Arion banki hf

ICEX:ARION

Earnings Call Analysis

Steady Performance with 13.6% ROE in 2023

In 2023, the company achieved its medium-term targets, flaunting a robust return on equity (ROE) of 13.6% for the year. Their digital channels and market business saw strong momentum, further recognized by winning the 'Banker of the Year' award thrice consecutively. The company's ESG initiatives advanced with a net zero objective by 2040, supported by strategic projects like 'Women invest' to empower female financial participation. Despite an economic slowdown with consumer spending cooling and lower Central Bank forecasts, they anticipate beneficial outcomes from ongoing wage negotiations and inflation trends. Additionally, the eruption near Grindavik poses limited risk due to the company's collateralized credit exposure and societal resilience. The bank concluded the quarter with just under a 13% ROE and a net profit for the year at almost ISK 26 billion.

A Well-Targeted Year Amidst Challenges

Arion Bank emphasized a successful financial year in 2023, where they achieved a notable return on equity (ROE) of 13.6%, marking the fruition of their medium-term targets. Despite being 'grossly overcapitalized,' a favorable circumstance for any institution, they plan to normalize their capital structure in the near future. Aside from financial achievements, they secured the 'Banker of the Year' title for the third consecutive year, reflecting persistent excellence in their operations.

Advancing Core Business and Embracing Digital Innovation

Arion Bank boasted strong momentum across all business lines, particularly highlighting their dominance in equity markets and involvement in all recent listings. Their digital banking app continued its reign as Iceland's finest for the seventh year, underscoring their focus on digital transformation. The bank's bancassurance model also displayed growth, and Vordur, their insurance subsidiary, continued diversifying its portfolio.

Strides in ESG and Empowering Women in Finance

On the ESG front, Arion Bank remains committed to reducing its carbon footprint and achieving net-zero emissions by 2040. Notably, they launched 'Women Invest,' an initiative targeted at enhancing financial literacy and participation among women, with over 600 participants within weeks. This initiative demonstrates their commitment to inclusive economic empowerment and long-term societal impact.

Stable Macroeconomic and Sectoral Analysis

Arion Bank's analysis of the macroeconomic landscape indicates a slowdown, with the Central Bank of Iceland maintaining policy rates and reducing economic growth forecasts from 2.6% to 1.7%. However, optimism is conveyed with expectations of declining inflation, potentially leading to lower policy rates pending successful wage negotiations. The Bank illustrated their preparedness in managing credit exposure to the recent volcanic activity near Grindavik, with sufficient natural disaster insurance mechanisms in place to mitigate any significant financial impact.

Robust Financial Results with Positive Outlook

CFO Olafur Hoskuldsson presented solid fourth-quarter results with an ROE just shy of 13%, propelling the bank to a strong year-end ROE of 13.6%. The bank experienced an uptick in net interest income and margin, a testament to their resilient profit generation capacity. Despite a slight deceleration in loan book growth, aligned with economic indicators, the bank's capital and liquidity positions were robust, closing the quarter with a Tier 1 capital ratio of 19.7% including a proposed 50% dividend distribution.

Investment in Technology and Efficient Operation Focus

The bank is actively investing in IT and adopting advanced technologies like AI to enhance its digital services. This surge in digital momentum necessitates a slight increase in full-time employees, primarily within IT and insurance due to strong growth ambitions. Arion Bank maintains a vigilant focus on balancing growth with operational efficiency to ensure controlled expense trajectories.

Capital Markets Strategy and Real Estate Sector Insights

On the Capital Markets Day, Arion Bank anticipates revisiting medium-term targets, including a potentially improved cost-to-core income ratio. They also express confidence in the commercial and residential real estate sectors, anticipating continued development in the capital area. Exposure to the commercial real estate sector is diversified and not a major concern, with low office space risk and strong demand in other subsectors.

Upcoming Funding Strategies and Investor Engagement

With benchmark Euro maturities on the horizon, Arion Bank plans to explore various funding markets, including local and international capital markets. The bank's strategy could involve issuing senior unsecured debt, reflecting on competitive pricing obtained in the local market. Investors are encouraged to partake in the forthcoming Capital Markets Day for more comprehensive insights into the bank's strategy and outlook.

Earnings Call Transcript 2023-Q4

[Benedikt Gislason, executive]

Good morning to you all, and a warm welcome to our presentation and webcast of our fourth quarter and full year results for 2023. My name is Benedikt Gislason, I'm the CEO of Arion. And here with me today to go through the results is Olafur Hoskuldsson, our CFO.There's never a dull moment in Iceland. And as we go through this in our headquarters here, we've had the sixth eruption going on at the Reykjanes Peninsula, 6th eruption since the fire started in 2021. And we will be going through the impact of those to our credit portfolio and the economy and some other details of our results.To begin with, it was a good year, and we met all our key medium-term targets in 2023 with a return on equity for the full year of 13.6%. The only kind of financial target that we're not meeting at the moment is a nice one to have, we are grossly overcapitalized at the moment. We are above our financial targets, which will enable us to normalize our capital structure further in the coming quarters and years.Here are some of the key milestones of the year, and I will go in more detail in some of those later in my presentation. It was a nice event to receive the bankers award, the Banker of the Year, for the third year in a row now. We enjoyed strong momentum in all our business lines. And we've come a long way with our main distribution channel, the digital channel, the banking app, which has been voted the best banking app in Iceland now for 7 years in a row. And many of our core products are mostly now sold through that channel, as you can see here.Strong momentum in our markets business. We continue to have a leadership role in equity markets, and we were involved with all of the listings that happened last year in the exchange and continue to have a leading role in building up our capital markets, a role that we have played strongly and seen the importance of being an instigator in since the great financial crisis. And the bancassurance model continues to deliver above market kind of premium growth and Vordur continues to build up its portfolio and diversified. And Ola will go in more detail through the numbers of Vordur.Now, it was a positive event late last year when we received a ratings upgrade or Moody's initiated a rating for our covered bond, which we've -- where we are an issuer globally through our EMTN program. And this is the highest rated instrument, that instrument in Iceland at the moment, as you can see here, 3 notches above the sovereign. And our advisers tell us that this will substantially broaden the investor base of our cover bonds. So very positive news.On the ESG front, we've made strides. This is the second year in a row that we've calculated the carbon emission from a loan portfolio. And this we use to assist our clients in assessing new investment that can further reduce their carbon emission. And we're on -- obviously on the -- have the objective of being net zero by 2040, in line with Iceland's targets. And as you can see on this slide, we have obtained 2 ratings, which rank us favorably compared to our peers, both locally and internationally.This is a project that we're really, really proud of and was launched at the beginning of the year. Women invest. Why did we launch this project? Currently, as in many or most economies, women are underrepresented when it comes to investment in finance. This is a long-term project, which we kicked off, as I said, in the beginning of January. And this is a long-term project where we are educating women on investments and pension, tax returns, et cetera. And in the 3 weeks -- now 3 weeks into the project, over 600 women have already attended seminars and in February, for example, we have 4 seminars scheduled and the schedule goes into the year -- into next year, actually. And the objective is, of course, to increase women's participation in financial markets and contribute to economic empowerment and thereby life quality.A quick reminder on our Capital Markets Day on the 1st of March, where we'll go through our key strategic initiatives, the outlook, economic outlook, the outlook for the bank, and we will review some of our medium-term targets. This will take place here in our auditorium and will be streamed live. So please save the date.Now on to the economy. We had a policy rate decision yesterday where the Central Bank decided to leave policy rates unchanged, but the tone has softened and we've most definitely reached the terminal rate, policy rates as the economy is slowing down and cooling, and it's notable to see that private consumption has really cooled off. The Central Bank took down its economic forecast for the year to 1.7%. The previous forecast was 2.6%. And I think this all plays very well into an environment where we can see -- start seeing inflation coming down further, policy rates moving lower. And we have hopes that the ongoing collective wage agreement will be supportive for that journey.What is also good to see is that when it comes to tourist arrivals, we have effectively reached the pre-COVID levels. And we saw a strong current account surplus in the quarter, which is going to support the exchange rate. As I said, inflation is on the decline and the collective wage agreements, which are ongoing, or the negotiations have the aim of supporting that trajectory. And if successfully negotiated in the coming weeks, we might see the Central Bank starting to respond by lowering rates.Now to the volcanic activity in the vicinity of Grindavik where we had an event this morning, as I said, the sixth eruption. Here you can see our credit exposure to the area, which is ISK 10.3 billion. It's secured by collateral, [indiscernible] or majority of it is actually secured by fishing vessels and associated fishing quotas, which is not impacted by the events. There are real estate, commercial, and residential in the area that we have exposure to. And we know, and this has been publicly communicated by the Finance Minister, there are ongoing dialogues on the resolution for the residents of Grindavik to resettle at least temporarily elsewhere. And we are part of those negotiations as other mortgage lenders in Iceland, and we expect the outcome of these discussions to be presented in the coming days.And obviously, this is a significant event for the area, Grindavik, and is impacting livelihood and corporate activity in the area. But in the context of Iceland's economy, this is something that we, as a society, are fully capable of dealing with. There is a natural catastrophic insurance fund that will cover any damages from volcanic activity. And maybe it's a good thing as well that the real estate -- residential real estate market has been cooling off quite dramatically in the last quarters. There is enough supply of housing to cope with this situation.There is a, speaking of housing, the housing prices are a component in the consumer price index. And this is something -- somewhat unusual to how western economies do this. So we have calculated an imputed factor from real estate prices, which is not done elsewhere. And there is now a discussion -- open discussion about changing the calculation. And here, we show you the impacts of making that change from a historical standpoint. I think the rental market in Iceland has developed in a way that there is now more flexibility in actually calculating this from the actual rental prices rather than the imputed real estate prices. And this is yet another argument for looking at the core inflation and acknowledging that the measured inflation is somewhat higher than the true core inflation at the moment.And with that, I'm going to hand over to Olafur Hoskuldsson, our CFO.

[Olafur Hoskuldsson, executive]

Thank you, Benedikt, and good morning, all. So now I'll look more closely at the results for the quarter and the year, starting with the key highlights. So we concluded another solid quarter with a return on equity of just under 13%, which completes another strong year for the group with an ROE of 13.6% for the year. Again, the result continues to be driven by good momentum in all our key businesses and core income streams. And during this quarter, we also saw a good recovery in our investment income, which has been under pressure in recent quarters.Second, net interest income again grew in the quarter along with the net interest margin, which increased by 0.1% to 3.1%. We are now entering a new phase in the rate hiking cycle, whereby fixed rate mortgages have started to reset and started to reset during this quarter, which will be an impact to our NIM going forward and into next year -- into this year. And this will be a tailwind for our NIM going forward.Third, the growth in the loan book has been slowing recently, and this continues in the fourth quarter. This is in line with our expectations and the guidance that we have provided to investors considering the slowing economy and elevated rate position of deposit rates, of course. And finally, our capital liquidity and funding position continues to be very strong. Our common equity ratio Tier 1 ratio increased by 30 basis points during the quarter to 19.7%, and this includes the impact of a 50% proposed dividend payment.So now looking more closely at the income statement. Net profit in the quarter was ISK 6.2 billion and the net results for the year ended at just under ISK 26 billion. Total operating income in the quarter was ISK 16.3 billion, which is 11% up from the fourth quarter of last year and 9% up from the last quarter. Total operating income was ISK 64 billion for the year. The core income lines, net interests, commissions, and insurance grew by 2% between years. Again, as mentioned, financial income saw a good recovery this quarter with ISK 1.4 billion in revenues after a number of challenging quarters in this line item.And now looking more closely at key line items of the income statement. And starting with the net interest income. Following a reduction, slight reduction in this line item during the third quarter, we again saw increase in net interest income during the fourth quarter by 3% or to ISK 11.3 billion. The net interest margin also increased and now stands at 3.1%. As highlighted in previous calls, there are perhaps 2 key themes to discuss here. First, as the size of the CPI-linked loan book increases, the fluctuations in the NIM will -- are expected to increase between quarters going forward. This is because the CPI-linked lending will be impacted by the inflation print between months and quarters, which will create more fluctuations in the NIM between quarters. And this can be seen in the bridge at the bottom of this page, where you can see that the increased inflation between Q3 and Q4 result in the ISK 500 million difference in net interest income between those quarters.The second theme that I want to mention is like I discussed earlier, we are now entering a new phase in the rate hiking cycle, which will be a tailwind for our NIM into this year. As you remember, the first phase of the rate hiking cycle was, of course, the repricing of floating rate assets, which at the start of the cycle had a very positive effect on our NIM. The second phase of the cycle has been over the past few quarters, the gradual increase in cost of deposits, which, as you know, in Iceland has been sharper than in many other countries. And this has been a headwind for our NIM in recent quarters.During the fourth quarter, then we entered into this, what I call, the third phase of this cycle, where we have the fixed rate mortgages with around ISK 150 billion of our loan book, which have begun to reset and will be resetting in each of the next quarters and especially into the second half of this year. There will be a partial counter impact of this, of course, from the fixed maturities of fixed rate cover bonds, but the net result will be a positive impact on our NIM. These factors will impact our name near term, but as before, we continue to guide to the medium-term NIM of around 3% level for the bank.So in terms of fees and commissions, which were again strong in the quarter of ISK 3.9 billion. This means that fees and commission for the year were ISK 16.4 billion, which are stable from last year, which was a record year for the bank. Fees for the year now cover 57% of operating expenses, and it's a demonstration of the change in composition of our income streams of this bank and the strategy that we've been working on, that this number used to be 37% only a few years ago. As before the diversity of the fee-generating businesses of the group supports good stability in this fee generation through the cycle. Assets under management grew and were just under ISK 1,400 billion at the end of the year.So in terms of the insurance results, we are generally pleased with the progress of what continues, of course, to be a long-term strategic project for the group. In terms of the top line, revenues were up 15% between years and the robust historic growth of this business is demonstrated by 11% annual growth on average in the last 5 years. The combined ratio for the year ended at 97%, which is higher than we would like it to be, which is up from 93.3% for last year. A key recent impact here, which is a sector phenomenon, has been the higher number of fire insurance claims during this year, and this has been highlighted by some of our competitors in the recent quarterly results.The return then on the investment portfolio, of course, of Vordur has been challenging in the past couple of years. And this has meant that the return on equity of Vordur has been below our targets for the past couple of years. We continue to see significant opportunities in this area, and we'll provide further update on the bancassurance journey and our Capital Markets Day in 1st of March.So looking at operating expenses. It is worth noting that here we present total operating expenses for the group, which includes the insurance operating expenses, which are netted in the insurance income line in the income statement. Total operating expenses in the quarter were ISK 8.7 billion, which includes a ISK 1.4 billion incentive scheme provision in the income statement. Total operating expenses in the quarter were the ISK 8.7 billion, it includes SEK 1.4 billion. This is then a 4% increase in total expenses from the same quarter last year, which compared to an 8% inflation during the same period. We then conclude the cost year for cost to core income ratio of 44.7%, which is well below our medium-term target cost-to-core income ratio.So just looking at the balance sheet and starting with loans to customers, which grew by 0.8% or ISK 9 billion between quarters. Growth in general has been slowing over the past quarters, along with the slowing economy and elevated rate position. Out of the total growth in the quarter, just under ISK 5 billion as a result of inflation impact on our CPI lending and ISK 4 billion from FX impact on our FX corporate loan book. The loan book continues to be very well balanced, 48% in mortgages, 5% other loans to individuals and 47% to corporates.So now looking at our provisioning position. This has increased over the year from -- to 0.4% of the loan book from 0.63% at the end of last year. Impairments in this quarter were positively impacted by some single name Stage 3 and Stage 3 collateral positioning improvements, increase in the loans to moratoria in the quarter are due to measures in Grindavik which Benedikt explained earlier. And we are, of course, as Benedikt mentioned, monitoring this situation -- evolving situation closely.In general, however, apart from the specific exposure related to Grindavik, the theme is the same as I've described in recent quarters. We have seen a slight uptick in non-performing loans, which are is to be expected in the current rate environment. But in terms of historical perspective, these are still low from any comparison. We continue to see through the cycle expected loss on the loan book of around 25 basis points based on the current loan book composition.So looking at deposits, they were relatively stable between quarters, the reduction of 1.7%. This decrease at the end of the year was effectively in the wholesale categories where we have deliberately allowed expensive deposits to leave the bank. Total deposit is now stand at ISK 793 billion, which represents 60% of total liabilities. As we have discussed, our strategy in this area has been to compete, especially in the stable categories of deposits. And as we have highlighted in the top right chart of this page, the growth during this year has been in these categories, reflective of this strategy.So moving on to wholesale funding. As Benedikt mentioned earlier, we had another positive quarter in terms of our rating profile. Following the upgrade of A3 -- to A3 of our bank rating from Moody's, we received our inaugural AA2 rating from Moody's for our cover bonds. S&P then upgraded also our outlook to stable again following a period of 6 months on negative outlook from S&P. These actions should, of course, support our wholesale funding efforts, and it has been very positive to see the trend of our secondary spreads in Eurobonds. In recent months, we have considered tightened considerably.It is also -- it was also very positive during the last quarter that we issued a ISK 9 billion senior issue in the domestic market during the quarter. This is the largest ISK senior preferred issue in the domestic market and is another very strong avenue of broadening our funding options, which support our funding effort going forward. We have a very strong envelope position. The buffer is 8.5% above requirements. And we, of course, continue to be active in the funding markets both in ISK and opportunistically in the euro markets in the coming months.Looking at capital, our position is very strong. Common equity ratio of 19.7%, which again increased by 30 basis points during the fourth quarter. The leverage ratio continues to be one of the highest in Western Europe, at least, of 12.4%. And this means now that our common equity ratio is 480 basis points above the regulatory requirements. And this includes, of course, a 50% dividend payout ratio assumption for the year. Obviously, as before, this is well above our medium-term targets of, like Benedikt mentioned, 150 to 250 basis points. And based on this target, there is a roughly ISK 15 million to ISK 25 billion of surplus capital above our management target -- medium-term management target.However, of course, as discussed, our capital planning has been impacted by S&P, which increased their economic risk assessments at the Icelandic banking sector earlier last year. And this effectively as discussed in our last previous quarters, increased our capital requirements for S&P thresholds by around 2.5% of risk exposure amount. It was good to see during the fourth quarter that S&P did move their economic risk score for the Icelandic sector to a positive trend, which does reflect the positive view of them potentially lowering the risk profile again in the next 12 to 24 months, which will again dramatically reduce our capital requirements from S&P perspective. As stated before, our expectation is that the rating agency and regulatory capital thresholds will convert over the medium term, which would allow us to optimize capital again to where we want to be over the medium term.So going forward, we concluded another strong operational year for the group, exceeding all our medium-term targets. And this is despite, of course, an ongoing volatile external operating environment. The sharp increase in policy rates has started to have an expected impact of excluding the Icelandic economy, and this has in turn slowed the growth of our balance sheet. We are, however, seeing, as Benedikt mentioned, positive signs that inflation is starting to subside, which will allow the Central Bank to manage rates back down in the near term. And of course, the ongoing union waste negotiations, which hopefully get concluded in the coming days or weeks, will be a very strong milestone and for the Icelandic economy to find a sustainable balance of the economy.Our diverse businesses and strong and mature market position in all key business units means that we are in a very good position to navigate the current external environment. And this is further, of course, supported by a very strong capital position, very broad and robust funding position and conservative loan provisioning as well as operational cost discipline. Of course, the volcanic activity on the Reykjanes Peninsula and the impact of the Town of Grindavik continues to be a key focus for us and the rest of the Iceland economy. We are working very close to our clients and authorities around this evolving scenario.And finally, of course, we hope to see many of you at our Capital Markets Day at the 1st of March, where we'll be going deeper into our key strategic projects and the outlook for the group. So on that note, I thank you very much, and I hand over to Theodor Fridbertsson to manage the Q&A.

[Theodor Fridbertsson, executive]

I just wanted to remind participants on line that they can submit questions through the platform. But as usual, we'll start with a couple of questions already submitted online. And starting with a question on the loan growth. During the last 2 quarters, there has been a limited loan growth both for corporates and individuals. What is your view regarding demand for new lending during the next few quarters, both for mortgages and corporate lending?

[Benedikt Gislason, executive]

Yes. On the corporate side, I think we need to factor also in that in last year, especially in the second half of the year, we saw sort of increased activity from lenders abroad, especially in the seafood and agriculture business. So if you adjust for that, our underlying growth, meaning that we were subject to early repayments on our exposure to these industries was actually somewhat higher than reflected in the loan growth figures. But what I find particularly good to see is that our focus on capital velocity and activity throughout the year in each quarter is demonstrating itself in strong kind of fee generation. So I'll kind of -- our focus on originate to distribute is really paying off here. And I would argue that the loan growth measure is not as critical when it comes to fee generation as it was maybe 3-4 years ago. So the activity remained strong in the last 2 quarters and the outlook is relatively strong as well. So -- but this is -- I would say, it demonstrates that this business model is actually working much better than having to rely on loan growth for generation of fee and commission income.On the market side, there is obviously the housing market, residential housing market has slowed down somewhat, but our market share in that space, increased somewhat in the second half of the year. And the outlook remains broadly similar for the year. So I think we will continue to enjoy single-digit -- low single-digit loan growth on the market side.Anything you want to add?

[Olafur Hoskuldsson, executive]

No, I think you covered most of that. I think, of course, in terms of the headline, absolute loan growth, I think there will be -- of course, the key impact there is the policy rate trajectory and the growth in the Icelandic economy, where we roughly are similar to that -- how that moves. But like you said, it demonstrates the strength of the strategy. That if you look at our fees in terms of lending fees and corporate finance in the past few quarters when loan growth has been limited. Those have been very strong, it shows that we are -- it doesn't look like we are, but we are actively rolling the book, and there is a lot of activity in the corporate lending space still.

[Theodor Fridbertsson, executive]

And then secondly, the number of FTEs have been increasing in recent quarters and 5% from year-end '22. In which operations within the bank, is this increase? And what can be expected regarding development in expenses going forward?

[Benedikt Gislason, executive]

Yes. We always continue to look closely at the FTE number and the main thing is to have kind of operational efficiency in all fronts. We have been adding to our headcount on the IT side as we continue to develop our distribution channels and invest into new technology, which is advancing quite rapidly these days in the last few quarters. And we expect to see further advancement of our digital services with the adaptation of AI, for example, and other tools. So data is a huge focus for us at the moment. And the kind of the organizational changes that we introduced on Monte are actually very much kind of steered towards continue to building our strength in this area. But this is also I would argue a function and a factor of the momentum that our business lines are enjoying. As we highlighted in our presentation, we continue to add on assets under management. We continue to strengthen our position in corporate investment banking and our bancassurance model is working well, and we're gaining momentum and market share in that area.

[Olafur Hoskuldsson, executive]

Yes. Maybe we are, of course, growing on the insurance side, very fast, 11% growth on average over the past 5 years. And we have high ambitions there for further growth. So we are investing also in people, the infrastructure there on the insurance side. So FTEs, we've been increasing in that area as well.

[Theodor Fridbertsson, executive]

And we just received a question from [ Anton Perk ] from [indiscernible].Hello, thanks for a great performance. Could you elaborate on your cost to income going forward? Is your target to be lowered? Or should we expect the cost income to increase? And secondly, do you have any insurance exposure to Grindavik or other affected areas?

[Benedikt Gislason, executive]

Ola, do you want to take this?

[Olafur Hoskuldsson, executive]

What was the first question, sorry?

[Benedikt Gislason, executive]

Cost-to-core income…

[Olafur Hoskuldsson, executive]

Yes. Cost-to-core income, yes. I mean, I think we have our Capital Markets Day in the first of March. We will be reviewing our medium-term targets here. We, of course, well ahead of our cost-to-core cost to income ratio currently. So that is something, of course, that we will be looking at. I don't want to sort of jump the ship before the Capital Markets Day on that front. Grindavik, we have some exposure there. But it's not material in any sense. And of course, as I think we had on the page, there is a natural catastrophe fund in Iceland, which is the key insurance entity with insurance insurers in these scenarios, the housing -- residential housing at least. So the insurance company is not very limited exposure.

[Benedikt Gislason, executive]

Yes. But on the cost-to-core income ratio, as Ola pointed out, there has been a positive trend. And this ratio is obviously a calculation of underlying costs, but also the development of our core income. And our business strategy is obviously to grow the income line and at the same time, keep costs under control. So this is something that we'll be discussing in more detail in our Capital Markets Day.

[Theodor Fridbertsson, executive]

It looks like this concludes questions from the online -- I just got one additional from [ Lulea Kulu ] from Goldman Sachs.Could you please touch on the trends you're seeing on the commercial real estate sectors? Anything to noteworthy in the construction sector. And secondly, on funding, you mentioned plans for local and international issuance in '24 and the plans for issuance in the senior unsecured format?

[Benedikt Gislason, executive]

Yes. If I touch first on the real estate sector, obviously, we have hopes that the undeveloped area, the largest undeveloped area in the capital area, which we hold at Blikastaoir will be progressing into development, and we made some kind of strides in that direction with the local municipality. And I think it's clear from both the Grindavik situation and just the fact that the Iceland population is growing at a faster pace than any European country at the moment that kind of new development is required. And we see and hear from our clients that there are new projects being kind of reviewed. And I think the momentum, especially in the residential real estate sector will continue. And the capital area will be under development for probably decades. And it's -- it's not long until we will see the population of Iceland exceed the 400,000 threshold. And the forecast actually for population growth is under review and is probably going to be raised.On the commercial real estate side, which I think it's fair to say that we've seen a recent surprising development, where office space, the office business is being developed. We haven't really seen that happening for a long time now, and that is the subcomponent within commercial real estate that we were maybe most worry about, but it seems like there's not oversupply and actually demand. But when it comes to other subsectors of the commercial real estate, the -- we're seeing strong activity. There's not much inventory. And in some subsectors, there is even shorter. So there aren't any concerns with that portfolio, and our exposure there is covered quite well in our financial statement, the LTVs and the NPL position.

[Olafur Hoskuldsson, executive]

Yes. We have a page -- I mean, it was in the presentation, but we have a page in the pack on the commercial real-estate exposure of the bank. So it's under 10% of the loan book. And as you can see on that page, it's very diversified, only 1% is to office space. And like you say, it is a very different office sector here than you maybe see in the U.S., and there are sort of regions where it's been a key concern. And it's also a very diversified portfolio for us. I think 40% -- just under 50% of it is to sort of SME clients. So small spread out too many individual counterparties, yes, so.

[Benedikt Gislason, executive]

The other question was…

[Theodor Fridbertsson, executive]

On the funding activities in '24. And any plans for issuing the senior unsecured format?

[Olafur Hoskuldsson, executive]

I think I mentioned we have a maturity -- benchmark Euro maturity at the end of this year and another one next year. So we'll be looking at all markets that we are operating in. It includes the Euro market and also the Scandian, now the domestic, which is good to have sort of 3 avenues for those issuances. But yes, we'll be looking at all of those in the coming months.

[Benedikt Gislason, executive]

And we're quite pleased with the pricing in the local market in our issue there in the fourth quarter. So that broadens our kind of the funding options for us quite considerably.

[Theodor Fridbertsson, executive]

That concludes questions from the online participants. So are there any questions from the auditorium?No. I guess we can conclude the meeting then. And thank you all for participating and attending here. And have a nice day. Thank you.

[Benedikt Gislason, executive]

Yes. See you on the 1st of March.

[Theodor Fridbertsson, executive]

Yes, 1st of March.