Arion banki hf

ICEX:ARION

Earnings Call Transcript 2022-Q3

[Benedikt Gislason, executive]

Good morning, and a very warm welcome to this presentation of our third quarter results. My name is Benedikt Gislason. And with me here today to present the results and our operating environment are, our Chief Economist, Erna Bjorg Sverrisdottir; and our CFO, Olafur Hoskuldsson.

To start with, a very strong quarter in terms of core income and a 10.5% ROE in the quarter and almost 15% for the first 9 months. This result is very much driven by the ongoing positive momentum in our core income, which increased by some 19% in the third quarter and an almost 20% increase for the first 9 months. Now it was a challenging market capital markets in Iceland, which impacts our financial income in the quarter. These are financial losses on the investment portfolio of our insurance business, Vördur and in our own market making activities. And that actually impacts our effective tax rate, again, which is unusually high at 36.5%, which is due to the combination of income and especially loss on equity positions. We are also missing a positive tax impact to contribution from our securities finance business in the downward trending market that we had in the third quarter.

A strong capital funding and liquidity position is demonstrated by the fact that we are now running a share buyback program, and we have refinanced most of our maturities for next year. And there is, overall, a good progress towards achieving medium-term targets, which we are above or close to in all instances. I would however want to raise your attention to one change that we're making to one of our financial targets, where we have introduced a management buffer of 150 basis points to 250 basis points on top of the minimum capital requirements rather than a fixed ratio of 17%. Now currently, this means 17.2% to 18.2% CET1 ratio based on our current capital requirements and will obviously change with any changes in the regulatory capital requirements.

Capital buffers are outside our control, but we are now implementing a Pillar 2 capital optimization plan through balance sheet management and change in risk appetite that is intended to reduce our relatively high Pillar 2 capital requirement going forward. So the midpoint of this range could easily go below 17% if we are successful in executing this plan with all else being unchanged.

In this relatively uncertain times, I think it's fair to say that Iceland is a positive outlier. And we are now enjoying a relatively strong operating environment. And this is reflected in the key interest rates close to terminal rates in the last policy meeting where the rates were hiked by 25 basis points. The message from the governor was that we are close to or even at the terminal rates.

Inflation is expected to decrease in line with the stabilization of the housing market. And I think it's important to note here that Iceland is not going through the same cost of living crisis as Europe is doing. And that is reflected in a harmonized index of consumer prices for Europe, currently running at 6% for Iceland, which is the second lowest in Europe.

Terms of trade are improving and are from an historical standpoint at a favorable place with all key export sectors performing both in terms of volume and in terms of value. And if you look to economic projections for next year, IMF is projecting that Iceland will have one of the highest real GDP growth rates in Europe at 2.9%. And our in-house forecast is even slightly higher.

Iceland is also enjoying favorable demographics with one of the highest population growth rates in Europe, 11% in the last 5 years and 2.8% in the past year and 1% actually in this quarter -- in the third quarter. I think it's also important to note that we are also enjoying a very favorable environment when it comes to capital markets. And this is important in these uncertain times where nations will have to become more self-reliant on funding and the international capital markets are not functioning at their best. And this is demonstrated in a few economic numbers. The net investment position is positive by some 25% of GDP. And that is helped by a very strong pension fund system, which is growing at a fast pace and is currently standing at 190% of GDP.

The reserves are almost the same as the positive net investment position, which will enable the Central Bank to provide FX liquidity into a market, if needed. And we have also enjoyed one of our strongest years in terms of foreign direct investment, which has been supported by the inclusion in the FTSE secondary emerging market index, but also on the back of directing investments into a prominent and growing Icelandic companies.

And on top of that, which is -- has been presented as one of Arion's business focus, the Arctic region. We are seeing a growing potential in that area. This summer was an exceptionally strong summer for tourism, which has been labeled because this impact was noted stronger in the North Hemisphere as ecotourism. And we've seen figures from Iceland, Northern Norway, Faroe Islands and Greenland, which support this trend.

Also in the Arctic, there are ample energy potentials, especially on the hydro side, geothermal, especially in Iceland, wind, which is hardly unexplored in this area and then potential to produce green hydrogen going forward. Mining is becoming a new focus with the ample green minerals in Greenland, around 1/3 of rare earth metals or minerals are to be found there. And then this area is rich of wild fish and fisheries and aquaculture are growing and have a meaningful contribution to production on a global scale.

And as we've said in our previous presentations and in our couple of Markets Day in November last year, Iceland is in a unique position to support development in this region. And the Arctic has a huge -- has huge amount to offer economically over the next few decades. And we are, as we've said, keen participants to be active in this region. And our recent partnership with Guggenheim and PT Capital on the Arctic Investment Partners is one example of that.

And with that, I'm going to hand over to Erna Bjorg, our Chief Economist, who will now go through the macroeconomic environment and effectively our operating environment.

[Erna Sverrisdóttir, executive]

Thank you, Benedikt. Good morning, everybody. I want to continue talking about the IMF's forecast, which Benedikt mentioned earlier and was published 2 weeks ago. I got chills and not the good client when are at the gloomy forward where it says, in short, the worst is yet to come. And for many people, 2023 will feel like a recession.

Here in Iceland, the news coverage was focused on the fund's Euro area forecast, and it was stated that when Europe catches a cold, Iceland gets pneumonia. However, it failed to mention that the IMF is expecting the Icelandic economy to grow by 2.9% in 2023. And as Benedikt mentioned, is one of the strongest growth in Advanced Europe. And this sentiment is accord by domestic analysts. So actually, it would be more accurate to say that Europe is at risk of catching pneumonia, while Iceland has a runny nose.

Now hopefully, the symptoms won't get worse as winter wears on. It certainly helps to have affordable heating and electricity thanks to Iceland's hydro and geothermal resources. Now the difference between Iceland and our main trading partners was already evident in the second quarter when Iceland experienced significantly stronger growth than the countries we like to compare ourselves to. According to preliminary figures from statistics Iceland, GDP increased by 6.1% between years, so pretty much in line with our expectations.

Yet again, growth was driven by a record-breaking private consumption, which increased by whopping 13.5% between years, a strong recovery in the tourism industry and regular business investment. Although this record private consumption was reflected in very strong imports growth, exports increased even more, thanks to tourism, leading to a positive contribution of foreign trade to GDP. Still, the second quarter gave us one of the largest current account deficits post GRC. But as I have talked about previously on this very stage, that result is largely due to improved financial results of the aluminum smelters and not worsening foreign trade.

Now I know this slide here is kind of like giving a history lecture. We want to know what is happening right now. So according to high-frequency data, there is actually no indication that the economy slowed down in the third quarter, quite the opposite in fact. Tourism has regained its former strength with tourist arrivals in the third quarter, reaching 98% of 2019 levels. Even more importantly, for the economy, each person is spending much more than pre-COVID, a trend we expect to continue at least throughout this year.

According to leading airlines flying to the country, the outlook is still bright with strong bookings in the fourth quarter, especially out of North America. As for next year, truth to be told, it is impossible to say what affects the cost of living crisis will have on the tourism industry. It is expensive to fly to the country and Iceland is a very expensive destination. But at the same time, we are lucky in the sense that roughly 30% of tourists are visiting the country come from North America, where the academic outlook is slightly brighter than in Europe and the U.S. dollar is very strong. It is fairly easy to get to the country, and we are the safest country in the world.

So despite the challenging environment, we stand by our tourist rival forecast, expecting 1.9 million tourists to visit the country in 2023. In other words, we estimate that the cost of living crisis will slow down the increase in tourist arrivals, but it will remain in positive territory. Now slower growth, that is not necessarily a bad thing because I'm not sure that we have the capacity to welcome many more people. So far, labor shortage has not restricted the industry, but it definitely has been a challenge to fill available positions. And this does not only apply to tourism industry. This goes over the labor market as a whole, which is currently very tight. In September, unemployment dropped to 2.8%, and hasn't been lower since well before Wawa's bankruptcy early 2019.

So this situation, the tight labor market, over 8% nominal wage growth, significant house price increases and substantial savings have laid the foundations for a very strong private consumption. And as I mentioned earlier, in the second quarter, private consumption reached unprecedented heights, especially if we look at prior consumption abroad, perhaps unsurprisingly, given the fact that half of the population went abroad in the second quarter. Now this wonder less consumption continued in the third quarter as over 45% of the population went abroad and the total payment card to turnover increased by 7.5% between years. So the third quarter was certainly very strong, but the outlook is still for a slowdown as winter advances.

Households are certainly in a very strong position. That levels are historically low and the saving ratio is at a 2015, 2019 average, but real wage growth has turned negative. However, due to the nature of the less collective wage agreements, real wage growth of the lowest income groups is still positive. And because I'm talking about real wages, I think it's important to mention, and as Benedikt talked about earlier, inflation is not the same as inflation and the inflation composition here in Iceland is very different from, for example, Europe.

In Europe, the cost of energy has increased by over 40% between years, accounting for almost half of the inflation rate. This is a cost increase that directly affects monthly household expenses. At the same time in Iceland, the main driving force behind inflation is house prices, which in many cases, perhaps most cases, does not affect monthly household expenses. So what I'm 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 in the mainland.

It could also mean that we could get inflation down relatively quickly without further rate hikes. And this is something that is already happening. Inflation currently stands at 9.3%, down from 9.9% in July and is expected to continue to decline further in the coming months as the housing markets kind of grind its own halt. In August, house prices in the capital area fell by 0.4% between months, the first price decrease in over 2 years. We expect further fluctuations in the house price index, but not necessarily a correction in the housing market through nominal house prices, but rather through wages and other underlying factors as actions taken by the Central Bank have left many hopeful buyers on the sideline.

And speaking of the Central Bank, the Monetary Policy Committee continued to raise interest rates in the third quarter by 75 basis points in August and 25 basis points in early October, taking the key rates to 5.75%. According to the Governor of the Central Bank, he strongly hinted that the rate hike cycle is over, if decisions in the labor market and public sector finances the support price stability. Now this is a very big if, but hopefully, everyone will do their part to ensure stability and prosperity. We are an Island. We are a small open economy. So our faith is not fully in our hands, but this is something that we have control over. We are in an unviable position and foundations of the economy are strong. So hopefully, we will be able to play our cards right.

That being said, I would like to welcome Olafur Hoskuldsson, our CFO, to state, to go over the financials. Thank you.

[Olafur Hoskuldsson, executive]

Thank you, Erna. And so I'll now look more closely at the results. As I normally do, I'll start with summarizing the key takeaways from the results as I see them. Firstly, of course, despite the very challenging market backdrop and volatility, the quarter resulted in a ISK 4.9 billion net profit, which is solid profit given the circumstances. This concludes a very strong first 9-month of the year with a net profit of ISK 20.4 billion, translating to an annualized ROE of 15%. Again, pleasingly, as Benedikt mentioned, this result is driven by a continued momentum in our core income, which increased by just under 20% year-on-year.

Second, we continue to see healthy growth in our balance sheet. In the quarter, with loans increased by 3.4% and core deposits by 4.2%. The net interest margin continued to strengthen and the quarter ended with a NIM of 3.2% on net interest-bearing assets. As we have guided in recent quarters, we are, however, starting to see the rate sensitivity slowing somewhat as funding cost increases, both in wholesale funding and in deposits.

Third, in terms of commissions, we continue to see this as a positive for the group. The third quarter is usually a slow one for the CIB business, a seasonally slow one. But the strength and diversity of our business is, however, demonstrated in a robust quarter in card fees and a very resilient quarter in asset management in a challenging market. Our capital markets business also continues to deliver a strong result and maintained the #1 ranking both in equities and bonds this year.

And fourth, very importantly, our capital, funding and liquidity position remain very robust, which is a key strength in the current volatile environment. We conclude the quarter with a common equity Tier 1 ratio of 19.3%, an LCR ratio of 189%. And in terms of funding, we have further strengthened our position with a euro senior issue this quarter with prefinance our maturities in 2023. This means that we have a very light maturity profile going into next year. And this, of course, is a very robust position in what continues to be a period of economic and market uncertainty. And this position allows for significant optionality to utilize this position for both opportunistic growth and to further shareholder distributions.

So now looking more closely at the results. As discussed, the net earnings in the quarter were ISK 4.9 billion. Again, the key story is the strength in our core income, which, as discussed, grew by 19% from the third quarter last year. On the other hand, we see a different story in terms of financial income, which clearly impacted the results in the quarter, which went from around ISK 1.4 billion positive this quarter last year to a negative ISK 1.3 billion this year, this quarter. I'll discuss the key line items in more detail on the following pages, but I want to stop briefly on the provisions line here.

The line is slightly positive in the quarter, but I want to emphasize that this is a net result of an increase in provisions in general provisions related to economic assumptions, but which is countered somewhat by one-off single name write-back of loans where we are recovering exposures that were previously written off. I will look at this more closely later in the presentation. Also, as Benedikt mentioned of note, of course, is a very high tax rate this quarter again, which obviously is a result of losses on equity exposures mostly.

So looking at net interest income, which increased by 31% compared to this quarter last year. With an increase in the period of interest-bearing assets of 12%, this results in a net interest margin increasing to 3.2%, which is the highest we've seen for a long time. During the quarter, we saw policy rates increase by another 75 basis points and ended the quarter at 5.5%. And since then, of course, as Erna mentioned, we had another 25 basis point hike in the fourth quarter.

Over the past quarters, we have remained cautious in our guidance in terms of rate sensitivity. We continue to include the sensitivity analysis, a scenario of sensitivity analysis in the notes of the accounts, which has remained relatively stable. But however, as discussed, this does not include the full impact of the uncertainty in the changing environment, especially in the competition around the funding markets.

Wholesale funding spreads have, of course, risen sharply. And while it is a definite positive that we have a very light maturity profile going into next year, should this remain, clearly, this will impact NIM over time. We are also seeing deposit margins starting to decrease as competition in that market increases. As discussed, we are in a very strong position to navigate this dynamic environment. But this also means guidance as the rate sensitivity continues to be challenging.

So looking at fees and commissions, continues as discussed to be a strong positive for the group. Net commissions for the period were just over ISK 4 billion. As discussed, the third quarter is usually a seasonal low for the CIB business in terms of advisory and lending commissions. We do, however, continue to see a very strong momentum in that business and the pipeline for the rest of the year is strong. It is pleasing to see the value and the diversity of our business. As -- while this is a seasonal low for the CIB business, it is quite the opposite for our card business. We saw a very strong quarter there with total fees of just under ISK 800 million in the quarter.

As previously discussed, card fees from Valitor were before the sale of that business to some extent, lost in consolidation and within the held-for-sale line in the income statement. From the beginning of the Q3, this will be including fully in commission income. It is also very pleasing to see the robust delivery of our asset management business, which delivered a solid quarter of just under ISK 1.3 billion, despite, of course, a very challenging market backdrop. We also continue to see a solid net inflow into asset onto management in the quarter, which is a clear signal of the strength of this business.

So looking at our insurance business, Vördur. On the positive side, we do see a good trajectory in terms of growth, where premiums increased by just under 10% year-on-year. And similarly, we see a strong growth in terms of number of customers. This year is, however, providing to be a -- proving to be a very challenging market for the insurance industry in Iceland. This is, firstly, of course, driven by the difficult market on the investment side of the business, but we are also seeing a very unusually high claims ratio this year.

After recovery in the second quarter from a very difficult start of the year in terms of claims, we again had a very challenging month in September, which resulted in a combined ratio for the quarter of just over 96% compared to 86% for this quarter last year. Clearly, this is somewhat of a result of several factors, but generally, the view is that this is an unusual year, and we are optimistic that this will turn towards a more normalized claims ratio in the near term. Of course, this year, we saw the economy return from COVID. And combined with an unusually challenging year in terms of weather in Iceland, this has impacted several of our key insurance businesses. We continue to see strong momentum in driving combined bancassurance strategy, and we are optimistic around this business going forward.

So in terms of financial income. In short, this is also a challenging quarter. We posted a ISK 1.3 billion loss in this area, mostly from a combination of the investment portfolio at Vördur and our market making business, both from bonds and equity holdings. On this page, we also wanted to provide a summary of our group's exposure to the housing financing fund bonds after comments from the Icelandic Finance Minister and report last week.

So in summary, the group has a total of ISK 4.4 billion holdings in these bonds and in direct and interact exposures and a conservative P&L impact of marking these bonds down to par value is limited or around ISK 250 million. Clearly, the eventual impact on the P&L of these bonds will depend on ongoing dialogue of the relevant parties, but the impact is not expected to exceed this level.

So in terms of operating expenses, in my view, again, the general story is that we are managing this relatively well, despite high inflationary pressures. Total expenses for the quarter were ISK 5.8 billion compared to ISK 5.6 billion for the same quarter last year. On this page, we have highlighted 2 trends, which demonstrate the enhanced efficiency of this business over the past years.

On the bottom left of the page, the core income per employee line, which has been on a strong trajectory of obviously from 2018, almost doubling over the period. Secondly, we show on the top left, an amended cost to core income ratio, which, of course, excludes the volatile financial income and other income lines. Again, this core income-to-expense ratio has been on a very positive trajectory.

So looking at the balance sheet, where I would say there are 2 main themes to highlight. Firstly, of course, again, our liquidity and stable funding position remained very robust, with an LCR ratio of 189% and a net stable funding ratio of 119% at the end of the quarter. Secondly, we continue to emphasize a focus on being competitive in terms of deposits. This has driven a robust growth in our core deposits, which has supported our lending growth in the period.

So in terms of the loan book, we saw a growth in the quarter of ISK 34 billion or 3.4%, which was relatively balanced between individuals and corporates. It should, however, be noted that out of this increase, just under ISK 15 billion was a result of inflation impact on our CPI-linked loans and impact on ISK depreciation of our FX loan portfolio.

We continue to see capital velocity as a key to our CIB strategy. And since year-end, we have sold just under ISK 20 billion of corporate loans to institutional investors. The loan book continues to be very well balanced between -- with 48% in mortgages, 7% in all the loans to individuals and 45% in corporates. In the near term, we are managing loan growth very closely in line with developments from the external environment as passed on the funding markets.

So just looking a little bit more closely at our provisioning position. So during the quarter, as discussed, we reflected the ongoing global economic uncertainty by making changes to our IFRS 9 economic scenario assumptions for the second time this year. We have increased the weight of the pessimistic scenario from 20% at the beginning of the year to 30% at the end of this quarter. We also increased real estate collateral haircuts in the pessimistic scenario from 40% to 45%. These changes in assumptions and net transfer from Stage 1 to Stage 2 together increased provisions by ISK 800 million. Again, these changes reflect our cautious view on the ongoing uncertainty environment and is not a reflection of what we are currently seeing in terms of key indicators of the credit quality of our clients, which continue to be on a positive -- generally positive.

During the quarter, as discussed, we also saw single name recoveries from previously written off exposures, which counters this impact in the provisioning line and the income statement. Additionally, we highlighted in this page that the Bank during the quarter implemented a new model for residential real estate collateral, which improves the quality of our credit risk assessment. This model gives a current estimate of market value and is updated monthly. So any drop in prices will immediately be reflected in the tax impairment.

The previous valuation was based on the government tax rate, tax value, which lags in time is only updated annually with a late after the fact impact on impairments and our credit risk assessment. So this change effectively makes our credit -- we believe this makes our credit risk assessment more robust going forward. We continue to see through the cycle cost of risk for the current business combination of around 25 basis points, and this has been reduced over the past years as mortgages have increased as a percentage of the total loan portfolio.

So in terms of deposits. This -- the growth in deposits has continued to be a key theme for the past year, and this growth continued this quarter. We are focused on offering competitive rates to our clients, and this will continue to be the case. Total deposits grew by 2% in the quarter and core deposits by just under 4.5%. Core deposits, which we define as a -- and deposit from individuals, SMEs and large corporates have grown by just under 15% year-on-year. Deposits now represent 60% of bank's total liabilities, up from around 50% in 2019. The loans to deposit ratio has also continued to trend down and now stands at 141%, down from 160% in 2019.

So moving on to wholesale funding. Clearly, the funding markets have been challenging over the past year. We are, however, in a very strong position to navigate these markets. We have a robust liquidity position as discussed. We have a good diversity in our funding options, and we have a light -- very light maturity profile near term. This position was further strengthened during the quarter when we finalized the EUR 300 million senior unsecured issue to refinance maturities next year. Clearly, we would have preferred to have tighter pricing on this issue. But considering the very volatile market, which has now persisted over the past year, it is a strong position to have this maturity prefinanced early. Our position allows for us to remain opportunistic in terms of issuing plans near term and in terms of pursuing profitable growth opportunities should they arise.

So looking at capital. Our position remains very strong, despite taking large steps in capital optimization over the past years. We have paid out ISK 61 billion to our shareholders since the beginning of 2021. And despite this, we end the quarter with a robust 19.3% CET1 ratio, which is 360 basis points above requirements. This position includes the foreseeing ISK 10 billion dividend payment corresponding to 50% dividend payout ratio and also the full impact of the ongoing ISK 5 billion buyback program.

As Benedikt mentioned earlier, we have made the clarification in our common equity Tier 1 ratio target. We now present a management buffer range of 150 basis points to 250 basis points which is in line with how many of our European peers present this, which we think better describes how we manage this instead of the absolute single ratio target. The ratio target, as Benedikt mentioned, will then be adjusted should the capital requirements change, for example, from Pillar 2 changes or any of the buffers. This allows for more transparency and active management taking into consideration both regulatory requirements and capital benchmarks from the rating agencies.

As discussed based on these current requirements, the buffer targets corresponds to 17.2% to 18.2% common equity targets. So at the lower end, the target is unchanged effectively. As discussed, we will manage the capital optimization carefully in the near term. We have received approval from the regulator for ISK 10 billion buyback program and currently have 50% of this or ISK 5 billion buyback program ongoing. The pace at which we utilize the remainder will be viewed near term while considering market dynamics and profitable growth opportunities. We have also highlighted on this page that a part of our surplus capital is, of course, contingent on us further optimizing AT1 and Tier 2 buckets, and we will be considering further subordinated issues near term. But clearly, these are market dependent.

So just before I hand over to Q&A, I want to again highlight some of the key themes that I see going forward. We are in a very strong position. The core operations continue to strengthen and the pipeline and strategic focus further support our earnings outlook going forward. Our capital funding and liquidity positions are very robust, and we are further strengthened by the senior issue this quarter, which leaves a very light maturity profile in the near term.

The global economy continues to add operational complexity and this needs to continue to be monitored carefully over the coming months. As Erna mentioned, the Icelandic and -- Benedikt as well, of course, the Icelandic economy is in a relatively strong position. Iceland has the opportunity to be ahead of the curve in terms of containing inflation, and we are starting to see indications of reaching terminal policy rates. The upcoming union waste negotiations are a key milestone in determining whether this position is sustainable. And should that be a case, Iceland could be in a very strong position for the economy going into next year.

Our key theme for the coming months is to retain optionality when it comes to balance sheet management, which can be very valuable in the current environment. This means that balance sheet growth and shareholder distributions will continue to be closely coordinated in the near term. Again, the group is in a strong position to navigate the current environment. We have a diverse and profitable businesses. We have robust capital funding and liquidity positions.

And on that note, thank you, and I'd like to now welcome Theodor Fridbertsson to manage the Q&A session.

[Theodor Fridbertsson, executive]

Thank you, Olafur. I would like to remind participants online that they can submit questions through the message ports on the bottom of the screen. We have a couple of questions here already. Starting on the net fee and commission income from Sveinn Thorarinsson. Net fee and commission income from lending was flat for the 9 months this year and down in Q3. How do you see this revenue stream progress into next year? Maybe Benedikt or Olafur?

[Olafur Hoskuldsson, executive]

Yes. Maybe if I start -- so this kind of income stream is a function of credit activity, including refinancing activity. And I think historically, the third quarter has been a relative -- or sort of slower month than other quarters -- a slower quarter, sorry, than other quarters, but that was not the case in 2021, which was an unusually strong quarter. But I think it's fair to assume that in the current rate environment where rates have been moving -- or policy rates have been moving higher that this activity slows. So we should be expecting this income line to be under pressure. But this also very much relies on our kind of business strategy, the capital velocity and originally to distribute the focus that we've had for CIP, which could have kind of additional lags in current environment where there could be some changes to the investment portfolios of our core clients on the back of the HFF restructuring efforts.

[Theodor Fridbertsson, executive]

Yes. Second question on the card net fee and commission was ISK 800 million in Q3. Is that seasonally high number? Or should we expect that level ongoing?

[Benedikt Gislason, executive]

If I take this as well, third quarter is usually a very travel-intensive quarter, and our clients were doing a lot of traveling abroad. But this is also impacted by, as Olafur mentioned in his presentation, the fact that post the sale of Valitor, we are now recognizing income that got lost in the consolidated treatment before. So -- and we had previously guided investors for ISK 200 million to ISK 400 million increase for this income line per quarter going forward.

[Olafur Hoskuldsson, executive]

Yes. And then just -- I mean, that the ISK 200 million to ISK 400 million is basically assuming the seasonality. So the higher range would be seen during the summer months and the lower range probably do the winter months. There is a seasonality in this.

[Theodor Fridbertsson, executive]

That concludes questions from Thorarinsson. We have one more question pending as well. You mentioned an impact of securities issued by the housing financing fund. Can you talk a little bit about that and how it will affect the capital markets in Iceland. I mean, obviously, we've discussed the impact on the back, but maybe, I guess, the question regards sort of a more background information.

[Benedikt Gislason, executive]

Yes. I would categorize current situation as restructuring efforts. This fund is obviously insolvent, but with a simple guarantee from the state, from the treasury. And these efforts will be, as indicated at the outset through consultation with creditors. And I'm sure that the plan is to try and reach a consensual resolution or agreement with creditors on the issue. If that does not -- is not reached, then there is an indication from the finance ministry and the finance minister himself that a winding up proceedings act will be required to need it into parliament to -- because there isn't any legislation around that at the moment.

And I'm sure that from a legislation standpoint, this will be then scrutinized and discussed in Parliament, if brought forward. But the -- I think the key component here is that Treasury is honoring and acknowledging its guarantee of the liabilities of the fund with accrued interest and inflation, which is considerable, and we'll honor it. I think this -- this shouldn't impact capital markets. This is an open and transparent method of restructuring this insolvent fund. And if successfully done, I think will change a bit the landscape -- interest rate landscape that will remove a considerable stack of bonds. There are relatively high yielding and also with CPI. And it will be a new reality for investors, a new interest rate environment that they need to now get through.

[Theodor Fridbertsson, executive]

Then we have a couple of questions from [ Mario Karara ]. The first one is also on the HF Fund, which I believe we have answered partly. But he asks what scenario has been assumed for the ISK 250 million impact on the Arion Bank side? And aside from this, what do you think about the situation? How do you think different parties involved see this, particularly the creditors of housing finance fund?

[Olafur Hoskuldsson, executive]

Just maybe quickly on the scenario. So basically, the ISK 250 million assumes that we take all these bonds down to par value. So I think based on their comments from the minister, that should be a very conservative assumption.

[Benedikt Gislason, executive]

Yes. And I think we've touched up on the latter part of the question. It's a complicated matter. And I think the most important thing is that it's done transparently and openly. And I'm sure that there will be some deep dive legal discussions around this as well. And we will reach the best consensual or an outcome that is -- will be disputed in court.

[Theodor Fridbertsson, executive]

And last question from Mario. I might have missed your comment earlier. Could you please remind us your funding plan for the rest of '22 and '23?

[Olafur Hoskuldsson, executive]

Yes. I mean I think I mentioned we have a very light maturity profile in next year. We actually have no maturities upcoming unless -- and we have a Tier 2 call date late next year. So funding plans will be looking at into further into 2024, '25, and being opportunistic in the market in terms of prefinancing. I think that's the -- so we have the optionality of being opportunistic.

[Theodor Fridbertsson, executive]

And then we have a question from Rahul Shah from Tellimer. Do you see potential for further buybacks next year? Or would you look to reach the CET1 target via the full year dividend?

[Benedikt Gislason, executive]

Yes. I think it's important to note that in our current capital ratio and capital calculations, we have already provisioned for a 50% dividend, normal dividend for next year. And despite that, we are currently enjoying a capital ratio, which is higher than our minimum requirements. And even with the introduction of the new management buffer, it's still above. So I would say that there is an opportunity to do that. But as always said, we will navigate this carefully and be opportunistic when it comes to weighing in different options in the market, including internal or external growth or other options in the funding market.

[Olafur Hoskuldsson, executive]

Yes. I mean I think we, of course, have -- we have a ISK 10 billion buyback approved by the Central Bank. So we have ISK 5 billion additionally, which we could put in place, but anything else has not been decided effectively.

[Benedikt Gislason, executive]

It's clear, if you look at our numbers for the past 8 quarters, the capital generation is grossly exceeding what we need in terms of our dividend policy and what we need in capital to support our credit growth. And if we are successful with the optimization plan for our Pillar 2, there will be additional room to work with our capital and distribute. We've -- since beginning of last year, we distributed around ISK 61 billion of capital to shareholders through buybacks and dividends. and that's very much continues to be part of our focus.

[Theodor Fridbertsson, executive]

The remaining buyback of ISK 5 billion, can you comment on any timing on when it will start, or else there will be any outstanding issues regarding that?

[Olafur Hoskuldsson, executive]

I don't think we have much to add on that. I think it's been approved. So we can launch it, when and if we see the opportunity. But as I think I mentioned, we want to sort of look at that carefully in combination with opportunities to utilize that capital in other ways. So if we don't see other opportunities, then we will launch it again. But there's no time line set as such.

[Benedikt Gislason, executive]

Based on kind of activity with our current buyback program, that will probably extend into well into November or even beginning of December. So...

[Theodor Fridbertsson, executive]

Yes. But there are no outstanding issues regarding the launch basically. I believe that concludes the questions online. So if there are anybody in the auditorium who would like to ask a question. Feel free. No?

[Benedikt Gislason, executive]

Yes. With that, we thank you for coming in and watching online, and we look forward to meeting you again in 3 months' time. Thank you.