the position within the target range near term through a combination of balance sheet growth and shareholder distributions. In terms of the leverage ratio, of course, continues to be very strong at 11.2%. And in terms of MRL, we are also in a very robust position with substantial headroom above requirements. So on that note, I would like to thank you and welcome our CEO, Benedikt Gislason, to go through some of the key operational highlights in the quarter and outlook going forward. Thank you.

Thank you, Oliver. I would like to start by focusing on the two medium-term targets that we didn't meet in this quarter. And just reiterating what Oliver mentioned around the insurance business, that this is a seasonal business. And for Werther, we've usually seen the combined ratio at these levels in the first quarter, as he explained. and we're obviously quite committed in delivering that medium-term target of combined ratio below 95%. I think it's also worth mentioning with our insurance business that we've reached a key milestone during the quarter, temporarily becoming... the third largest insurance company in Iceland, with an insurance revenue market share of 19.5%, reflecting strong commercial momentum and sustained customer growth. The result underlines the strength of Vörður's operational model, brand and distribution, as well as benefits of closer integration with the Arian Group. And as Olof mentioned, we see further growth opportunities for this business throughout our bank assurance strategy, leveraging Arium's customer base, advisory capabilities, and physical presence to deepen relationships and increase cross-selling. The other medium-term target that we haven't met and has taken quite a time to get closer to is the set-one ratio, and on that point, On that target, I would want to highlight that we will continue to manage profitable balance sheet growth along with capital distribution through buybacks and dividends. And at current set one levels, balance sheet growth remains well supported and buybacks will continue to serve as an active tool for capital optimization alongside ongoing dividend distributions. And these buybacks, which we've conducted throughout the years, have resulted in a higher earnings per share growth than the sort of net earnings attributable to our shareholders. And as well, a higher dividend per share growth than the bottom line stipulates. Now going to some of the operational highlights for the first quarter. The Ariane rewards momentum continues. The majority of our active retail clients are now enrolled with rewards deposit accounts. The program's latest addition growing 68% in the quarter. And building on that success, the next step is to extend a similar rewards program for our corporate clients. And in the corporate space, we rolled out automated SME credit decisioning in the first quarter, covering overdraft applications below 20 million, delivering instant 24-7 decisions with a 50% approval rate since launch. On the insurance side, Werder delivered three successful new product launches in the quarter, with further product development ongoing. And on the cyber risk, we continue our focus on improving cyber risk and resilience with using latest technology like AI to support vulnerability scanning and extending third-party risk oversight. Now going to the merger discussions with Quica, it became clear through the extensive pre-notification discussions that the simplification of the financial system, which we strongly believe would have been desirable and beneficial for customers and shareholders alike, would not materialize and resulted in termination of those discussions. Our strategy is clear and unchanged. We will be targeting capital priorities, optimizing our capital stack and growing profitable and focusing on efficiency and shareholder returns. And the bank is well positioned to evaluate further value and creative opportunities that will support, in particular, our focus on the Arctic region and corporate and investment banking activities there. And one initiative in this quarter supported our activities in the Arctic, in particular, the European Investment Bank financing facility towards the blue economy, which covers not only Iceland, but also Faroe Islands and Greenland. This is the first blue economy financing facility that European Investment Bank has established. extended to a financial institution and the first facility towards these three countries. On our large residential real estate development project, which is an asset that sort of came out of an enforcement many years ago and is the last asset that we've been working with out of that portfolio, And I'm very glad to tell you that we have now reached a major planning milestone with a detailed zoning plan for phase one. of this project, which was formally approved by Mosul Spire at the end of March. The municipality that we're working with closely, making significant milestones after years of development work involving leading experts in the field. This is a high-quality, nature-based design that follows the three principles 3,300 urban green standards, and for those of you that do not know anything about that, it means three trees visible from every home, 30% green surface coverage, and no more than 3,300 meters to the nearest park. Making it, this project, one of the only a handful of new neighborhoods in the capital region to achieve this, and the largest residential real estate development project in the capital area for quite some time. This project is financially structured to accelerate delivery with our financial contribution to the municipality over the development period, enabling the community to build out the neighborhood and its infrastructure at pace. We are now evaluating our strategic options for future ownership, including partial divestment, full divestment or partnership structures, which may ideally include a listing format providing shareholders with enhanced liquidity and, most importantly, establishing a market-driven price point for asset revaluation. And before I turn over to our chief economist, I want to highlight some of the key themes going forward in our operations. As Oliver outlined, this is a solid start to a new year, where again the diversity of our business provides support for the overall earnings momentum through the cycle. We continue to cautiously anticipate a continuing complicated external environment near term, which I'm sure that Erna will explain to you in her presentation, both near term in terms of domestic rate development and in terms of the international political landscape. And with this market backdrop, it is, of course, important that we and other key participants in the isolated economy do what we can to facilitate economic stability in areas that we can control. That will require a holistic discussion and open dialogue between different parts of the economy. And we at Arian have certainly in the recent months attempted to support this effort with a structured public discussion around what we see as the key drivers in this area and will continue to do so going forward. Arjan and the Icelandic economy are well positioned to navigate this environment and capitalize on opportunities as they emerge. And finally, while our recent effort for consolidation in the Icelandic banking sector has proved unsuccessful, we are proud of the effort and continue to strongly believe in the rationale for Arion and, importantly, for Iceland. We have a clear strategy and strong operational momentum, and we will not stop looking for ways to strengthen this further and support our clients. And with that, I will hand over to Erna Björk, our chief economist.

Thank you. Good morning. We have an old saying here in Iceland, which means that an outsider often notices things that locals overlook. This remains relevant today, as settlement in Iceland has been subdued with rising rates, high inflation, higher unemployment, and global tensions pushing and pulling at oil prices. External observers, however, tend to be less pessimistic, pointing to our renewable energy base and commodity exports. In fact, the IMF currently expects stronger GDP growth in Iceland this year than in other advanced European economies on average. That said, Iceland is not immune to high oil prices. Around 13% of our total energy consumption is imported, and as an island and a small open economy, we rely heavily on transportation and foreign trade. So the global environment will likely weigh on the economy, which is already coming off a challenging year. GDP growth came in at a modest 1.3% last year. The fourth quarter was particularly weak, with GDP contracting by 0.6% between years. Investment and consumption were effectively pulling in opposite directions, with consumption increasing significantly, up 5.5% as households rushed to purchase new cars ahead of tax changes at year-end, while investment declined, largely in relation to major data center projects. Although weaker investment reduced imports, the contribution of foreign trade to GDP was still negative, as goods exports, particularly aluminium, contracted between years. This year has started on a somewhat stronger footing for the export sectors. The seafood industry had a record first quarter, supported by a strong capling season and high prices. while tourist arrivals have broadly stabilized after declining last fall and winter. We also received positive news from Norderau, with a return to full production capacity expected by late July. At the same time, imports have continued to decline, both computer imports related to data centers and outbound travel, with Icelanders' trips abroad down 7% after a record year last year. And this is consistent with other signs that households are becoming more cautious, as growth in payment card turnover in the first quarter slowed markedly to 3.5%. And this is one of the key changes to our latest economic forecast, as we now expect a slower private consumption growth, reflecting tougher conditions for households. The other major revision relates to the export sectors. First, the temporary production health at Norderau and the weaker outlook for mackerel and blue whiting were not yet on the radar the last time we published the forecast. Second, and perhaps more concerning, is the expected drop in tourist arrivals. or a 5% drop according to our forecast, due to reduced flight capacity. Uncertainty remains high, as high jet fuel prices may constrain flight capacity. So far, the impact on capacity to Iceland has been limited, and bookings for the summer remain strong, especially around the solar eclipse in August. Overall, we expect a 1.6% GDP growth this year, driven by private consumption, and a positive contribution of foreign trade to GDP, as export revenues from data centres and aquaculture continue to increase, while investment softens and weighs on growth. Now, falling investment, high interest rate, and limited room for expansion in the export sectors has had a clear impact on the labour market, which has cooled quickly in recent months, and not just in sentiment, but in the hard data as well. Job growth has been weak, total hours worked and vacancies have declined, and hiring plans have softened, particularly among export-oriented firms. So unemployment is expected to remain high, or around 5% on average this year. Even though the labour market has softened, pay rises are still too large and not consistent with the inflation target. The steep pay rises have had a clear impact on the domestic portion of inflation, while the strong corona has helped suppress imported inflation. Therefore, headline inflation has proven persistent, measuring 5.2% in April. Even though higher inflation is to some extent due to hikes in public levies and rising oil prices, underlying inflation has reached its highest in over a year. To make matters worse, inflation expectations have also begun to rise, which increases the risk of second-round effects through wages and prices. And this development played a key role in the MPC's decision to raise rates by 25 basis points last March. As the inflation outlook has not improved substantially since then, the committee is likely to opt for another 25 basis point rate hike later this month. Not least to send a clear message that it remains determined to bring inflation back to target. even if that proves painful for the economy and for the housing market, which is already cooling. The supply of new housing has continued to accumulate, and the average time to sale for newly built homes has grown significantly longer. Still, we are not seeing any clear signs of distressed sales. Market activity has partly normalized, and nominal prices are still increasing. We expect nominal prices to continue to increase, but at a very slow pace, while real prices are projected to decline through next year. In this day and age, uncertainty is high, so I'd like to finish my presentation on a slightly positive note by reminding you that the fundamentals of the economy remain strong. Both households and businesses have shown remarkable resilience and are supported by, again, strong economic fundamentals and healthy balance sheets. And that concludes the presentations here today. I'd now like to welcome Theodor Fredriksson, our head of IR to the stage, to lead the Q&A section. Thank you.

Thank you, Erna. Good morning, everyone. As usual, I remind participants online that you can still submit questions through the platform. Kicking off with the online questions already submitted, we have a few questions from Alexander at Accur. The first one is around the construction portfolio. Oliver, you mentioned that earlier. The net impairment of 12 basis points annualized is below your 20 to 25 basis points long-term expectations, despite IFRS 9 weights still tilted pessimistic. With corporate NPL growth since 2023 concentrated in construction, what is your current construction exposure? And is 12 basis points sustainable through 2026?

Yes, I think I covered some of this in the presentation already. Our construction book is around 110 billion. Like I outlined in the presentation, we've stressed this considerably. There are some elevated NPLs there. But we have been very conservative in the way we provision for this in recent years. So the fact that we're only impairing 12 basis points now probably reflects the fact that we have been very forward-looking in the way we provision and increased the pessimistic to a weight in our first nine scenarios early. So effectively, the picture that we're looking at now is probably at least not worse than what we were anticipating. actually better. So that's why our impairments are where we are, and we are very confident in the levels where we currently are. In terms of sort of the outlook, I think we continue to guide around the 2025 base points through the cycle. Of course, there are some fluctuations between quarters.

Thank you. Next question is on Blikkastadir. Phase 1 zoning at Blikkastadir is finalized at 1260 units, with remonetization past flagged. After the Arnaland disposal, what is the realistic timeline for Blikkastadir? And how does a listing compare against the sale on early realization and capital release grounds? Benedict.

Yeah, I would say in current market environment, the predictability and outlook is sort of more uncertain than when we were working on the sale of Arnaland, unfortunately. But our kind of approach has been always to sort of retain the value of the asset and reduce the uncertainties. And the reason, this is a 15-year development plan, or even 15 to 20 years, the three phases, and the value obviously is generated throughout the development, even though there are some upfront revaluation potentials in it, and depending obviously on the market environment. The listing concept is an idea that we've loaded in our Capital Markets Day. our last capital markets day because of this nature of the long sort of tenure of this project where we wanted to explore the option of our shareholders retaining the upset value of this development project over a longer period of time. And we continue to explore the opportunity of going down this route. But at the same time, we are opportunistic in terms of sort of partial or full divestment, but that has to meet our evaluation criteria and sort of timing as well. I would say that there is a substantial decrease in uncertainty of this project now, which should facilitate a sort of a more clarified interest of developers and investors on the project. And I think this is... This is very different to other development projects in the sense that this is sort of the largest of its nature in many, many years. And it's done on a site where sort of you can operate over a longer period of time and not sort of these smaller development sites that have been sold and developed in the capital area in recent years. So there's scale in the project and all of the infrastructure, sort of the roads and sewer system are controlled by the entity that holds the land.

Thank you. Next question is on external growth. With Quika off the table, domestic external growth is unlikely. Is the bank evaluating opportunities abroad? And if so... In which business lands and jurisdictions?

Yeah, as I mentioned in my presentation, we were always looking for opportunities to sort of create value for our shareholders. And I think we've been quite successful in kind of this long-term strategic initiative of focusing on the Arctic region. And as I mentioned, the kind of signing the financing facility with European Investment Bank is a testament of that. And we were generally welcomed in the Arctic, and we see opportunities for growth there. And I think sort of when it comes to external growth, we would always be looking for platforms that support that strategy.

And final question from Akkur. Headcount is up 20% from the 2021 lows, with Q1 FT is at 900. The CEO frames AI as among the most far-reaching technological advances of recent decades. At what point does that translate into stable and declining headcount and further operating leverage?

I think it's worth mentioning if you look at our salary item line that we've been managing this quite carefully throughout the years and if you sort of just for the headcount changes you can see that sort of the average salaries within the group have not gone up the same tune as the salary index in Iceland and sort of our performance management and and HR are sort of very focused on sort of keeping or sort of managing the cost side of this and having tight control on it. I would also want to mention that we have, since the sort of large language models were made available, commercially available, been exploring this technology and we're making sure that as many of our employees as we can are made available to the latest technology and we're currently exploring the utilization of the technology in various units within the bank and we see for the time being sort of with the earnings momentum, the revenue momentum in our business and our success in enhancing cross-selling and cross-selling our products, that there are also quite a number of opportunities in extending that momentum and creating more personalized services. using these tools to become more efficient. The tone from the top has been very clear that this is a major opportunity for advancing our services, and we want to make sure that our employees get access to these tools and training. And that is the primary focus for now. on guidance when it comes to FT number, I think it's just too early to say. We will be exploring these large language models and the agents that are rolling out. There were 10 new agents coming out just a couple of days ago that we're looking at now. And we will be then sort of guiding on that as time progresses. These are very exciting times for an institution like us.

Maybe just maybe saying the same thing again. It is a key project within the group. We have, you know, basically everyone is working on mapping out the opportunities, the threats, and what could be the impact on our business. In addition to having a dedicated team working on this full time, but it's just, you know, I think it's for any institution it's too early to put those to put that work into changing of targets just yet. But you know, it's getting closer, definitely.

Then final two questions come from . First one on unlisted equities. Unlisted equities were down $765 million during the quarter. Can you explain the drivers of this fair value reduction, including the relevant sector exposure, and comment on the risk of further write-downs versus potential reversals over the remainder of the year?

So I think covered some of this in the presentation already. So these are sort of marked down conservative. You know, these are unlisted holdings, not many trades. So we try to be conservative in the way we value these. These are effectively, just to add maybe a little bit more color, these are effectively two holdings in the tax sector. So Anatta and Contraland, both sort of tech companies that are you know, global companies, but, you know, have roots, strong roots in the Icelandic economy and have worked with the bank for a long time. So the Anlata holding is at 1.8 billion and Controlat is at 0.8. So these are the largest by far, so that's around half of the unlisted equity holdings. And those two are the ones that we are marking down this quarter.

With the reference price coming from other shareholders in the companies or recent trading.

Yeah, and always trying to be very conservative in where we mark these holdings.

And the final question is on fee income. Given that the year-on-year and quarter-on-quarter decline in fee income in Q1 is largely attributable to corporate investment banking, How do you view the outlook for the CFB fee income over the coming quarters of 2026?

Yeah, I think as Olof went through in his presentation, there are first quarter of last year was particularly strong one with the one of our largest kind of advisory work, recording fee income, JPT model, so it was an unusual quarter, I guess, last year in terms of fee income from that standpoint. As we outlined in our presentation and in the financial statement, we continue to see healthy growth in the corporate space. Credit activity remains robust, and I think we're also seeing, as I mentioned, increased activity in the Arctic region. So we're positive for the year and going forward that the momentum in this business will continue. But there will be sort of seasonality, especially on the advisory side, as sort of fees are posted when projects are finalized.

Thank you. That concludes the questions from the online participants. So are there any further questions from the auditorium? No? Then I think this concludes today's session. Thank you all for attending, and see you next time.