Arion banki hf

ICEX:ARION

Earnings Call Transcript 2021-Q4

[Benedikt Gislason, Chief Executive Officer]

Good morning. I would like to welcome everyone to this webcast presentation of Arion Bank's fourth quarter and full year results for 2021. My name is Benedikt Gislason, I'm the CEO of Arion. And today, with me presenting will be Erna Björg Sverrisdóttir, our Chief Economist; and Olafur Hoskuldsson, our CFO. I'll be starting by going briefly over the kind of main events of last year and the outlook for our business this year and in the next few years. And then Erna Björg will go through the economic outlook before Olafur goes in detail into the financial accounts. But -- it's fair to say that Arion Bank performed well in 2021. We reached all of our financial targets for the year. And that despite the fact that the global pandemic continued to have an impact on the economy. We had a double-digit deposit growth and loan growth in the year. And with the net increase, if we adjust for the refinancing activity, of $85 billion or 23% in the year. Implementing the bancassurance model, we believe, will enhance and diversify the range of financial services that our customers cannot obtain from Arion Bank, and this is going to position ourselves as a leading one-stop shop on the financial -- Icelandic financial services market.Now if we look to operational excellence in the year, we formed a new division within the bank customer experience to place customer experience at the heart of all of our banking services. We updated our equality and human rights policy with clear objectives and introduced a special provision for paternity/maternity leave to further balance the position between the genders. And it's fair to say that performance-based incentive scheme and the sheer option plan further aligned the employee interest with those of the bank, and provided for a relief on rates inflation in the year and connected obviously, wages better with performance.On the balance sheet side, we released capital through buybacks and dividends of ISK 31.5 billion in the year. That is roughly 20% of the market cap of the bank at the beginning of last year. And we also did some -- or made some progress on the funding side, especially with the entry into the euro-covered bond market, where we had our inaugural covered bond -- euro-covered bond issued. The first actually that an Icelandic Bank has done at a very favorable rate, which further improved our funding position. But we also made progress on the Green Financing side. I'm going to illustrate to you what we did in terms of delivering sustainable banking services. So in keeping up with our environment and climate policy, we placed a special emphasis on green financing. And during last year, we released our first green financing framework which applies to both lending and funding at Arion. And you can see from this slide how actually funding and lending compare favorably in size. And we identified around 3,000 green projects under this framework, which consists of green buildings, energy efficiency and sustainable fishery and agriculture and then other industries. And we've made new targets for the end of this decade, where we want to see this ratio at 20%.And here, on the right-hand side of the slide, you can see some of the kind of numbers for the activity of last year. And this obviously is an important tool for further improving our funding cost because our green bonds have been priced more favorably than senior unsecured. Now towards the end of last year, we updated our financial targets. We lifted the ROE target, which was previously at 10%, as I said earlier, up to 13%. And then we adjusted slightly our loan growth target, which is now set to be in line with nominal economic growth, which, as Erna will explain, is expected to be considerable this year. And then we introduced a new target for the insurance premium growth, highlighting our focus on bancassurance, where we aim to increase the market share of Vördur, our insurance company going forward. If we look at our proposed dividend of ISK 15 per share, that represents a 79% payout ratio, which effectively is the 50% payout ratio that we have as one of our financial targets, plus, which is part of the financial target to release some of the surplus capital through dividend payments. So you can effectively say that 29% are due to capital optimization.And this capital optimization, we continue -- we'll continue to focus on this year and next year. And that leads me to the final slide in my presentation, which is kind of forward-looking slide, providing some insights into kind of our business plan for this year and the coming years. Last year was exceptionally strong and core earnings continued to move higher, but it was also favorable because of reversal of provisions which we think will now normalize this year. We won't see the kind of the same windfall through our income statement as we did last year. And then market activity was good and markets were good. So we're not expecting kind of the same level of financial income this year as last year.But on the flip side of that, we were operating last year, at least half of last year in a fairly low rate environment, and it was only in May when we saw the policy rates starting to move higher. And we will see a positive impact on that coming into this year. But the main or sort of one of the key pillars to delivering a 13% ROE for the year and higher in the coming years will be to continue to normalize our capital structure to the 17% CET1 ratio. Further built on the strength that we have already created within the CIB operations and throughout our platform, the bancassurance investment that we -- or a journey that we are on, we think we will start capitalizing on that as soon as early next year. And then obviously, keeping a close focus on costs. We are making a special investment this year into IT and customer experience to further support for example, the bancassurance journey, but also to rationalize better our IT platform to be able to run it more efficiently in the coming years. So this is a kind of a one-off investment that we expect to reduce operating costs in the coming years. And with that, I'm going to hand over to having given you the outlook of our business for the next 2 years. There is a bullet here about the economy, and we're saying that we delivery will be operating in a strong economy in this year and years to come. And to explain that, our Chief Economist, Erna Björg, is going to present to you the macroeconomic outlook.

[Erna Björg Sverrisdóttir]

Thank you, Ben. Good morning, everybody. It's great to be with you all here today. Now I'm not known for being brief especially after pandemic and almost feels like you're talking about a different economy each and every day. But I promise I'll try to stick only to the main points. So in short, the Iceland economy is on the road to full recovery with domestic demand behind the wheel. The economy is set for a strong growth this year with the consensus forecast among domestic analysts at 54% growth followed by 2.8% GDP growth in 2023.Now of course, it goes without saying that one of the most important assumption for these forecasts is tourist arrivals, how many people will actually visit the country. And the outlook still remains highly uncertain as it depends on the path that the pandemic takes and how governments respond. And we here in Iceland, we've been rather lucky as we've enjoyed relatively soft measures despite a surge in new COVID cases as over 80% of the population, 5 years and older is fully vaccinated. But the situation, it varies between countries and the Omicron variant has had and could continue to affect demand for travel, the slowing down recovery, especially in the first quarter of this year. But we are definitely on the right path. And in the second half of last year, we welcomed over 600,000 tourists, which is roughly 60% of tourist arrivals in the second half of 2019. And I'm fairly optimistic I believe that Iceland as a tourist destination has the means to grow at a relatively quicker rate than many comparable countries due to its lush area, pristine nature, it's safe and more importantly, it is accessible. And the news coverage of the past few days and weeks, they support this as demand for travel seems to be increasing again and the airlines are seeing strong booking trends. So hopefully, the Omicron variant will only be a slight bump in the road.Now the tourism industry, it is a very labor-intensive sector. So the industry's recovery has provided considerable support to the labor market. But tourism isn't the only sector that is hiring. Actually, it's very far from it. In the fourth quarter of last year, jobs have increased by over 20,000 between years cross sector. And actually, the situation on the labor market has exceeded all expectations, unemployment has more than half and reached prepandemic levels much sooner than anticipated. And this situation on the labor market coupled with real wage growth, housing price increases. This has laid the foundation for a very strong private consumption. And actually, for the past year or so, we have repeatedly seen record-breaking payment card turnover figures, most recently in this December. So overall, as you can see on the slide here, the Icelandic economy is surely regaining its footing. Domestic demand is strong, driven by private consumption, business investment. The outlook of foreign trade is positive. Tourism is recovering, Capelin returning in large quantities and other industries, for example, the intellectual property sector are going from strength to strength. But unfortunately, life is not a bed of roses. And as other economies, we are facing some major challenges this year. First of all, housing prices have risen sharply increased by 18% between years in the last quarter of last year. And at first, the price increases were driven by rate cuts. But now housing shortage plays a more prominent part. And in fact, at the end of last year, just over 600 properties were advertised for sale in the Reykjavik area, which is the smallest number ever recorded. So even though nominal wages increased by 8% last year, housing prices increased at a much faster pace, a development that surely will be 1 of the main topics in the coming wage negotiations. Now house prices, as you can see here on this graph, house prices are currently the main driving force behind inflation. Inflation measured 5.7% in January, well over the Central Bank's inflation target and roughly half of it can be attributed to housing prices. At the same time, we are seeing domestic inflationary pressures increasing and the first signs that imported inflation is picking up. And that is only slightly offset by the recent appreciation of the ISK. Thus, inflation is expected to remain more persistent or be more persistent than previously forecast. And even though most analysts expect that inflation will peak in this quarter, it will still remain well above the Central Bank's inflation target in the near future, and the risk is still tilted to the upside. But this is a pretty strange situation, not here in Iceland, but in the world because for the first time in a very long time, inflation is not a uniquely Icelandic problem. The U.S. is battling high inflation, U.K. I mean even the Euro-zone has inflation above 5%. Certainly, everybody is talking about rate hikes and tapering. And I was going to say that we are no different, but that would be a lie because we are slightly different. First of all, the Central Bank's QE program, it was miniscule. The Central Bank or Treasury bonds were ISK 22 billion, which is less than 1% of GDP. So you can't really talk about tapering here in ISA because it just doesn't apply. Second, the Central Bank of Iceland was actually one of the first Central Bank to raise interest rates with the first rate hike announced in May last year. Now in 2020, rates were lowered to 0.75%. They are now at 2.75% following yesterday's rate hike.Now the Central Bank has also lowered the maximum LTV on new mortgages, introduced a maximum debt service to income ratio and increased the countercyclical capital buffer and financial institutions. So monetary tightening has well and truly begun in Iceland. And further rate hikes, they are expected, but this is a tricky path that we are on and one that we are not very familiar with. Because this time, the share of non-index mortgages is at an all-time high, and the same could almost also be said for variable rate loans, which means that the monetary policy is much more effective than I think it has ever been before. Now also, at the same time as the Central Bank is hiding the monetary policy, the government is running an accommodative fiscal policy and it needs to finance a considerable fiscal deficit this year. And actually, as you can see here in the years to come according to the 5-year plan, so it kind of feels like the Central Bank has gone 1 way and the government will certainly not in the same path at least as a Central Bank. So there's also a risk as a government is still now that the government will crowd out private investment in its search for capital. And that is a worrying thought as business investment has finally picked up following a 3-year plan and increasing housing investment has probably or seldom never been as important as now.Now I promised you I would only stick to the main points, so -- but just before I welcome Olafur to the stage, I would like to just briefly summarize. The economy is on its way to full recovery the outlook is bright, tourism is on demand, other export sectors are flourishing, unemployment has reached pre-pandemic levels and domestic demand is surging. But we have a very challenging year ahead of us. Inflation is high, housing market is tight and we have a very difficult wage negotiations in this fall. However, if we play our cards right, if the government, the Central Bank and the labor market come together to ensure stability, the economy should be in a very enviable position. So I'm going to stop here today. Thank you all for listening. I would like to welcome Olafur Hoskuldsson, our CFO, to the stage. Thank you.

[Olafur Hrafn Hoskuldsson, Chief Financial Officer]

So thank you, Erna, and welcome again, all to this earnings call for the fourth quarter 2021. So now for the numbers. As I normally do, I want to first start off by highlighting some of the key themes from the fourth quarter. And firstly, as of course, Benedikt mentioned, we're very pleased to present another robust quarter in terms of core earnings momentum and profitability. Return on equity for the quarter was 13.4%, which completes a very strong year with an ROE of 14.7%. Very importantly, like also Benedikt mentioned, this is a result of all our business lines producing a return on equity above our targets. And this, of course, greatly supports our strategic flexibility going forward.We also continue to see a strong lending pipeline with a robust 13.8% growth in the loan book this year. Second, a clear positive trend that continued this quarter is the strength of our fee business. Fees and commissions were over ISK 4 billion this quarter and have now produced growth for 6 consecutive quarters. And third, in terms of the net interest margin, a combination of a reduction in the surplus liquidity and growth pickup in the corporate lending, followed by a normalization of the policy rates, we see positive momentum there as well. So for theme, there are a couple of items related to operating expenses this quarter that I wanted to highlight. First, of course, a key management tool that we have discussed before is the revision of our employee incentive scheme. Our scheme is constructed around the overarching KPI of achieving an ROE higher than weighted average ROE of our competitors. So with the economic uncertainty this year, we have not accounted for this being achieved until now when we've seen the full year results of our key competitors. We have therefore accrued for a payment related to this scheme now in the fourth quarter based on the performance metrics at year-end. The scheme remains a very important tool going forward, both in terms of aligning interest of our stakeholders as well as managing pressure on fixed pay, which, of course, will become even more important in the current inflationary environment. Secondly, moving into this year, we are looking to build on from the strong operational momentum to further strengthen our competitive position. And for this, we have earmarked an investment of up to ISK 1 billion into specific customer experience and IT infrastructure projects. And finally, we are pleased to propose a dividend for the year of ISK 15 per share to our shareholders. And this is another very important step in our capital optimization effort with our common equity Tier 1 moving closer to our target level. So moving looking more closely at the results for the quarter. So net earnings for the period of ISK 6.5 billion, representing an ROE of 13.4%. As outlined earlier, this includes a ISK 1.5 billion accrual of the employee incentive scheme and excluding this impact, net earnings are ISK 7.6 billion with an ROE of 15.7%. We continue to see strong growth in core income, which increased by just under 15% year-on-year with increased -- as I said, increase in fee income, the main generator for this growth. And this robust fourth quarter concludes what has been a very strong year for the group. Net earnings for the year were ISK 28.6 billion, with an ROE of 14.7%. Core income grew by 9.4% over the year with a very strong year for fees and commissions, of course, producing ISK 14.7 billion in revenues, which is a 26% increase from the previous year. At the same time, operating expenses decreased by 1% for the year and close to 4% looking at the quarter year-on-year. So the fourth quarter -- compared to fourth quarter last year. So in terms of net interest margin, we are starting to see an upward trend in recent months as we reduce surplus liquidity for example, through the buyback program and lending growth picking up on the corporate side, along with the rising policy rates, which are now moving away from the historical low levels. The net interest margin for the quarter was 2.8%. Based on the current outlook, we are anticipating the margin to trend towards the upper end of our guidance over the coming year. The growth pickup in corporate lending is then reflected in an increase in the credit risk over the past couple of quarters, while net interest income over credit risk has been on a positive trend. Now looking at fees and commissions, which continue to be a strong positive for the group. In line with the trends described in our Capital Markets Day, fee generation has continued to grow, and we saw fees above ISK 4 billion in the fourth quarter. As before, the diversity in our fee-generating businesses has supported this development. The CIB business continues to deliver on its revised strategy, and the pipeline there remains strong, both on the lending and advisory side. Capital Markets had a very strong quarter and ended up having the highest market share in Iceland for the year when looking at total turnover for equities and bonds. And we are also currently seeing a very strong development in income from our FX trading business. Asset Management also had a very strong quarter and has now delivered just under 20% increase in assets under management this year -- or last year. And finally, transaction fees in the retail business are picking up and expected to gain further momentum as the economy returns to a level of normality. We continue to see our fee generating businesses and insurance as growth areas for the group. And it is pleasing to see that this is being demonstrated in these income streams now covering 70% of operating expenses, which is up from 50% a couple of years ago. Looking at our insurance business specifically, we're continuing to see a strong trajectory, the return on equity for the company Vördur over the past year, exceeded 25%, which is in line with the ROE over the past few years. Net profit for the company was $2.5 billion. As we have outlined before, we see significant opportunities in enhancing this business through closer collaboration with the product group. We, therefore, aim to continue the strong growth of this business, which grew in terms of premiums of just under 12% last year. Financial income, again, was driven by the investment portfolio within the insurance business, which delivered roughly 50% of the ISK 1.2 billion in financial income for the quarter. This portfolio within the insurance business now stands at ISK 25 billion and will increase as we continue to grow this business going forward. In terms of operating expenses, we have, over the past year, made significant strides in enhancing the efficiencies of this business. This has been demonstrated for an example, in fewer employees and considerable efficiencies in the housing costs. We ended the year with a strong cost income ratio of just over 44%, below our 45% target. Clearly, operating expenses for the quarter are impacted by the ISK 1.5 billion accrual of the employee incentive scheme as highlighted earlier. It is, of course, important to emphasize that this is a variable cost and future expense will be tight to required operational outperformance in coming years. Excluding this impact, total expenses in the fourth quarter are down just under 4% year-on-year. IT investments play a considerable part in the group's operating expenses today and especially into the future. During the past year, we have finalized the group's largest IT project to date through the implementation of the Sopra banking platform. This is a clear milestone for the group, and we have also made strategic moves to in-source more of our IT operations, and this will shift other operating expenses into salaries. We are confident that this -- the net impact of this move will be positive going forward for operating expenses. This is, therefore, a very good time to review the plans and look forward. At the end of 2021, we finalized our business plan for the coming year. And following this, we updated our financial targets, as Benedikt outlined earlier. As a part of this business plan, we look we want to look at the operating expenses and investment plans for this period. And there are a couple of themes there to highlight. First, as we mentioned earlier, we want to utilize the current strong position to make targeted investments in the strategy, strategic project that we have highlighted, and we see as enhancing our competitive position and therefore, earnings potential over the medium term. We have, therefore, in our business plan allocated a short-term EUR 1 billion investment over the coming year related to the key projects as outlined before, namely customer experience enhancement and including back insurance as well as IT infrastructure projects. The second theme, of course, relates to the current inflationary pressure in the economy. It will be a key project for management to manage this external pressure and for example, our employee incentive scheme plays a key role there. Countering this, to some extent, is a bill from the government, which currently is being discussed in Parliament for a reduction in the charges related to Iceland Deposit Guarantee fund. The cost reduction related to this bill could be up to ISK 0.6 billion annually. We are very confident that both over the short term and even more so over the medium term, other drivers will more than come to this cost impact that we've described above, and that these investments will enhance the earnings potential of the business going forward. Ongoing milestones in capital optimization, along with strong business pipeline and improving net interest margin outlook supports this view and is, of course, reflected in our updated ROE targets. So moving quickly on balance sheet. The key theme, of course, over the past year has been the robust 14% growth in our loan book, combined with a 15% growth in deposit, both of which I will discuss in more detail on the following pages. Our liquidity and funding position remains robust with an LCR ratio of 203% and a net stable funding ratio of 121%. In terms of loans -- our loan book, clearly, the 14% growth over the year has been driven by the mortgage business. Over the past couple of quarters, we have, however, seen a shift here and the growth has become more balanced between individuals and corporates. Based on our current pipeline, we anticipate that this trend will continue in the near term, and that growth will be relatively balanced between corporates and individuals, Although, of course, this will vary between quarters. The diversity in our portfolio remains, of course, very strong.Quickly on the asset quality of the loan book, we continue to see a supportive outlook. The loan loss provisions have been gradually reduced over the past year and now stands at 0.8% of the loan book. Loans in moratorium have now been reduced to close to 0 and are now mostly performing while marked as forbearance. On average, these loans have been extended by 15 months. And the portion of Stage II loans, of course, continues to be reduced as well. We guided in our Capital Markets Day to a 20 basis points normalized cost of risk. And since then, expected credit loss based on our models has continued to trend towards this estimate and now stands at 23 basis points versus 29 basis points at the end of the third quarter.Growth in deposits has been another key theme for the year, and this growth continued into the fourth quarter, although at a slightly lower pace. And this strong growth in deposits has, of course, as highlighted in our Capital Markets Day reduced loan-to-deposit ratio from what was 180% 3 years ago, down to 143% at the end of last year. In terms of borrowings, clearly, we were very active last year in the international markets with 2 successful EUR 300 million issues, Green Senior and an inaugural covered bond in September. The covered bond issue was in a very important diversification exercising our funding profile, and its stability has been demonstrated in recent months as spreads on the senior issues of the Icelandic banks increased somewhat, but the common bond spreads have not moved accordingly. In terms of near-term issuance, our maturity profile is very well balanced and with no maturities in FX until next year. So we expect issuance this year to be mostly in ISK where we will be active, while opportunistically looking at FX market later in the year. So looking at capital, we are, of course, proposing a dividend of ISK 15 per share, which is another milestone in our capital optimization effort. This translates to a dividend payout ratio of 79% of net earnings. This is, as Benedikt mentioned, in line with our capital dividend payout policy, which is to pay 50% and additionally payments to support our capital optimization effort. When we have concluded this current buyback program, we will have distributed ISK 35.8 billion in capital to our shareholders, mostly through buybacks over the past year. And then this will be followed by ISK 22.5 billion dividend along with our proposal. Assuming these distributions, the year-end common equity Tier 1 ratio stands at 19.6%, having come down from 22.3% at the end of 2020. We continue to target a ratio of 17% and to this end, we aim to retain the option of further buybacks later this year, along with the potential specific dividend related to the completion of the sale of Valitor We, of course, announced just before year-end, an extension on the long stop date for that transaction until May to allow for the process with the ICA, which has taken somewhat longer than expected. The leverage ratio remains very strong at 12.6% for the bank. So I wanted to provide a quick update on the MREL requirement. This is a very complicated slide, but the message is very simple. We have now received the first iteration of the MREL policy from the regulator. And based on this, we have a 22.4% requirement, which we effectively comfortably exceed even when having optimized our capital position. The subordination requirement has not yet been finalized, but we expect this to be introduced in the coming year or years. Based on our current estimate, this could result in a requirement for a senior nonpreferred issue of around 0.8% of risk exposure amount. And clearly, this is a manageable amount, and we will have time to respond to that when it becomes clear.So before I turn over to Q&A, I want to again highlight some of the key themes going forward. First, we're in a very strong position. The operations continue to strengthen across our businesses and the pipeline and strategic position further supports earnings outlook going forward. This positive outlook is reflected in our updated targets, including the ROE target of 13%. We are building on this momentum and guiding for a planned strategic investment over the coming year of up to ISK 1 billion. These will strengthen our customer service and our competitive position, which will support earnings outlook over the medium term. This will be -- this will impact cost over the near term. But while we are very confident that the positive drivers in our operations will more than counter this impact and which is reflected in our raised ROE target. And finally, again, we are very pleased to be in a position to pay out a strong dividend to our shareholders, and this is another milestone in our capital optimization strategy. Thank you. And I would now like to hand over to Q&A. I think we will start with questions submitted online.

[Theodor Fridbertsson, Head of Investor Relations]

We have a few questions submitted already online, but feel free to add more questions. So the first questions are from Rahul Shah, who is an analyst from Tellimer. Basically, a few questions in 3 different areas. Cost to income, insurance and cost of risk, so I'll try to break it up. On the cost income, the first question is you have raised the revenue generation medium-term target for the cost income target is unchanged. Have your plans for investments in the business increased? And if so, in what areas?

[Benedikt Gislason, Chief Executive Officer]

Yes. I hope this question has been answered in more detail by Olafur Hoskuldsson. It's a specific investment into IT and customer experience and it has to do with kind of our ambition to evolve into a proper financial aggregator, where we have unusually brought set of services to offer to our clients and the insurance piece is a really important component of that. And -- and so that is the investment that we plan to make for the next 12 months into those areas.

[Theodor Fridbertsson, Head of Investor Relations]

Thank you. Then moving on to the insurance. We have a few questions there. So I'll break it up for questions. So if you start with the first 2 ones, what level of insurance premium growth do you expect at the system level? And what would be the main upside downside risk to this? And secondly, your ambition to grow insurance market share. Is it driven only by better cross-selling to the back-end customer base? Or are there some key project launches also planned?

[Benedikt Gislason, Chief Executive Officer]

Yes. For the first question, we've outlined this as 1 of our new financial targets. So we're targeting a 3% net premium growth on top of what the kind of market has been growing. And this is something that Vorour has been able to deliver on in the past few years, but it still remains the smallest insurance company. But it's a full service, so life and non-life insurance with effectively all of the products required by the market. So this is primarily driven by kind of grabbing market here, better cross-selling to our clients and reaching out to new clients.

[Theodor Fridbertsson, Head of Investor Relations]

And then regarding the cross-selling, when cross-selling to the banking customer base is your assumption that you're displacing other providers or other new to insurance customers? If you plan is to displace existing providers, do you foresee any price competition?

[Benedikt Gislason, Chief Executive Officer]

Yes. I think it's a combination of both. We -- obviously, the demographics in Iceland are favorable and our kind of younger population, kind of investing making the first investments into housing and transportation is relatively kind of high proportionately compared to the rest of Europe. So there are a number of new-to-market clients, we obviously pricing has to be carefully considered out there. But -- and then there is the churn in the businesses I think comparable with the rest of Europe. So there is mobility. We obviously, through our bankers approach are hoping to be able to add new clients that are banking plans, but not on the insurance side. So creating a little bit of more mobility in the market.

[Theodor Fridbertsson, Head of Investor Relations]

All right. Moving over to cost of risk. You have given some helpful guidance on normalized cost of risk level. Could you provide similar information for the net financial income line, which has given a big boost to the top line in recent times?

[Benedikt Gislason, Chief Executive Officer]

Yes. It's a fair question. I think it's really difficult to predict the financial income. What we want to highlight is that half of the financial income comes from the insurance business, the investment kind of portfolio of the insurance business. And I think the best way to kind of make estimates on that is to look at through the cycle investment returns of the insurance companies over a longer period. But in Iceland, but also in Europe, the investment returns have been decent through the cycle.

[Olafur Hrafn Hoskuldsson, Chief Financial Officer]

I think the point I made this well in the presentation is that because of this insurance portfolio, I mean we don't count it when we talk about our core income, but of course, it is a core income for our insurance business. And compared to other -- some of our competitors who do not have an insurance business. I think this will be, of course, be a more stable part of our income statement than for the others. So -- and it is a growing portfolio.

[Theodor Fridbertsson, Head of Investor Relations]

I think we've been guiding ISK 800 million to ISK 1 billion per quarter through the cycle. Obviously, it fluctuates quite a bit, but -- and should grow in line with a larger base. And then we have questions from Maria Semikhatova, who's an analyst from Citi. First, on the net interest income. What was the impact of rate hikes on net interest income in fourth quarter '21? Do you expect similar impact from tax? As he refers to the guidance we made during the Capital Markets Day, which is ISK 200 million to ISK 350 million for every 25 bps and what level of interest rate is assumed in 2022 ROE guidance of 11%.

[Benedikt Gislason, Chief Executive Officer]

I think maybe first, we should point out that the ROE guidance is not 11% for 2022. I think we indicated that were around 13% in the table Secondly, I think on the guidance, I don't think we're making any updates to that guidance currently. I think we've seen the impact of being in this range. But it's -- of course, we're seeing a very sharp rate increase currently, and it's difficult to -- it's a multidimensional impact to our business. So giving a firm sort of number on that is, of course, always very difficult for -- but I think we sort of stick to what we said before.

[Theodor Fridbertsson, Head of Investor Relations]

And then finally on costs. A couple of questions. What is the expected cost growth in 2022, taking into account inflationary pressure and planned investments?

[Olafur Hrafn Hoskuldsson, Chief Financial Officer]

I think we are -- on the investment, we are, of course, guiding to up to ISK 1 billion. We see most of this -- it's up to ISK 1 billion. I think in reality, this will probably come below that number. A lot of that will go through our operating costs. Some of it might be capitalized. I think on the inflationary pressure, I think we aim to manage it as best we can. We have the employee incentive scheme, which is a tool, of course, as well. And then we have -- I think I mentioned in the presentation, we have counter impact, for example, the deposit guarantee cost decrease, which is a significant number. But it's -- yes, it's -- I think we -- it's difficult to give a firm review than that -- it's a management challenge for everyone, of course.

[Benedikt Gislason, Chief Executive Officer]

It is. Some of the services that we our purchasing on the IT side are FX-denominated. So the appreciation of the currency obviously helps with mitigating that. So -- but I don't think we can provide any more detailed guidance than just the ROE target on this.

[Theodor Fridbertsson, Head of Investor Relations]

Yes. And then the final question is probably other side of that coin. What is the expected revenue and cost benefit from specific customer experience and IT investments? And how fast can they be realized?

[Benedikt Gislason, Chief Executive Officer]

Yes. We're saying that we will be capital or sort of starting to monetize on those investments as early as next year. And that's why sort of the bridge that we had in our deck indicates that we have greater ambitions for the profitability in next year already. And I think that the key on the key contributor there will be kind of the bancassurance approach. So when we have kind of optimized our customer online or digital customer journeys, and kind of taking better advantage of all of the touch points that we have with our clients on the packing side, which outweigh the touch point on the insurance side by a large smooth to book, then we'll be seeing benefits from that investment already next year.

[Olafur Hrafn Hoskuldsson, Chief Financial Officer]

Yes. I think I think we've identified very -- like we said, very specific, very high-return investments. We've sort of guided that, I think it's fair to say that the investment returns on those greatly exceed what our overall ROE targets. And we're sort of guiding to those having already impact in 2023, a very strong impact, I think.

[Theodor Fridbertsson, Head of Investor Relations]

Thank you. That concludes the questions online. So we'll turn to the auditorium. If we have any questions here No. right? I think it concludes the event. So thank you all for joining, and see you next time.