Arion banki hf

ICEX:ARION

Earnings Call Transcript 2022-Q2

[Ida Benediktsdottir, executive]

Good morning, everyone, and welcome to Arion Bank Presentation for the Second Quarter Results. My name is Ida Benediktsdottir, and I'm the Deputy CEO and the Head of the Retail Banking. The agenda for this called today is that I will start by going over the highlights of the quarter; our Chief Economist, Erna Bjorg Sverrisdottir will then give an update on the Icelandic economy; and finally, the bank CFO, Olafur Hoskuldsson will go into the numbers in more detail. Benedikt, our CEO, sends his best regards. He had a conflict as his son was playing football abroad, and he made the right decision of going there with him and the family. This then also gave me the opportunity to introduce myself to the shareholders here today. Benedikt will be back to present the third quarter results in the autumn.

So before I start the presentation, I'd like to remind our participants online that you can submit questions throughout the presentations through the message board located below the video feed, and we will provide answers to your questions in the Q&A session at the end of this webcast.

So to the results. First of all, we are happy and proud with the strong result in the quarter achieved during challenging market conditions. The sales process of Valitor concluded at the end of this quarter, which was a great milestone after a long sales process with Rapyd. Valitor has been a part of the group for many years, so this is a significant event for both parties. The tailwind from the sale of Valitor was ISK 5.6 billion in net profits, as well as producing a significant capital release.

What is also pleasing with this quarter is the handsome growth and the core income that increased 23.5% between years, mostly due to higher net interest income as well as a record quarter in terms of fee and commission income. The return on equity in the quarter was 21.8%, bringing the return for the first 6 months to 16.9%, which is a good progress towards achieving our medium-term targets.

Clearly, we are thoughtful of the loan growth target and would like to mention that we intend to be quite selective in our lending activities given where we stand now in the economic cycle. We also saw strong insurance premium growth that further encourages us on our bancassurance journey. And finally, we enjoy a strong capital and liquidity positions, which is very comfortable in the current operating environment.

So looking at the quarter, it was a quite eventful one for us here in Arion Bank, but I will just touch upon a few of those points over there. As previously mentioned, we had a strong fee income. And although our asset management business saw a decline in asset and the management due to the challenging market conditions, we however enjoyed a strong inflow into our asset management during the quarter. Also, broker fees, they were up 57% in the quarter. And Stefnir Dividend Fund and Stefnir Equities Fund delivered the strongest performance among mutual funds in Iceland over the past 12 months. And also, we saw a very strong activity in our CIB business with record fees during the quarter and 2 public listings of Alvotech and NOVA Telecom.

On the digital front, we also had a few highlights. First of all, we concluded the implementation of digital registration for title for car loans. This greatly shortening the lending process. So now it takes only 5 minutes from the loan application until the proceeds are paid out. So strong -- a good milestone there. We are also offering a broader insurance product in our app, and that is just in line, of course, with our bancassurance journey. We received a strong credit rating from Moody's with a positive outlook and also received a solid ESG rating from Sustainalytics that places Arion Bank in the low-risk category. The rating reflects that there is low risk of ESG factors having material financial impacts on the enterprise value of Arion Bank.

And finally, we implemented our new communications strategy after a process of a comprehensive brand review, which we started following our strategic change 2 years ago. And more on that note, the main objective towards -- objective of this process of reviewing our brand is to communicate the core values of the bank in a more compelling way. And to be more engaging and consistent in our communication with our customers, employees, and other stakeholders across all channels. The outcome of this work is this creative concept, pinn arangur, which literally mean, your success. But arangur is a big Icelandic word and it has multiple meanings, so in the Icelandic languages the meaning could be like results, achievement, accomplishment, progress, improvement, and success. The Icelandic -- in Icelandic, this slogan therefore becomes a commitment to the long-term success of our customers in all its different forms.

So as a Head of Retail Banking, I just wanted to take the opportunity to take a quick look at our key retail product, residential mortgages. The mortgage portfolio is, in many ways, a very important product for the group. These, of course, are the core financial product for most of our retail clients and as such provide a scope to build our further relationship and cross sell. The mortgage are also a key collateral in our covered bond issues, and therefore they also play an important part in our funding. And currently, this loan book accounts for under 50% -- just under 50% of the total bank's loan book.

So Arion, we have always been in the forefront of the residential mortgage market. We were the first to offer non-index linked loans in 2011 which have since then become the most popular product in the mortgage market space in Iceland. We also transformed the market with our digital solutions, especially when we started to offer fully digital credit assessment in 2016. So we have always been proactive in the market, and we did, for example, proactively changed our credit strategy last year to focus more on real estate construction, both to the lack of supply in the housing market, which has been a key factor of driving up housing prices in Iceland, and also because our loan book in construction was maturing quickly.

So we have always been dynamic in the way we manage our loan growth, depending on market and economic situation each time. This has meant that over the past year, we have in many ways been leading the change in the interest rate in the market to align with the new funding dynamics in that market. We have, however, maintained relatively competitive pricing throughout the period while margins have shrunk considerably. With this, we have continued to offer our clients products at a competitive level while aiming to making up for the margin compressions through a broader client relationship and cross sell. The result of this is that despite having been proactive in the pricing in the market, we have seen healthy growth of our loan book of 17% over the past 12 months.

We have also been very proactive when it comes to credit assessment. Our LTV thresholds have always been 80% and 85% for first time buyers, so well before this was enacted across the market recently by the Central Bank requirements. So all in all, we are confident in this portfolio, which is to an extent the result of this proactive and dynamic management of this asset class.

The LTVs are still strong and household debt to disposable income are relatively robust and lower than in the Nordic countries. Also, large part of our mortgage portfolio has fixed interest, either non-indexed or CPI-linked, and the CPI-linked loan they carry lower payment burden. So this will limit the near-term pressure of the portfolio from rising rates.

It is also worth to mention here that we do not offer interest-only loans. That is more common in other jurisdictions. Nonperforming loans are declining, and we still don't experience any financial difficulties such as increased difficulties in our short-term lending. Unemployment rate is low in Iceland, as Erna will probably mention later, and disposable income has been increasing during the last years. However, if our customer will start to experience difficulties, we have numerous ways of helping them through that difficulties. One option, for example, is to move into CPI-linked loans, which reduces the payment burden.

Also, worth noting that macroprudential measures, that I think Erna will mention a little bit more on later in the presentation, implemented recently by the Central Bank is already starting to have an impact. Recent changes to the debt service-to-income measures set by the Central Bank are mostly affecting first-time buyers and the ones that have higher loan applications. And this is also starting to impact the mortgage market and which is slowly reaching healthier levels in our opinion. But, of course, higher interest rates and inflation will, of course, affect the disposable income of households going forward.

On that note, I'd like to welcome Erna Bjorg Sverrisdottir, Chief Economist, who will talk more about the housing market and other economic matters, to the podium. So welcome, Erna.

[Erna Sverrisdóttir, executive]

Thank you, Ida. Good morning, everybody. I hope you're all having a wonderful summer, haven't been overly affected by the heatwave sweeping across Europe. If the heat is getting too much, I recommend visiting Iceland. Currently, they are 9 degrees Celsius outside and slight rain, and actually the only thing at risk at overheating here is the economy.

Now, according to preliminary figures from Statistics Iceland, GDP increased by 8.6% between years and the first quarter of 2022, exceeding expectations by a significant margin. Growth was mainly driven by a record-breaking private consumption, which increased by 8.8% between years, thanks to Icelanders' love of travel, and regular business investment which increased by 19% between years. Now, this robust domestic demand was reflected in strong imports growth. So despite tourist arrivals increasing by 200% between years, the contribution of foreign trade to GDP was negative and the current account deficit the largest in 14 years. However, increased current account deficit is largely due to primary income. In this case, improved financial results of the aluminum smelters, not worsening external trade. And I say this because I think it is important to remember that Iceland is a commodity exporter, which means mainly -- of course, what we export mainly is seafood and aluminum, which means that higher oil and commodity prices have not negatively affected the country's terms of trade. Quite the opposite, in fact.

Now I realize that talking about national accounts in the first quarter is almost like giving a history lecture. Economic conditions are changing almost daily, inflation around the world is rising, central banks are scrambling to catch up, and a likelihood of a global recession is increasing. Still, despite the highly uncertain global economic outlook, the Icelandic economy is set for a strong growth with the second quarter shaping up to be even stronger than the first one.

Tourism has almost regained its former strength with tourist arrivals in June reaching 90% of June 2019. According to leading airlines flying to Iceland, the outlook is good with strong bookings for the second half of this year. Because of that, we have revised our tourist arrival forecast for this year upwards to 1.7 million tourists, or 85% of 2019 levels. More importantly, each tourist who visits the country is spending much more than pre-COVID, a trend we expect to continue throughout this year.

Now, with tourism ramping up, there is still one question that looms large. How are we going to service all the people visiting the country? So far, labor shortage has not restricted the industry. We have, for example, not experienced the same chaos as in many European airports, but it definitely has been a challenge to fill available positions. And this does not only apply to tourism industry, because the labor market as a whole is very tight currently. Unemployment in June fell to 3.3% and hasn't been lower since before Wow Air's bankruptcy early 2019.

In addition, according to Gallup's Spring Survey, the share of firms reporting staff shortage is at its highest since 2007. So these conditions on the labor market, coupled with rising house prices, 8% nominal wage growth, and accumulated savings, have laid the foundation for a very strong private consumption. And as I mentioned earlier, over the past quarter, actually quarters, we've seen record-breaking private consumption, a trend that is expected to continue in the second quarter as payment card turnover increased by 16% between years. So overall, the Icelandic economy is set for a strong growth, driven by private consumption, business investment, and tourism, with the consensus among domestic analysts at 5.1% growth in 2022, followed by a 3.1% growth in 2023.

Now, some of you might wonder how I can say that growth will be driven by household consumption when inflation just hit 9.9% in July, and that is a valid question. So I'd like to try to answer it. If we look at the composition of inflation here in Iceland, it is very different from, let's say, Europe where the cost of energy has increased by 42% between years, accounts for nearly half of the inflation rate. At the same time here in Iceland, cost of energy accounts for roughly 20% of the inflation. The lion share is due to higher oil prices at the pump, not electricity and heating.

Here in Iceland, the main driver behind inflation is house prices, with almost half of the 9.9% inflation rate in July due to rising house prices. So what I'm actually trying to say is the inflation rate here in Iceland does not reflect the same increase in cost of living as in Europe, which means that the effects on household spending could be less pronounced here than on the mainland. That being said, inflation is expected to continue to rise and to hover around 10% over the coming months, which, of course, could dampen household and businesses' expectations further, eventually affecting consumption and investment.

But it's not only inflation that affects expectations and behavior, it's also the actions taken by the Central Bank. And the Central Bank of Iceland has taken a very tough stance on inflation and hiked rates by 200 basis points in the second quarter. Overall, the Central Bank has hiked rates by 400 basis points since May last year, taking the key interest rates to 4.75%. Further rate hikes are expected, but as the Monetary Policy Committee has not given any forward guidance on any target rate and they are actually still waiting to see, well, just some progress from earlier rate hikes, it is impossible to say when and where the rate hikes will stop.

Also, to make matters even more complicated, we find ourselves in a completely new situation because the Central Bank is not only tightening the monetary policy, it's also at the same time applying macroprudential instruments in order to tame the housing market. In the second quarter, house prices increased by 24% between years. So despite significant wage increases, both in January and again in April, house prices have risen at a considerably quicker rate, leading to a growing imbalance in the market and prompting the Financial Stability Committee of the Central Bank to act.

As Ida mentioned earlier in her presentation, in June, the committee decided to lower the maximum loan to value to first-time buyers and established a reference interest rate for the calculation of debt service. Of course, they enacted this in June, so we haven't seen the effects on house prices, but it is likely that higher mortgage rates, coupled with stricter rules on both the loan to value and debt service, will slow down the market, hopefully without exaggerating the fluctuation.

So this is the economic environment in which we have to start our wage negotiations as 85% of wage agreements expire in the next 9 months. Therefore, I think it's safe to say that we have a very difficult winter ahead of us, and the government, the Central bank, the labor market, they must all come together to try to ensure some kind of stability. However, whatever the future holds, the foundations of the economy are very strong. Despite the pandemic, a war, and highly uncertain global economic outlook, the Icelandic economy is relatively well equipped to handle further challenges.

That being said, I'd like to welcome Olafur Hoskuldsson, our CFO, to the stage to go over the financials. Thank you.

[Olafur Hoskuldsson, executive]

Thank you, Erna, and good morning, all. So now, I'll be looking more closely at the second quarter results. As I normally do, I want to start off by highlighting the 5 key takeaways from the quarterly results. Firstly, of course, we are very pleased with a strong set of results with a net profit for the quarter of just under ISK 10 billion and representing a 21.8% return on equity. Pleasingly, this is a result of a combination of a continued momentum in our core business, combined with a successful divestment of held-for-sale assets.

Secondly, of course, a key highlight in the quarter was the successful sale of Valitor. It is great to finally conclude this transaction, which has been a strategic project for the group for a number of years. The total proceeds were USD 112.5 million, representing a net profit of ISK 5.6 billion and a total capital release of just under ISK 14 billion. I would like to personally take the opportunity to thank Rapyd and the Valitor team for their cooperation throughout the process, and wish them, of course, all the best in their running this and driving this business going forward. All in all, I think this was a great transaction for all parties involved.

Third, a continued positive for the group has been a strength in our fee generating businesses. We had another very strong quarter with ISK 4.5 billion in fees, which is the highest on record for the bank? Fourth, we continue to see strong trends in our net interest income where in the quarter we saw the net interest margin holding at a very strong 3.1% level. And finally, our capital and liquidity position remain very strong. And have been further strengthened by the sale of Valitor. The Common Equity Tier 1 ratio stands at 19.7% and the LCR ratio at 163%.

This is an enviable position in many ways, going into a period of what, as Erna mentioned, is a period of economic uncertainty. This position allows for optionality in the way we utilize this position and for potential opportunistic, profitable growth and further shareholder distribution. We have requested -- we have a request, pending regulatory approval, for share -- new share buyback program, which will be considered, therefore, in the near term, in parallel with a view of the market in general and profitable opportunities for growth.

So now looking more closely at the results. Net earnings were ISK 9.7 billion for the quarter compared to ISK 7.8 billion for the same period last year. Core income lines are all tracking very well, and core income grew by 17.9% between quarters and 23.5% year-on-year. I will discuss the key line items in the following pages, but I want to highlight 3 items -- other items on this page.

Firstly, on provisions. We increased the loss allowance in the first quarter as a result of the uncertainty in the economic environment. There are minimal changes in the second quarter in that regard, but we have a small positive in the provisions line, which is mainly a result of recoveries from previously written down exposures. Secondly, because of the composition of our income this quarter, we have an extremely high tax -- effective tax rate of over 50%. This is, of course, mainly because of the financial loss in the quarter, where equity positions -- loss in equity positions is not deductible. Third, in addition to the ISK 5.6 billion profit in this held-for-sale line from the sale of Valitor, we also have a ISK 500 million additional recovery from the Solbjarg travel agency assets. And the rest of that line items relates mostly to the contributions of Valitor in the quarter, some of which represent items that actually will remain within the group post deconsolidation of Valitor, as has been discussed before.

So in terms of net interest income, which grew by 22% compared to the first quarter last year and 3% from the last quarter. The net interest margin was unchanged from the first quarter at a strong level of 3.1%, which is up from 2.9%, which has held relatively steady over the past year. We saw 2 rate hikes during the quarter in May and then late June of 100 basis points each. Of course, the impact of these, therefore, is not only fully -- only partially reflected in this quarter. Looking ahead, we see the full impact of this, these 2 rate hikes and further potential incremental hikes supporting our margin going forward.

At the same time, we continue to be cautious as to the rate environment on the funding side, and it is, therefore, very difficult to make a clear guidance as the overall rate sensitivity. We do include sensitivity analysis in the notes of the account, but of course, these are based on numerous and dynamic assumptions, so it's very challenging to give a definitive view here.

Now looking at fees and commissions, which continue again to be a strong positive for the group. Net commissions for the period were ISK 4.5 billion, again, the highest on record for the bank. We also saw all fee-generating businesses grow from the second quarter of last year. This is, of course, very positive given the volatile market backdrop that we've been experiencing.

As Ida mentioned earlier, this was a very eventful quarter for the CIB business, which was a key contributor to the growth in fees. The pipeline there remains very strong, but the pace of those being realized will, of course, depend on the market backdrop going forward. While the asset management business clearly is impacted by the market volatility, it is a demonstration of the strength of that business that the business -- that the fees remained at ISK 1.2 billion in the quarter. We also saw a very strong positive net inflow actually into the business, although the overall assets under management did drop because of the market impact. As discussed before, fees paid by Valitor to Arion Bank will going forward be included in card fees, which has historically been lost in consolidation.

So looking at our insurance business Vordur. We saw a very good recovery, which was a positive after a very challenging first quarter. The combined ratio for the period was 86.8%, while the negative results for the business were, of course, clearly impacted on the investment side by the challenging market conditions. Earned premiums increased by 13% year-on-year, and we are seeing very positive traction with regards to the broad integration of the insurance company with the bank. And this remains, as Ida mentioned, a key strategic project for the group.

In terms of financial income, we are posting a total loss of just under ISK 3 billion. This is clearly impacted by the volatile market conditions, both on our market making business and also for the investment portfolio of Vordur. It should, however, be noted that ISK 1.9 billion out of this headline figure relates to a reclassification from other comprehensive income within equity due to an accumulative loss from bond investments. This reclassification, therefore, does not impact our equity position nor our capital position. We include further details on this in the notes of the accounts.

So in terms of operating expenses, in my view, the general story is that we're maintaining this relatively well despite extreme inflationary pressures. Total expenses for the quarter were ISK 6.6 billion compared to ISK 6.4 billion for the same quarter last year. In terms of specific items, there is not much to report in this quarter, but the marketing cost is somewhat higher because of the rollout of the communication strategy, as Ida mentioned earlier, of course. Payments to the Deposit Guarantee Fund have, on the other hand, as discussed before, been reduced to 0 in this quarter and will be so going forward.

In terms of salaries, the average salary has increased by around 3% within the group, while at the same period, the wage index in Iceland has increased by 8%. Clearly, this, of course, excludes the impact from the variable remuneration scheme, which as highlighted in previous presentation, provides a strong tool for us to manage fixed costs. As was the case last year, we do not anticipate to provision for the incentive scheme until Q4 when we have a complete view of the KPIs guiding that system. We do, however, provide an estimated scope within the notes of the accounts.

So moving on to the balance sheet. I would like 2 highlights from within the quarter here. Firstly, of course, we have a simple balance sheet. And with the sale of Valitor, we are further simplifying this. The held-for-sale line was 1.6% of the balance sheet a year ago and has now been reduced to ISK 2 billion or 0.1% of the balance sheet. Second, we continue to emphasize focus on being competitive in terms of deposits for our core clients. This has meant that our growth in deposits has been robust and has tracked well the growth on the lending side. Our liquidity and stable funding position continued to be very strong with an LCR ratio of 163% and a net stable funding ratio of 115%.

So in terms of loans to customers, those grew by 3.5% within the quarter, which is fairly balanced between corporate and retail. The split of the loan book is now 46% corporate, 48% mortgages, and 6% other loans to individuals. The share of corporate loans has increased slightly over the past year when it represented 44% of the loan book. We continue to see capital velocity as the key to our CIB strategy. And since year-end, we sold ISK 14 billion of corporate loans to institutional clients. Going forward, we are in a strong position to retain optionality when it comes to avenues of loan growth. The longer-term credit strategy is to retain a rough 50%-50% split between corporate and retail, but we will continue to manage growth to where we see the best risk-return opportunities in the near term.

In the near term, as Ida mentioned, it is fair to say that we are managing loan growth very closely with a view of the external environment. So looking at deposits, which has again been a key theme for the past year, and this growth has continued into 2022. As said, we continue to offer competitive rates to our core clients, and this will continue to be the case. Total deposits grew by 7% in the quarter and 11% from year end or by around ISK 70 billion. Deposits now represent 61% of liabilities for the group, up from 59% at the end of 2021 and 50% at the end of 2019. Loans to deposits have also continued to trend down and now stands at 139%, down from over 160% in 2019. Core deposits have also pleasingly grown by just under 17% year on year.

So moving on to the wholesale funding site. Clearly, the funding markets have been challenging this year. This can be seen from the secondary spread developments for the market as a whole, which have widened significantly over the past few months. We are, however, in a strong position to navigate these markets. We have a robust liquidity position and a balanced maturity profile with only one ISK maturity this year remaining, which has been prefunded with the domestic issues over the past year.

We have in recent years continued to broaden our funding sources and enhance transparency and the overall dialog with credit investors. This continued into the past quarter when we added the Moody's rating and then also opened up access to the ECB repo window, which we see as an option which allows us more flexibility when it comes to issuing plans, especially while markets remain unfavorable. Pleasingly, of course, the Moody's rating was a notch above S&P, and with a positive outlook reflecting the improved risk profile of the group and enhanced profitability.

So looking at capital. Our position, of course, remains very strong despite taking large steps in capital optimization over the past year. We have paid close to ISK 60 billion to our shareholders since the beginning of 2021, and despite this, we ended the quarter with Common Equity Tier 1 ratio of 19.7%. This includes full capital release from the sale of Valitor which again amounts to just under ISK 14 billion. Our target Common Equity Tier 1 ratio is unchanged at 17%, which implies just under ISK 24 billion of surplus capital, in addition to the ISK 8 billion already deducted from capital for foreseeable dividends -- 50% dividends.

As discussed, we will manage this optimization carefully near term. We have submitted the request to the regulator for a ISK 10 billion buyback program which awaits approval. The pace at which we utilize this will then be viewed in the near term while considering market dynamics and profitable growth opportunities. We have also highlighted on this page that just under half of the surplus capital is contingent on us further optimizing AT1 and Tier 2. We will, of course, be considering further subordinated issues in the near term to optimize these buckets, but clearly this is market dependent.

So before I hand over to Q&A, I again want to highlight some of the key themes going forward. We're in a very strong position. The core operations continue to strengthen across our businesses and the pipeline and strategic position supports our earnings outlook. Our capital and liquidity positions are very robust and are further strengthened by the sale of Valitor. The sale also reduces operational complexity of the group and supports the momentum in our fee business going forward. This position allows for optionality when it comes to balancing management, and this can be very valuable in the environment that we are currently experiencing. This means, as discussed, that balance sheet growth and shareholder distributions will be closely coordinated near term.

As Erna mentioned, the global economy continues to add operational complexity. In my view, however, and I hope she agrees, there is some scope for optimism. Increased agility with global supply and demand dynamics as well as information transparency should support faster recovery of the global economy than we have seen in previous inflationary periods. Finally, we are, of course, reliant on the operating environment in Iceland. Fortunately, as Erna outlined, Iceland is, in many ways, in a strong position. And a key strength -- one of the key strengths in the economy is the level of consistency and stability when it comes to regulatory, fiscal, and political environment. This is highly important for the strong access to broad funding markets, which, of course, is a key to us supporting the Icelandic economy.

It is worth noting, again, that competition in funding markets have increased, and those are likely to remain elevated as central banks across the globe are shrinking their balance sheet and investors' return requirements are increased. We are in a strong position to navigate these markets in this environment, again, with our diversified and profitable businesses, broad funding options, and a robust capital and liquidity position.

Thank you. I would like to now hand over to Q&A and I would like to welcome our head of IR, Theodor Fridbertsson, to manage the questions.

[Theodor Fridbertsson, executive]

Thank you. [Operator Instructions] We have one question here pending online. And it regards the net fee and financial income. And the question is how should we think about the development of the net fee and financial income going forward, given that we saw a very strong quarter in Q2?

[Ida Benediktsdottir, executive]

So with regards to the -- if I will take the fee income, we still see a significant demand in the market, especially for corporate advisory that we hope will materialize in further fee income during the quarter. Although the markets in asset management has been -- the assets under management has been going down, we are, however, seeing a solid free income, I would say, and we expect -- we have seen new money -- new strong inflow into that market.

So if I talk about more the retail side of the bank, the cards turnover is booming now after COVID, and we are also seeing a strong income from the airport, the FX part of it. So traveling -- Icelanders traveling abroad, they're using their credit cards and tourists coming to Iceland is also helping the fee. Lending activities in the mortgage market is now trending down, so we expect that it has been lowering and we expect that to continue a bit -- lower a bit. So if I hand over to Olafur to talk about the financial income.

[Olafur Hoskuldsson, executive]

Yes. Maybe just quickly on the fees first. I think clearly in the quarter we saw the CIB business leading the way with a significant increase in their fee business. Of course, those are transaction driven to a large extent. But I think the overall trend in that business is for fees to increase. And I think the strategic changes that we made to that business in 2019, they are flowing through. So although these are lumpy, I think that the pipeline is very strong. And I'm positive around the fees in that business.

Was the question also on financial income?

[Theodor Fridbertsson, executive]

No, just net fee and commission, yes.

[Olafur Hoskuldsson, executive]

Okay.

[Ida Benediktsdottir, executive]

Okay.

[Theodor Fridbertsson, executive]

So, secondly, we have a question from Rahul from Tellimer. What should be the beneficial impact for payments fees post the Valitor sale?

[Olafur Hoskuldsson, executive]

I think we've guided on this already. I think it's difficult. We can't really look forward because, of course, now Valitor is a third party, and we need to treat them as any other customer. But historically at least, while this was a part of our group, the fees there were around ISK 200 million, ISK 300 million a quarter.

[Theodor Fridbertsson, executive]

And then finally we have a question from Maria at Citi. Please update on additional IT spend of up to ISK 1 billion, how much is booked in the second half of '22 and do you expect any spillover into '23?

[Ida Benediktsdottir, executive]

So we have stated that we wanted to increase our investment in IT and that was just that we have been quite open about. We want to have more investment just at the digital front and also just in automation of the end-to-end process. So that is what we guided I believe ISK 1 billion at the end of -- before this year. Actually we do not have been using that all that proceeds already. But if you would like to continue with the...

[Olafur Hoskuldsson, executive]

Yes. I think the commitment to investing in that area remains, but I think we have -- so the pace of that investment, we've aligned that a little bit to the broader economy, and we are definitely making strides. But I think, as you say, some of those costs will now spill into probably into 2023. It will spread over a longer period.

[Ida Benediktsdottir, executive]

Yes. It's also, of course, in connection also with our bancassurance journey.

[Theodor Fridbertsson, executive]

The second question from Maria. How much of the 200 basis point hikes this quarter were passed on to depositors?

[Ida Benediktsdottir, executive]

So we have said that -- I don't have the exact figure in mind, but we have said that we want to be competitive, and we have been competitive in our deposit funding, especially in normal savings accounts, towards corporates, and also in term deposits, while we have not hiked the current account as much.

[Theodor Fridbertsson, executive]

And finally from Maria. In what segments are you more cautious in underwriting in the near-term?

[Ida Benediktsdottir, executive]

Cautious in?

[Theodor Fridbertsson, executive]

In underwriting, so to which sectors are we cautious -- looking cautiously at?

[Ida Benediktsdottir, executive]

I think it's fair to say that we are looking at the real estate -- the commercial real estate. I think that is the market that we are looking more into now. We're not that cautious, as I mentioned before, at the residential mortgage market. But if I need to say -- point out some particular sector, I would do that.

[Olafur Hoskuldsson, executive]

Maybe just to add. I think the cautious comment, I agree, commercial real estate is one area. I think we included actually in the pack. We didn't go through it today. We are very confident in our commercial real estate portfolio. We're cautious, as we mentioned in the presentation, across the space. There's a lot of uncertainty in the environment. It's difficult to pinpoint now where the risk might arise. But real estate is, of course, one area, and those, both on the residential and commercial, have seen significant price increases over the past 2 years. So we're carefully looking at it, but this is the reason why we included more detailed commentary in this presentation on these 2 areas, mortgages and commercial real estate, because we wanted to present the way we look at it and that we are in general confident.

[Ida Benediktsdottir, executive]

Yes. Of course, we are confident, but as this -- higher interest rates and higher inflation would, of course, affect this sector more than others in a way.

[Theodor Fridbertsson, executive]

So that concludes the questions online. So then we'll move on to the auditorium. Any questions from you guys? No. All right.

[Ida Benediktsdottir, executive]

Okay. So just to tell once again that we are very happy and proud with the results in this quarter, very strong fee income, very strong growth in our core income. But otherwise, I just thank you all for attending and hope you enjoy the rest of the summer and see you next time. Thank you.

[Olafur Hoskuldsson, executive]

Thank you.