Arion banki hf

ICEX:ARION

Earnings Call Analysis

Strong quarterly performance driven by insurance and robust capital positions.

The company reported a strong quarter with a return on equity of 16.1%, bolstered by record insurance profits of ISK 1.7 billion. Total operating income rose 17% year-over-year, with significant contributions from net interest income and commissions. The net interest margin remains solid, projected around 3% medium term. Despite a challenging economic backdrop, slow loan demand, and rising operating expenses of 12%, the company maintains a robust capital position, demonstrated by a common equity ratio of 18.8% and plans for higher dividends and share buybacks next year.

Solid Performance with Strong Returns

The earnings call highlighted a robust financial performance, reporting a return on equity (ROE) of 16.1% for the quarter and an annualized ROE of 12.2%. One of the standout segments was the insurance business, which achieved a profit of ISK 1.7 billion, marking its highest performance in history. The firm's overall total operating income reached ISK 17.5 billion, demonstrating a 17% increase year-on-year and a 5% increase quarter-on-quarter, reflecting strong underlying demand across key business lines.

Interest Income Outlook

Net interest income was ISK 11.9 billion, maintaining stability compared to the previous quarter, with a marginal decline in the net interest margin (NIM) to 3.1%. The management guided a medium-term outlook for the NIM to remain around 3% despite potential market fluctuations. The ongoing adjustments to fixed-rate mortgage resets are expected to continue offering support for the NIM, while inflationary pressures and heightened interest rates may introduce short-term fluctuations.

Segment Highlights: Insurance Growth

The insurance division exhibited exceptional growth, with revenue increasing by 30% year-on-year alongside significant sales to individuals, which surged by 38%. Operational efficiency was remarkable, with a low combined ratio of 70% for the quarter. The management insists on harnessing this segment's strong momentum to bolster overall earnings, reflecting its increasing weight within the group's earnings contribution.

Cautious Economic Environment

The management acknowledged prevailing economic uncertainties influenced by tight monetary policies, noting a slight deceleration in loan demand across mortgage and corporate sectors. The loan book grew modestly by 1.5% or ISK 17.8 billion, primarily driven by inflation-linked lending. However, expectations for the economic outlook have shifted, projecting a growth of just 0.5% for the year amid challenging consumer spending dynamics.

Expenses and Risk Management

Operating expenses rose by 12% year-over-year primarily due to increased personnel costs and ongoing investments in IT and insurance solutions. The management confirmed consistent provisioning practices are in place, maintaining a relatively low cost of risk at 31 basis points. This conservative approach reflects their commitment to safeguarding asset quality amid fluctuating rates.

Capital Position and Shareholder Returns

The bank's capital position remains solid, with a common equity ratio of 18.8%, exceeding regulatory requirements by 355 basis points. With successful capital management strategies, including ISK 13 billion in dividends and ISK 12.5 billion in share buybacks, the bank aims to further normalize its capital structure in the coming quarters, maintaining a commitment to enhanced shareholder returns amid favorable capital accumulation.

Navigating Future Uncertainties

Looking forward, management expressed cautious optimism about the bank's ability to navigate upcoming challenges posed by fluctuating interest rates and inflationary pressures. They underscored their diversified business model and proactive risk management strategies as essential tools for mitigating potential impacts, reiterating confidence in continuing to manage through these external economic conditions effectively.

Earnings Call Transcript 2024-Q3

[Benedikt Gislason, executive]

Good morning, all, and a warm welcome, to the presentation of our third quarter results. We're very pleased to present solid financial results for the third quarter, with a return on equity of 16.1%, and particularly pleased to see how well our insurance business, Vordur, performed in the period, delivering one of the strongest quarters in the company's history. And other segments of our core operations also performed strongly and produced excellent results.

And we delivered on all our financial targets in the quarter, except on capital, where we continue to be overcapitalized despite our efforts in recent quarters to normalize the capital stock through dividends and buybacks.

So further substantial normalization is to be expected going into next year, as we continue to move closer to a financial target there through dividends, additional dividends and share buybacks.

This year, we paid a dividend of ISK 13 billion, and have conducted buybacks of shares worth ISK 12.5 billion. And the pace for next year could be somewhat higher based on our current capital generation and taking into account new capital rules.

Going through some of the key operational highlights. As I mentioned, very strong quarter for Vordur, one of the strongest quarters in the company's history, somewhat explained by review of the liability for reported claims, which led to a higher amount released during a quarter, but still a really, really good quarter for Vordur as Olafur will explain in more detail in a few minutes.

There has been emphasis on increasing core banking revenues from corporates with new digital solutions being rolled out every quarter now. And in this quarter, the focus was on corporate credit cards with new solutions, and we're already seeing a benefit of that in terms of growing revenues.

Assets under management continue to grow, and we have taken steps to upgrade our Premia services emerging the private banking services with the asset management services under the Premia brand, and there is good momentum in that business.

On my final slide, I'm going to mention new financing frameworks, which will enable us to focus more on green initiatives and sustainable projects. We upgraded our financing framework to include sustainable financing in that framework, with particular focus on social projects, which include affordable housing, education, healthcare.

And also, we reinstated our cooperation with the European Investment Fund, which we previously worked with 8 years ago and signed a new agreement, which enables us to provide financing at more favorable terms into green, digital and sustainable transformation of the economy as well as into cultural sectors.

And obviously, these 2 frameworks enabled us to further support, as I said, both the sustainability focus of our credit operations and green initiatives.

Before I hand over to our Chief Economist, who will go through the economic outlook and current situation, I just want to highlight, and I believe my colleague, Olafur Hoskuldsson, CFO, will also explain that. But with policy rates and inflation coming down, and not necessarily in tandem, you could expect to see more volatility in our net interest income. But at the same time, I think it's important to highlight that, obviously, this trend is quite supportive of other income lines in our income statement.

And with that, I hand over to Erna Bjorg.

[Erna Sverrisdóttir, executive]

Thank you, Benedikt. Good morning, everybody. It's great to be with you all here today. It is currently 2 degrees and raining here in Reykjavik, so honestly, it is not that much different from the summer, which was, according to the Icelandic Met Office's report, relatively cold compared to the summers of this century, with few warm days and rather unfavorable weather.

So unsurprisingly, Icelanders fled to warmer countries, making August one of the biggest August on record for Icelanders traveling abroad. To top it off, it was also one of the biggest August in terms of spending abroad. So in total, Icelanders' payment card turnover increased by 3.7% between years in the third quarter in real terms. Normally, this would indicate a solid increase in private consumption. But as you can see on the graph beside me, the predictive value of payment card turnover has decreased recently despite extensive improvements in data collection.

And this was especially clear in the second quarter when private consumption caught analysts by surprise and decreased by 0.9% between years, at least, according to preliminary figures. In addition, service exports declined by 10% resulting in a 0.3% drop in GDP in the second quarter.

Now, some of you might have noticed that I used the word preliminary figures. And I can't stress this enough, because I can almost guarantee that these figures are going to be revised upwards in the coming quarters, as has been the case recently.

One of the main reasons why analysts, including the Central Bank, have called the most recent figures into question is the disconnect between economic growth and the increase in labor input. And this was especially clear in the second quarter, and this indicates a quite strong GDP growth in the third quarter.

However, there is no doubt that economic activity has lost pace, and over the last few months, analysts have revised their economic forecast downwards with a consensus now at 0.5% growth this year, followed by a 2% GDP growth in 2025. And this is quite a change from the spring publications, which is mainly due to weaker private consumption growth and challenges in the tourism industry.

Now, as I mentioned earlier, the case of private consumption, it is quite a curious one. Even though payment card turnover indicates quite significant private consumption growth in the third quarter, other high frequency indicators point to the different directions with Icelanders' overseas travels remaining steady between years and households growing more pessimistic. In our latest economic outlook, we expect that private consumption will continue to have its ups and downs, increasing by 0.6% this year and 1.3% in 2025.

And tight monetary policy plays a crucial role in this context. I'm not going to say that households haven't felt the rate hikes, but they have been sheltered by inflation index mortgages, and that situation has changed dramatically in the past weeks, as inflation index mortgage rates have increased significantly, and structural changes in the credit market have caused borrowing terms to tighten.

And this enhanced transmission of monetary policy to households could have a notable impact on housing market activity, with some expecting real house prices to decline. However, the effects remain to be seen, as seismic activity and increase in population have driven up demand for housing, while the supply side has failed to keep pace.

As for the tourism industry, it is currently facing significant challenges, even though visitor numbers have remained steady between years, each tourist is staying for a shorter period of time and spending less than before. Although, we don't agree with the notion that the country has fallen out of favor, the data simply does not support that claim, we cannot overlook the fact that Iceland is an expensive destination. Labor costs are high, and that diminishes the country's competitiveness.

I would say that we are moderately optimistic, expecting just under 2.2 million tourists to visit the country this year, which is a slight decrease compared to previous year. However, the outlook for next year has deteriorated, mainly due to challenging operating conditions for the Icelandic Airlines, which means that we are only expecting minimal growth in visitor numbers next year, depending on flight availability to the country.

And this challenging environment is reflected in the labor market, where demand for labor in the tourism industry has decreased between years, which brings us to one of the clearest signs that economic activity has eased, because although labor demand is still strong, there are clear signs of a slowdown as job growth has lost pace and registered unemployment has continued to inch upwards, measuring 3.3% in September.

Furthermore, staff shortages have subsided, and according to the latest survey, firms have scaled down their hiring plans. So we are finally -- you could say that we're finally seeing clearly the impact of high real interest rates on the real economy. And high real interest rate is something that we should expect going forward as inflation continues to fall.

Inflation measured 5.1% in October, and has fallen faster than anticipated. However, in this context, I must mention that headline inflation does not fully reflect underlying inflationary pressures as one-off items stemming from government measures had significant impact on inflation in the third quarter. As a result, underlying inflation has not tapered off as quickly as headline inflation.

Still, we are seeing that inflation is coming down faster than anticipated. There are clear signs of slowdown in the labor market, and inflation expectations have been moving in a favorable direction.

So the Monetary Policy Committee has started to cut interest rates, with the first step taken early October, when the committee decided to cut rates by 25 basis points. Further rate cuts are expected in November, despite increased political uncertainty.

However, as underlying demand pressures have remained quite strong, most anticipate cautious steps from the committee and tight monetary stance with real interest rates somewhere around 4%, and that is, of course, really high, and could pose a significant challenge for the economy going forward.

With that, I would like to welcome Olafur Hoskuldsson, our CFO, to the stage. Thank you.

[Olafur Hoskuldsson, executive]

Thank you, Erna, and good morning, all. So now looking more closely at the results for the quarter and starting as usual with the highlights.

So overall, as Benedikt mentioned earlier, a strong quarter, 16.1% return on equity and all -- good traction on all key line items of the income statement. This then contributes to 12.2% ROE for the year.

A key positive, again, was a strong delivery from our insurance business, which had a standalone profit of ISK 1.7 billion, which is the highest in the history of this business. The net interest margin also remains at the upper end of our guidance. But as highlighted, and Benedikt highlighted earlier, and we have highlighted in previous calls, the significant shifts in inflation and interest rate environment have the potential to enhance fluctuations in this line item in the coming months, while the medium term outlook remains intact at 3% level.

And finally, and of course, always very importantly, our capital, funding and liquidity position remains very robust, and we continue to manage our loan provisioning conservatively in the current elevated rate environment.

So looking more closely at the income statement. Total operating income in the quarter was ISK 17.5 billion, which is up 17% from the third quarter of last year and 5% from the second quarter of this year. Net interest income increased by 9% between years and commission income by 1%. Insurance service results were, as mentioned, very strong in the quarter, at ISK 1.5 billion, or up from ISK 0.5 billion for this quarter last year.

Financial income was around ISK 500 million, which is solid compared to previous difficult quarters in this line item. And the core parts of the financial income line, namely the investment business on the insurance side and our market-making business in the banking side had actually a very strong quarter. There were, however, some countering impacts from other areas, such as markdowns of unlisted equity holdings.

We then had the revaluation of a development asset in the quarter, which explains the ISK 300 million negative line item in the other operating income line. This relates to the old silicon metal plant in Helguvik, where we are in a dialog with a number of parties for the sale of the plot for development of other alternative uses of the land and infrastructure in place.

Operating expenses increased by 12% between years with seasonality, usually meaning that Q3 is a seasonal low in this line item. Impairments were then somewhat up from the previous quarter at ISK 950 million, which represents a cost of risk of around 31 basis points, which is in line with our previous guidance.

The effective tax rate was then 21% with some positive impact from income from equities which is non-taxable. Net profit, therefore, ISK 7.9 billion, which takes the net profit for the year to ISK 17.8 billion.

And now looking more closely at some of the key line items, and starting with net interest income. Net interest income was ISK 11.9 billion, which is roughly flat from Q2, while the margin was slightly down at 3.1%. I think it's fair to say that there are a number of moving parts with net interest income in the near term.

Firstly, as Benedikt outlined -- or actually, firstly, of course, as we have outlined before, we have the ongoing resets of the fixed rate mortgages, which were lent out during the low interest rate environment. This continues to be a tailwind for the NIM and will continue to do so for the next year.

There are, however, other headwinds. And as Benedikt mentioned, firstly, the inflation imbalance that has increased over the past year, where inflation-linked loans have become more popular. This effectively means that we have an increasing part of our CPI-linked loan portfolio is being funded by non CPI-linked deposits.

In general, of course, there is a good correlation between inflation and interest rates through the cycle, and so we are, in general, comfortable with an imbalance in this area. However, during the rate reduction phase, we can see a period of temporary discrepancies between inflation, which could fall sharply, like it is in the current environment, and nominal interest rates, which moved slower in line with the Central Bank actions.

This can result in periods where the margin of these loans become compressed for short term, when real rates are extremely elevated. However, the majority of this imbalance is in the form of floating rate loans. So we have the option of adjusting these rates in line with rising real interest rates. And this, for example, was done during this quarter to manage and protect net interest margin.

We also have the option of hedging some of the CPI-linked exposure through CPI-linked swaps, and this is being considered. Again, I think it's fair to say we have the tools to manage this potential headwind, and are comfortable with the position through the cycle. But as highlighted, this can potentially mean more fluctuations in the NIM between months and quarters. But again, we have the tools to manage this headwind and are comfortable with the position.

The other headwind, I think I mentioned in the previous quarter was the increase from the Central Bank of the interest-free reserves from 2% to 3% earlier this year. This lowers our interest income per quarter by around ISK 200 million. So we continue to guide to the interest margin being around the 3% area over the medium term.

So looking at fees and commissions. Total fees were ISK 3.9 billion in the quarter, or roughly flat from the previous quarter. Most fee-generating units performed well in the quarter, with lending fees and cards, particularly strong. Asset management also continues to provide solid stability in earnings and continues to grow assets under management, which now stand at ISK 1,580 billion, or roughly the size of the balance sheet of the group.

As discussed in Q1, the annual comparison needs to be taken into consideration that there was a reclassification of card insurance and the closure of the Keflavik Airport branch earlier this year, which means there's a ISK 320 million of fees for the last -- for this quarter last year, which is now not in this line items. So adjusting for this, we actually had a very good positive growth of year-on-year.

So as Benedikt outlined, I think it's fair to say that our insurance business had a very strong third quarter, where standalone operations had a net profit of ISK 1.7 billion. Revenue growth also continues to be strong, with revenues increasing by 30% year-on-year, which is in line with the growth trajectory we have seen over the past years. Also, very importantly, of course, we have very good traction in terms of new sales, where sales to individuals, for example, increased by 38% year-on-year.

Claims were also favorable in the quarter, following difficult claims period for example, last year. The headline claims and reinsurance ratio was 54%, but this does includes a reserve release of around ISK 400 million related to review of our technical provisions. So excluding this impact, the ratio will still be very strong at 65%.

So the combined ratio in the quarter was low and therefore, 70%. And for the first 9 months of the year 87.4%. This is, of course, as we talked about before, a seasonal business where normally Q2 and Q3 are strong -- seasonal strong quarters and we generally see weaker Q4.

But we are very pleased with momentum in this business which continues to increase its weight in the overall earnings contribution of the group, which we of course outlined in our Capital Markets Day earlier this year.

So looking at operating expenses, including those from the insurance business. Total operating expenses were ISK 6.8 billion, which is up from around ISK 6 billion for the third quarter last year. Growth between years is somewhat impacted by line items or annual line items -- cost items that fell between quarters this year and costs from redundancies in the quarter.

The increase in FTEs is mainly due to IT, personnel and insurance business, which is, of course, an investment area for the group and which has grown significantly over the past few years. But like I always say, we generally continue to manage expenses conservatively while maintaining the investment commitment that we outlined in our Capital Markets Day in March.

So moving on to the balance sheet and starting with the loan book. Loan book grew by 1.5% or ISK 17.8 billion in the quarter. Out of the total loan growth, around ISK 3 billion is because of inflation impact on our CPI-linked lending book. But in general, I think as Erna sort of outlined, I think the environment is slowing. So we are seeing slowing demand both on the mortgage and corporate side. But we continue to see good profitable growth opportunities. And as before, we are dynamic and utilize our strong balance sheet to grow where -- when and where we see opportunities in that area.

We also continue to work with private credit partners to originate a syndicate lending business to enhance the capital velocity and utilization of our balance sheet. During the year, we sold ISK 17 billion of corporate loans, which is just under 2x the amount sold for this period last year.

And also related to this, our fund management business is in the process of funding our third Icelandic private credit fund in the market. The loan book continues to be well balanced with 48% mortgages, 5% other loans to individuals and 47% loans to corporates.

So looking at our provisioning position, impairments in the quarter were ISK 950 million, which represents a cost of risk of 31 basis points, which is what we have been guiding to in recent quarters. Total loss allowance at the end of the quarter is just under ISK 10 billion or 0.8% of the loan book. But in general, the theme is very similar to what I've described earlier. We are seeing a slight -- the credit -- all the credit indicators are very strong, but we do continue to see a slight trend towards higher rate of payments past due.

As we have highlighted before, we took proactive and conservative steps in the beginning of the rate hiking cycle to increase our IFRS 9 model-based provisioning. And even though the rate reductions process has started, rates are, of course, still very high and the time line of the normalized rate environment remains unclear. And we, therefore, retain a conservative stance in terms of provisioning at this point in time.

We continue to see through the cycle expected loss of the loan book of 20 to 25 basis points, and for the next 12 months, potentially slightly higher or around 29 basis points based on the current loan book composition.

So moving on to deposits. Deposits were relatively stable between the quarters at just below ISK 850 billion, which represents 62% of liabilities. As we have discussed repeatedly in previous quarters, our strategy in this area is to be competitive in stable categories of deposits. And as you can see on this picture, the growth in this -- for this year has been in these categories.

So moving on to wholesale funding and ratings. Clearly, the highlight during this quarter on the funding side was the successful U.S. dollar AT1 issuance, where we refinanced and upsized our call date that we have in early 2025 and optimized our AT1 capital position, which is, of course, a key element to be able to optimize our common equity stack.

We also concluded a senior preferred issue in Norwegian kroner and Swedish krona at the tightest spread that we have seen for a number of years.

Another positive, of course, during the quarter was also the upgrade from Moody's of our rating of our covered bond program, which are now Aa1 rated. This is, of course, a clear positive for our funding going forward.

And looking at capital, our position, of course, remains very strong with a common equity ratio of 18.8%, 355 basis points above requirements. This, as normally, we include the foreseen dividend payment corresponding to our dividend payout strategy of 50% of net profit for the period.

As we discussed last time, we had an exercise period of outstanding equity warrants during this quarter. The exercise of those warrants increased the capital by around ISK 6 billion, but we had an offsetting additional buyback during the quarter of around ISK 5 billion, which netted most of that impact out.

So based on our management buffer target, we currently have a surplus equity of around -- up to ISK 20 billion. But as Benedikt outlined earlier, we also expect some net positive impact from the CRR3 implementation, which will be effective from Q1 next year. This is an ongoing dialogue with the regulator, but at this time, we anticipate that the increase in surplus capital could be around ISK 5 billion.

So we are, as always, committed to the medium-term targets of capital optimization, and we'll continue to manage towards this through a combination of shareholder distributions and balance sheet growth where appropriate. Leverage ratio, of course, continues to be very strong at 12%. And in terms of MREL, we have a very strong position with a 6% buffer above requirements.

So before I hand over to Q&A, just highlighting some of the key themes going forward. We conclude a very strong quarter with momentum in all our key earnings drivers. Our diverse businesses and strong and mature market position in all key business areas, combined with a very robust balance sheet, continues to mean that we are in a very good position to navigate the current external operating environment.

The key challenge, of course, continues to be the -- to involve the external rate and inflationary environment. But we have, as outlined, the tools to navigate this and are confident and positive regarding the through-the-cycle outlook.

And finally, and of course, always importantly, our capital liquidity and funding position remains robust and allows for optionality in terms of balance sheet management near term.

So on that point, I'll hand over to Theodor Fridbertsson to manage the Q&A session.

[Theodor Fridbertsson, executive]

Good morning, everyone. I would like to start saying to the participants online that they can still -- you can still submit questions through the platform. And as usual, I think we'll start with a few questions already submitted online before we move on to the auditorium.

So starting off with the first question, is there any new update on the legal case on variable rate mortgages? How confident are you about the positive outcome for the bank, given that you don't expense anything in relation to the case in the accounts? Maybe Benedikt.

[Benedikt Gislason, executive]

Yes. So our position there not to expense or make any provisions against this claim is based on a thorough legal review. So when this case was brought forward in 2020, we did an extensive review of the contractual terms and all of the interest rate decisions behind the sort of changes in variable rates. And the review concluded that its terms met legal standards and industry norms, emphasizing transparency and compliance.

This was then later confirmed in a district court ruling. 2 of these cases were then brought up to an EFTA -- sort of opinion sought by the EFTA Court, which were nonrelated to us. And our argument there is that -- and with an unfavorable opinion towards Landsbankinn and Islandsbanki, our opinion there is that our variable interest rate terms differ significantly from those 2 cases brought to the EFTA Court ruling.

And then -- but after that sort of opinion was sought, we got an independent opinion commissioned, which reaffirmed basically our view and explains why we haven't made any reserves, and we think this lawsuit lacks substantial merit and it's based on this legal review. But also, I think it's important to note that the competitive market landscape as well provides for a high degree of flexibility when it comes to refinancing mortgages at the low cost if clients are unhappy with the changes in variable rate.

[Theodor Fridbertsson, executive]

Thank you. Next question to Olafur. Can you provide any further guidance on the near-term NIM outlook sort of, I guess, for the next 2 or 3 quarters?

[Olafur Hoskuldsson, executive]

Yes. I mean I think as outlined in the presentation, I think the sort of near-term market expectation around inflation is that we will probably have very low inflation in the next couple of quarters, at least. And given, like I said earlier, the CPI imbalance, that is a headwind for our NIM. But we have tailwinds as well from the resets. We have been reducing deposit rates recently.

And so -- and then we have the tools that we are, of course, always looking at to increase floating rate CPI-linked loans, which if the real rates are extremely elevated, that's a natural action for the bank to take, but we are, of course, in a competitive environment. So that obviously needs to be taken into consideration as well. But I think the guidance is around 3% area. I think it's potential that we will go below the 3%. If that happens, there will be a short-term impact, and we are very confident being around 3% or above over the medium term.

[Benedikt Gislason, executive]

But I think it's important to note that other income lines in an environment where inflation and policy rates are coming down should be trending favorably. We've had a great deal of headwinds when it comes to financial income, and other income as well has been sort of slow this year despite the progress with our land development projects. So I would expect that we would see some tailwinds there in this scenario.

[Olafur Hoskuldsson, executive]

Yes. I mean, this quarter demonstrates the importance of having a diversified business, and we're showing insurance coming strongly into our income statement. And financial income, like I said, has been difficult in that business for a number of quarters. But if rates cut and inflation starts coming down, that's going to be a positive.

We also talked about -- we have been conservative in terms of provisions. If inflation and rates come fast down, that should support our clients and support asset quality as well over the medium term. So there are a number of moving parts. So it's difficult to give a more complete answer than that, I think.

[Theodor Fridbertsson, executive]

And the third question, do you intend to continue returning capital to shareholders through buybacks for the remainder of the year?

[Benedikt Gislason, executive]

Yes, I think it's -- we're very committed to delivering on this financial target and capital distribution will continue. That's the best guidance that we can give at this point in time. But I'm sure that any requests that we submit will be taken favorably on the back of our strong capital position.

[Theodor Fridbertsson, executive]

It looks like that concludes the questions from the online participants. So we move on to the auditorium. Any questions from here?

[Unknown Analyst]

[indiscernible].

[Theodor Fridbertsson, executive]

Yes. Maybe repeat the question. It's about cost of risk guided for the next 12 months at 29 basis points. And given the slowdown in the economy, what is the risk of that sort of increasing?

[Benedikt Gislason, executive]

And policy rates coming down. So the question was effectively, could the cost of risk for the next 12 months be lower.

[Olafur Hoskuldsson, executive]

Lower. Yes. I think there's 2 different dynamics. Yes, inflation and interest rates probably coming down, but we're also seeing unemployment go up. So I guess we're just in a very -- we're at very elevated rates. And until now, the economy has managed this very well. But, no, there is a lot of uncertainty still, and that's why we remain conservative, and this is our best guess. But there is potential upside there, yes, if the economy manages through this favorably.

[Benedikt Gislason, executive]

Yes. But I think it's important to flag that sort of consumer finance or sort of non-mortgage related lending to individuals has not been showing any growth and actually, it's been contracting not only here, but for the banking system as a whole. So majority of our financing towards individuals are mortgage-related, which on average have low LTVs. Regulator has been quite conservative when it comes to sort of controlling this business through rules and regulation. And that has showed itself in sort of low debt of households, both from a historical standpoint, but also in an international context.

So I would look at the sort of the consumer finance or the consumer lending, collateralized and non-collateralized, as relatively low cost of risk at this point in time. And you will see in our accounts the kind of the estimated cost of risk that we have for different portfolios within that book.

So to summarize that, I think it will sort of be more a factor and a function of how corporates will sort of survive or sort of develop through this extended period of high interest rates, high policy rates.

[Theodor Fridbertsson, executive]

Any other questions? No. And I think this concludes the session for today. We thank you all for attending, and see you after 3 months. Thank you.