Arion banki hf
ICEX:ARION
Arion banki hf
In the realm of Icelandic finance, Arion banki hf. stands as a key player in the country's economic landscape. Established in the wake of Iceland's banking collapse in 2008, Arion Bank was created from the ruins of the defunct Kaupthing Bank, underlining its resilience and adaptability. Over the years, the bank has intricately woven itself into Iceland's financial fabric by offering a suite of banking services that cater to both individual and corporate clients. The bank’s operations are a blend of traditional banking services—such as taking deposits and issuing loans—and investment banking, which places it at the heart of financial intermediation in Iceland.
Arion Bank primarily generates revenue through the interest it earns on loans exceeding the interest it pays on deposits. This interest rate spread is a fundamental aspect of its income. However, the bank's financial reach extends beyond conventional banking. It also garners income from fees associated with asset management, advisory services, and securities trading. Arion Bank has gradually embraced digital transformation, enhancing customer engagement and operational efficiency, which is crucial in our increasingly tech-driven world. By maintaining a diversified approach to financial services while staying rooted in robust risk management practices, Arion Bank exemplifies a modern financial institution in a uniquely volatile economic environment.
Earnings Calls
Arion Group reported a net profit of ISK 26.1 billion for the year, up from ISK 25.7 billion. The company achieved a return on equity of 13.2% for the fourth consecutive year. Notably, the insurance segment demonstrated robust growth, contributing ISK 3.7 billion to profits and achieving a 30% return on equity. The bank maintains a strong capital position, with a CET1 ratio well above regulatory requirements. Looking ahead, it expects net interest margins around 3% and plans capital distributions of ISK 16 billion in dividends and ISK 3 billion in buybacks, showing commitment to shareholder returns despite economic challenges.
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[ Hi, all ] and a warm welcome to this presentation and webcast of Arion Group's fourth quarter and full year results for 2024. My name is Benedikt Gislason. I'm the CEO of Arion. And here with me today to present the numbers and the -- and our operating environment are our CFO, Olafur Hoskuldsson; and our Chief Economist, Erna Bjorg Sverrisdottir. I'll start by going through sort of the key highlights, and then I'll hand over to our Chief Economist to discuss the operating environment.
This was yet another solid year where we posted a return on equity in excess of 13%. This is the fourth year in a row that we deliver on our medium-term target of plus 13% ROE. It is, however, as well a year of investments where we made considerable investments into growing our business further and making solid sort of grounds for further growth in our business. So -- and that is reflected in the cost to core income being slightly higher than our 3- to 5-year medium-term financial target of 45%. But it was good to see that we delivered the same return on our risk exposure amount as last year, 7.1%. And our businesses are going well. Our insurance business had a particularly good year, as I'll come to in a minute.
And we are now finally getting closer to delivering on our capital optimization plan where we want to have our CET1 ratio somewhere between 150 and 250 basis points above the regulatory minimum capital requirements set by the regulator. And we've already committed ISK 19 billion of capital distributions this year through the ongoing share buyback and a dividend proposal for our AGM of ISK 16 billion. And here, I want to make the note that additional distributions will be considered when capital levels are above this target. And we will consider that in the context of how we see loan growth evolving into the year, having seen the loan growth slowing a bit in the fourth quarter. So, depending on how our business developed this year, we will consider further capital distributions.
It was an eventful year, a lot of positive things happening in our business. Maybe one of the biggest milestones in terms of numbers is the fact that last year, we got our assets under management that is from our markets division, Vorour Insurance and Stefnir fund management, crossing the ISK 1,600 billion mark. And it's a milestone because it's the first time ever that we post a number that is higher than our own balance sheet. When it comes to our businesses, it was very active in the corporate and investment banking space, as you can see from the slides and some of the major transactions that took place last year we were involved in. A lot of work accounted for at the beginning of this year rather than last year, even though most of the work was done last year.
Our leadership in capital markets continued and retail banking, I'll go in more detail into that, but we continue to run a very efficient retail bank where a majority of our sales are done digitally with interacting with our clients. We saw a substantial increase in household deposits last year. And our insurance sales continued to increase substantially. And I'll talk about the -- some of our investments on the following slide. I mentioned the insurance business. This was the best full year results of Vorour Insurance since we acquired the business in 2016. Vorour opened 4 new branches in shared offices with Arion, 2 in the capital area and 2 in the countryside. These complement the 2 existing branches shared by Vorour and Arion in Selfoss and Akureyri before we opened these 4 branches.
And obviously, we want customers who use a wide range of services from the Arion Group to feel the full benefit of doing business with a one-stop shop. And this is why we have launched Arion Refund, which enables Arion Bank customers to -- that are insured with Vorour to get a 5% refund on their insurance premiums if they are claims free for 12 months. And we will be taking further steps in the near term with our rewards system. This was -- this business resulted in more than 30% return on equity for the full year. Obviously, a very sort of good operating environment on all fronts, both investments and when it came to the combined ratio. But I think it's worth mentioning here that Arion, the group is using the Danish compromise, which allows banks to risk weight their insurance investments instead of deducting them from the full -- deducting in full from the capital, which means that the effective ROE for the group is somewhat higher, as Ola will explain in his presentation.
Now coming to our investments. last year that have already demonstrated a substantial growth in our business. So, we -- one of the themes for last year was the family. We wanted to service the family needs in a better way. And we launched a number of new services in our app there and it's very interesting to see how better services, better access to services actually increases the volume of our business. Same applies to our corporate services, where we have a 3-year road map, digital road map for corporate services, where we felt we were lacking. And some of the initiatives that we introduced last year have already resulted in substantial growth in our business.
I forgot to mention some of the awards that we received for last year. And I want to mention in addition to the 3 that are up here, the educational awards with Business Iceland awarded us this week. In the jury's discussion, it stated that it's clear that strategic and targeted work in educational matters at Arion Bank results in progressive and professional educational work and as a result, satisfied employees. And that with projects such as Women Invest, the bank also connects educational work with social responsibility. Yesterday, we celebrated the first -- the 12 months anniversary of having launched this long-term initiative, Women Invest. Why did we launch this? We felt that women were underrepresented when it comes to investments and finances. The objective, obviously, was to increase women's participation in financial markets.
What did we do last year? We had 45 and actually 46 events, if you include the event yesterday, campaigning for involvement of women in investments, seminars, online accessible information followed had started investing and over 4,000 -- actually close to 4,500 women have now attended 46 seminars all around the country. And what has the impact been? It's very pleasing to see when we reflected on the results at our 1-year anniversary event yesterday that in all areas of investments, women are doubling or tripling their engagement compared to men. So, this is already a success. But as I highlighted, this is a long-term initiative and we will continue throughout the year and the following years to advocate for women investing.
My final slide before I hand over to our Chief Economist with the key development assets. These are the residential development plots in the capital area, which are very large compared to the kind of estimated delivery of new housing in capital area and in Iceland as a whole. Probably represents around 10% of what could be on supply for the next 10 years. And this is the year that we expect to see a result of years work of planning and preparing for the development in close cooperation with the local municipalities and the citizens of these municipalities. And we're expecting the approval processes of both projects to be completed, the first phase for Blikastaoir. And here, we put out the book value. I think it's worth mentioning that the book value of Arnarland is the total book value, and we hold 51% stake in that project. And we discussed this in detail at our Capital Markets Day last year in March. And I think we will see some of the ideas that we floated there coming into more discussion and maybe reality later in the year.
And with that, I'm going to hand over to our Chief Economist, Erna Bjorg Sverrisdottir, who will discuss our current and future operating environment.
Thank you, Benedikt. Good morning, everyone. It's great to be here today. Despite all the storm warnings and bad weather we have had, Icelanders certainly seem to have spring in their step. In October, following the first rate cut of the Central Bank, the Gallup Consumer Confidence Index saw its biggest monthly jump since measurement began. And for the past 3 months, the index has remained well above 100 points. This suggests growing consumer optimism, a view that is supported by payment card turnover figures as Icelanders' payment card turnover increased by 6.1% between years in the fourth quarter.
In addition, registered unemployment measured 3.6% and real wages increased by 1.3% between years. Normally, this would indicate a solid increase in private consumption. But as you can see on the slide here, the predictive value of these indicators seems to have weakened. And this was especially evident in 2024 when private consumption consistently surprised analysts by being softer than expected. According to preliminary figures from the national accounts, private consumption only increased by 0.2% in the first 9 months of 2024. While this didn't flip the balance, it certainly contributed to a 1% economic contraction over the same exports with the capelin failure having significant negative effects in the first quarter and service exports turning out weaker than expected.
The silver lining was strong growth in exports of aquaculture products, which increased by 17% between years and pharmaceuticals, which increased by a whopping 55%. All in all, it is likely that the preliminary GDP figures for 2024 will show a contraction despite the substantial efforts undertaken by the government around the volcanic eruptions on the Reykjanes Peninsula. As some of you might have noticed, I deliberately used the word preliminary, and this is something that I can't stress enough. These are preliminary figures from the national accounts and they have been called into question most recently by the Central Bank as there are signs that economic activity is stronger than implied by these figures. However, there is no doubt that economic activity has lost pace as the Central Bank continues to battle inflation with high real interest rates, but the tide may seem to be turning.
According to economic forecast, the economy has reached the desirable soft lending with expectations for increased economic growth in this year with the consensus at 2.1% GDP growth. The growth will be driven by domestic demand with private consumption at the forefront and also regular business investment. The increase in investment might surprise some given the tight monetary stance, but this is primarily due to 2 sectors, land-based fish farming and certain sectors. As I mentioned earlier, private consumption has been surprisingly soft, but there are signs of recovery. In the fourth quarter, household consumption picked up and private consumption growth is expected to gain momentum this year, supported by households overall strong financial position, accumulated savings and growing net wealth. However, these forecasts that I have referred to, they were all published before President Trump's trade war escalated, and I would just briefly like to touch upon that.
Growing trade protectionism can dampen global economic activity and that will, of course, affect Iceland being a small open economy that is dependent on exports. It is still unclear whether Iceland will be directly affected by tariffs and to what extent as Iceland is not part of the EU and most of our exports to the U.S. are in the form of services, mainly tourism, while exports of goods is limited to 2 sectors, seafood and medical products. Even though escalating trade wars could negatively affect exports, the outlook still remains fairly okay. Indicators from the tourism industry from the fourth quarter suggest a strong quarter. And in fact, it was the strongest fourth quarter on record when it came to tourist arrivals.
In total, 2.3 million tourists visited the country in 2024, exceeding expectations. We are slightly more optimistic for this year than we were because there seems to be an increased interest in Iceland. And according to the largest Icelandic airline, the booking outlook is promising. However, we can't ignore the challenging operating environment. Labor costs are continuing to increase and this has been reflected in the demand for labor, especially in the tourism industry, where it has continued to decline. And this is actually one of the clearest signs that economic activity has eased.
Although labor demand is still strong in certain sectors, there are clear signs of slowdown as job growth has lost pace and registered unemployment has continued to inch upwards, measuring 4.2% in January compared to 3.8%, 1 year ago. Additionally, firm's recruitment plans have returned to historical averages. So, there is no mistake in it. High real interest rates are affecting the real economy with some even suggesting that a small negative output gap is developing. Not only that, but inflation has continued to come down, reaching 4.6% in January. More importantly, underlying inflation has also continued to fall, albeit not at the same pace as the headline figure.
Although analysts anticipate that inflation will continue to subside, bringing it down to 3% to 4% could prove challenging. This is something that the Governor of the Central Bank has addressed and is one of the main reasons why the Monetary Policy Committee is committed to keeping real rates high for extended period of time. Still, the MPC has managed to lower nominal interest rates by 125 basis points down to 8%, while keeping the monetary stand relatively tight. Further rate cuts are expected despite increased geopolitical uncertainty. However, given the fact that underlying demand pressures have remained quite strong and inflation expectations are still well above the inflation target, most anticipate cautious steps and tight monetary stance going forward, at least until inflation is closer to target.
With that, I would like to welcome Olafur Hoskuldsson, our CFO, to the stage to go over the financials. Thank you.
So thank you, Erna, and thank you, Benedikt. So, now looking at the results for the quarter and for the full year 2024. And as usual, starting with my key highlights. So first, an overall good quarter, a solid quarter where our diversified businesses delivered an ROE for the fourth quarter in a row like Benedikt mentioned -- four year in a row, as Benedikt mentioned, of 13.2% for the year and 16.3% for the fourth quarter. I think it's a good result for the year, especially given the fact that it's fair to say that as Erna outlined in terms of the economy and the rate environment, it's been a somewhat challenging external environment.
Second, I think some of you might remember that in the Capital Markets Day last year in March, I emphasized our view that the insurance business has the potential to become a key material contributor to the group's net earnings in the future. I think we can safely say that 2024 provided a positive milestone on that journey. And the year ended very well with a profit, as Benedikt outlined, of ISK 3.7 billion and a return on allocated capital at group level of above 40%, being one of the most profitable businesses, I think, in the group.
Third, I think another positive highlight from my perspective in the quarter was how we managed the net interest margin during the period. While the margin is down at 2.9% between quarters, its stability in what has been a complicated external rate environment is, in my view, a good demonstration of our ability to manage this through the cycle, which I will outline a little bit more further later in the presentation. And finally, in terms of our funding and liquidity position, the bank is in a very, very strong position, which allows us to be opportunistically capture growth opportunities that could arise over the coming year. And we are, of course, very pleased to continue the decisive steps on our capital optimization journey with -- towards our medium-term targets and are, of course, proposing a dividend proposal and the ongoing buyback program of close to ISK 20 billion at the start of this year.
So, now looking at the -- more closely the income statement in the quarter. So, total operating income was ISK 17.9 billion, which is up 10% from the last -- from the fourth quarter last year. Net interest income was roughly flat between years, while commission income was up by 6%. Insurance service results are generally seasonally low in the fourth quarter, but were as like in Q3, up considerably from last year. We then had a generally good quarter in terms of equity and bond markets, which supported our investment income on the insurance side and in the market making business in the bank and allowed us to deliver ISK 2.2 billion profit in the financial income line, which is up by 60% between years.
Operating expenses were up by 10% between years, where the main driver relates to the variable incentive -- employee incentive scheme, which I will outline in more detail later in the presentation. We then had a positive quarter in terms of impairments and I think as we have discussed in previous quarters, we have been conservative in recent years in terms of proactive provisioning on our own portfolios. And this continues to be the case and I will outline that in more detail when we go through the IFRS 9 provisioning later in the presentation. However, during the quarter, we had a periodic review of certain provisions and discounts on individual loans and loan portfolios, which resulted in a positive impairment line during this quarter.
The effective tax rate is low in the quarter. And as you know, this primarily relates to gains on equity holdings, which are not taxable. So, net profit for the quarter is ISK 8.3 billion. And this then takes the net profit for the year to ISK 26.1 billion, which compares to ISK 25.7 billion for the previous year. Net interest margin is importantly unchanged for the full year at 3.1% and the overall operating income is up by 4%. And now looking more closely at some of the key line items and starting with the net interest income.
Net interest income was ISK 11.2 billion, which is roughly flat from the fourth quarter last year, but is down from the third quarter this year. The net interest margin as a percentage of interest-bearing assets is, like I said, 2.9% for the quarter compared to 3.1% from the previous quarter. I think we've discussed this at some length in previous calls and we have guided for this, but there have been a number of moving parts when it comes to the margin over the last past few months. The primary challenge over the past few months has related to the rapid reduction in inflation, as Erna outlined earlier, which combines with a slower reduction in policy rates, which has meant that short-term policy rates have risen to extremely high levels over the past few months. This environment does place a short-term pressure on the margin of our CPI-linked mortgage portfolio, especially, which is partly funded by non-CPI-linked deposits.
As mentioned in previous calls, we were anticipating this and have utilized the levers that we have to defend the margin as best we can. And this primarily relates to increasing the interest component on the floating rate mortgages, which are largely -- the CPI-linked mortgages which are largely floating rate and also increasing our funding efforts on the CPI-linked bond side. And as mentioned earlier, I think we are pleased with the way we manage this period and we definitely expect the margins of these projects to improve again in the coming quarters. So, we continue to guide to the margin over the medium term and near term around the 3% level.
So, looking at fees and commissions. So, another solid quarter in that regard with fees of just under ISK 4.2 billion, which is the highest rollover year for the group. As discussed earlier in the year, annual comparison, I think it's important to note, I'm not going to continue to do this every quarter, but I think it's still important to note that we did -- there was a reclassification of insurance card fees and the impact of the Keflavik airport branch at the start of the year, which combined contributed to around ISK 240 million of fees for this quarter last year. So of course, adjusting for this, there is a strong underlying momentum in the fee generation of the group. Most of the fee-generating businesses are doing very well.
And it was especially pleasing this quarter to see a strong quarter from the Corporate Finance and Capital Markets businesses. This area, as Benedikt outlined earlier, is also having a very good start to the new year and closed, of course, one of the most significant corporate finance projects in Iceland to date in Q1 when Marel concluded their merger with JBT. As most of you know, corporate finance fees are not something that really should be measured on a 3-month basis as most of those fees are generally lumpy. But I see us being in a very, very good position to leverage what could be an increased activity in the reduction -- rate reduction cycle in the Corporate Finance business. Also, as Bennett outlined, our asset management business continues to grow and it was very pleasing to see a milestone of the assets under management in the group now exceeding the total balance sheet of Arion Bank Group at ISK 1,633 billion.
So as highlighted earlier, our insurance business, Vorour had a very strong year and delivered a profit of ISK 3.7 billion. This represents a stand-alone basis, an ROE of 30%. And like I said, because of the capital treatment at group level, the earnings -- return on allocated capital is above 40%. In terms of the fourth quarter specifically, we had a solid results, which as previously guided for is a seasonal low in terms of profitability for insurance businesses generally. This results in a quarter where net results of ISK 1.7 billion compared to ISK 450 million for the same quarter last year.
I think in terms of the overall results, most of the earnings drivers are performing well. Firstly, the investment income, of course, which is a key part of insurance business earnings, improved significantly from a couple of very challenging years in that area. We also had -- in terms of the insurance side of the business, we also had a very good improvement in most of the drivers. Claims cost and reinsurance ratios were down between years, which contributed to a combined ratio of 89% versus 97% last year. We're also seeing strong growth in the business continue with increased market shares, underscoring the potential of our overall bancassurance efforts. And looking forward, we also continue to see very good traction in terms of growth with business -- in the business with, for example, sales to individuals up by 21% between years. We do, however, cautiously continue to guide and we have a medium-term target for the business of a combined ratio of around 95%. And we retain this for the time being at least, but clearly, this year provides some optimism in this regard.
So, looking at operating expenses, including those from the insurance business. Total operating expenses in the quarter were ISK 9.6 billion. This includes a ISK 1.8 billion provision related to the variable employee incentive scheme, which is usually, as you know, accounted for us in the fourth quarter every year when we have a good view of the key KPIs, which drive the employee incentive scheme. So this year, we have 100% provision related to this compared to 80% in the fourth quarter last year. And this mainly explains the impact of ISK 1.8 billion being provisioned versus ISK 1.4 billion last year.
So, this year -- yes, so from a -- just for perspective, I think it's worth noting that excluding the costs related to this variable cost, which is definitely variable, the ROE for the group would have been 13.9%. So, excluding the incentive scheme, costs were around 5% up between the year and this is partially due to increased number of employees during the period, but also just because of the general inflationary environment, which continues and inflation during this period was the same number around 5% area. As before, the increase in number of FTEs for the group is mainly in IT and in the fast-growing insurance side of the business.
So, looking at the balance sheet. Starting with the loan book, which is up by 1% to around ISK 10 billion in the quarter. As discussed in previous calls, we are -- we remain dynamic in the way we manage loan growth with a view of balancing our credit strategy and profitable growth opportunities. I think it's fair to say that recently, we have been seeing more appealing opportunities on the corporate side of the business and with margins, like I mentioned earlier, especially compressed in the CPI-linked mortgage space, as outlined earlier. So this is, of course, demonstrated in the fact that in this quarter with the growth in the loan book was virtually all on the corporate side. This is not to say that we're not writing new business on the mortgage side as we are, of course, always turning the book continuously.
And we are optimistic that the margins in that area will improve as the year progresses and we are in a very good strong position to increase growth there again with strong funding position and market position, allowing us to be optimistic when the opportunities arise. At the same time, we see strong traction on the corporate side and we have been able to add very good exposure there over the last few months. We've also continued to leverage our relationship, strong relationship with private credit partners where we originate to distribute and sell assets to third-party investors. And we sold a total of ISK 22 billion of corporate loans to investors over the last year.
The strength -- the key strength of our platform is that we can be optimistic and dynamic in the way we manage our loan growth in the way to decide what to retain on our balance sheet and what to syndicate out to other investors. And this will -- is and will continue to be a strength over the coming year. And the loan book continues to be very well balanced, 46% mortgages, 6% other loans to individuals and 48% to corporates. So, looking at provisioning, as discussed, we had just around ISK 900 million positive reversal of impairment in the quarter. As discussed, this primarily relates to certain discounts and provisions on individuals, loans and loan portfolios. We have, however, not changed our conservative outlook when it comes to our IFRS scenario-based provisioning. We retain our 30% pessimistic weight, for example, which we increased during the rate hike -- when the rate hiking cycle started a few years ago. So, the total loss allowance at the end of the quarter is ISK 9.4 billion or 0.8% of the loan book.
And I think in general, the theme is very similar to what I've been describing in previous quarters. Credit indicators are robust and our clients seem to be managing through the very high interest rates relatively well. But we are, however, conservative, and we are -- while the rates are starting to come down, rates are still very high. So, we retain -- and this is the primary driver for us retaining our conservative stance when it comes to our IFRS 9 assumptions for the time being. And we continue to see through the cycle expected loss of the loan book of around 20 basis points to 25 basis points and slightly higher over the next 12 months at around 27 basis points based on the loan book composition currently.
So on deposits, deposits continue to grow in the quarter and ended at just under ISK 860 billion. And as before, we continue to drive the strategy of growing where we see stable categories of deposits. And as you see in the top right chart of the page, the growth is in those areas. And I think it's also worth noting the impact of deposits in our net interest margin. And it's worth highlighting like I did in the Capital Markets Day that the fact that the deposit betas are very high in the asset market, deposit was high when the rates came up. This can create a buffer for our margin when rates come down again from the clear obvious reason that there is just more room for the deposits to come down in the rate reduction cycle than you see in other countries where the deposit beta was lower.
In terms of wholesale funding, in general, the funding markets have continued to be very constructive and our focus has been to nurture this as best we can and continue to diversify the funding profile continuously. Following a successful AT1 issuance in the third quarter, we have been especially active in the Scandi market in the fourth quarter with the senior and Tier 2 issues. And on capital, our position remains strong, common equity ratio of 18.2% or 293 basis points above regulatory requirements and still, of course, above our 150 basis points to 250 basis points target. This includes, of course, the full impact of the ISK 16 billion proposed dividend payment and the ongoing ISK 3 billion buyback program.
During the year, there were some movements in the capital requirements where the systemic risk buffer was lowered from 3.2%. But at the same time, the buffer for systemically important bank was increased from 2% to 3%. So, the impact overall for us was negligible. We also had an increased risk exposure amount at the end of the year because of the operational risk component. This is an annual revision of the operating risk requirements and the impact of this was around 0.1% increased capital requirements on the CET1 ratio.
As outlined in the third quarter presentation, we expect some net positive impact from the CRR3 implementation, which we now expect to be coming into effect in July. This year, at this time and subject to ongoing dialogue with the regulator, we expect this to increase surplus capital by around ISK 5 billion. We are committed, of course, to our medium-term targets of reaching 150 basis points to 250 basis points management buffer, and we expect to reach the target within the next year or so. The leverage ratio continues to be very strong at 12.2% and the MREL position very strong again with a 6% buffer above requirements.
So, before I hand over to Q&A, I just want to highlight some of the key themes from my perspective going forward. So, we conclude another solid year for the group where a key of the diversity of our business provides support for the overall operating income of the group through the economic cycle. We continue to cautiously anticipate continuing complicated external operating environment near term, both in terms of the domestic rate environment and also, of course, because of the international political landscape. But however, the recent definitive reductions in policy rates, coupled with the sustained strength of the Iceland economy clearly offers potential upside from that conservative outlook. We are, as before, well positioned to navigate this environment and to capitalize on profitable opportunities as they emerge into the new year with a robust balance sheet and a seasoned and focused business model, we start the new year with optimism.
Thank you very much. And I'd now like to hand over to Q&A and welcome Theodor Fridbertsson, Head of IR. Thank you.
Thank you, Olaf. Good morning, everyone. As usual, we will start with questions from our online participants. And also we would like to remind them that they can still submit questions through the online platform and then turn to the auditorium. And -- but we -- I have a few questions already in here and we'll start with a few questions from Alexander at Akkur. Five questions. The first 3 ones are on capital. So, I'm going to read them all up.
Did we read anything into the decision to pay bigger dividend than the 50% target rather than do more share buybacks? Secondly, the current share buyback plan probably ends shortly. Can we expect further buybacks in the near future? And thirdly, can you shed some light on when you expect or wish to achieve your CET1 capital ratio target of 17.2%, which is in the mid-range of our target. Even when accounting for the dividend and ongoing share buybacks, you still have around 100 basis points in excess of the target at year-end. And I assume you will add another 50 basis points to 100 basis points to profits in Q1. Did you get all that?
Do you want to take this?
Yes. So I think the first question was on the dividends versus buybacks. So, we're paying above our 50% dividend payout ratio for this year. And I think this is just always a sort of consideration we have different stakeholders, different investors that have preference for different types of payments. We've been very active in the buyback space over the past few years. So, I think on balance, we decided to increase our dividend payout ratio now.
Yes. But obviously, the buybacks provides a little bit better flexibility in capital management as we navigate into a year and see how our risk exposure amount develops on the back of loan growth. So, I think the fact that we decided to propose a dividend payout, which is higher than kind of our financial target, I think, demonstrates the -- our intention to get as close to the -- our target as we can this year. And then I assume that buybacks will be other means of getting closer to that.
So you almost answered the next 2 questions. I think the second question was on whether more buybacks could be expected. And I think Benedikt outlined that in the beginning of his presentation that we are looking at loan growth into the next year. But clearly, we've been very active in the buyback space and that's a good way to distribute capital when we see the opportunities. So, I wouldn't exclude that, definitely. And the third one, I think I answered that as well. I think we have the ambition to optimize the levels within the next year or so.
Then the next question is on regarding our development properties. Can you shed any light on the possible upside in Landey? At what point in time do you expect to market [indiscernible]? Will you wait until the first phase plan has been fully approved, i.e. Q4 '25 or Q1 '26? Or could it happen sooner?
Yes. I think I want to stick to the message in the presentation that this is going to be the year when we start seeing results of years work, extensive work in close cooperation with the municipalities around developing these development sites. And we -- as you can see from the time lines that we put on screen here, first half of the year, we're expecting Arnarland to come basically into development phase with district planning being approved second half of the year for Blikastaoir. But I suspect that we will sort of start preparing for future ownership structure for the benefit of our shareholders earlier than that for Blikastaoir.
And I think these 2 projects are somewhat different. I think Arnarland, once it gets the final approval, it's effectively fully kind of monetizable, whereas the Blikastaoir obviously has 3 considerably large phases. So, our approach for kind of retaining and ensuring that the value is distributed to our shareholders is somewhat more complicated than Arnarland. I think maybe just -- I mean, we, of course, always reflect in our accounts, our best estimate of the valuation. And -- but of course, the key uncertainty key driver of the valuation is the time line of these projects. And as we show on this page, as we reach those milestones, that time line becomes more known. And of course, then there will be -- as we go along that time line, that uncertainty becomes less clearly.
And the final question from Akkur is on the impairments. So, if borrowers have managed to get through the last couple of years with very high interest rates and elevated inflation without any major setbacks, should we expect further release of impairments this year with lower interest rates and inflation?
I think we -- as Ola outlined in his presentation, some of the releases were due to loan portfolios towards individuals, which is a bit of a legacy kind of situation going back years. And I think we always try to reflex on the sort of true value of our loan portfolios. And this was a time where we felt, especially having come through the environment that you described, that we felt that this was the right point in time to release some of these provisions back. And I must admit that it's been pleasing to see debt service capabilities of our clients through this challenging period and that demonstrates that finances of households and corporates are generally in good order. Ola, you provided a certain guideline to kind of the provisioning.
Yes. So, we have 27 basis points 12-month expected provisioning. But like I said earlier, we provision very cautiously when rates started to increase. We increased the IFRS 9 sort of model assumptions as putting a weight on a worse scenario, pessimistic outlook. Clearly, if we start seeing rates coming down and the underlying sort of assumptions around that, those assumptions becoming clear, then we have the scope to reduce that again. I don't think we're there yet is what my message was, but it all depends on how the economy comes through this.
And we have another question on Landey, but I believe we have answered that quite thoroughly. And then the final question here is on loan growth. Could you elaborate on how you perceive the loan growth potential in relation to expected lower interest rate levels? And related to this, there is a decrease in mortgage lending from last quarter. Do you expect further decrease in this portfolio?
Yes. The mortgage portfolio is very price sensitive. And in order to manage our CPI imbalance, we priced our mortgage products in a way that we sort of didn't want to see a substantial increase in that imbalance. So, we can manage this growth, especially on the mortgage side through pricing quite well. And it's -- the market responds fairly quickly to sort of different pricing. On the corporate side, I think it was a relatively slow quarter, fourth quarter of last year. However, a little bit better growth on the corporate side. The year starts off slowly, but as Erna outlined in her presentation, there are a number of capital-intensive projects being worked on where we are involved and committed to kind of supporting corporates in that space in the industries that we believe in, in building up the businesses. So, it sort of remains to be seen how much the improved interest rate environment for corporates and households leads to loan growth.
I believe that concludes the questions from the online participants. So, we'll move to the auditorium. Are there any further questions? No. Then I think this concludes our session today. So, thank you all very much for attending both here and online and see you next time.