Islandsbanki hf

ICEX:ISB

Earnings Call Analysis

Islandsbanki's Q2 2024 Financial Highlights

In Q2 2024, Islandsbanki reported profits of ISK 5.3 billion, down from ISK 6.1 billion last year. Their return on equity was 9.7%, below the 10% target, mainly due to one-time expenses. Loan growth was strong at 2.3%, while deposits grew by 4.2%. Despite high interest rates, asset quality improved and non-performing loans decreased slightly. Management expects modest inflation decreases in the coming quarters and remains committed to share buybacks and capital optimization. The bank is well-positioned with a high capital ratio and strong liquidity.

Financial Performance Overview

In the second quarter of 2024, Islandsbanki reported a profit of ISK 5.3 billion, a slight decrease from ISK 6.1 billion in the same quarter last year. Notably, the return on equity (ROE) was reported at 9.7%, but if adjusted for a recent fine, the ROE would rise to approximately 10.6%. This performance is slightly below the bank’s target of around 10% for the year, primarily due to challenges posed by the high-interest rate environment and fluctuations in net interest income (NII) resulting from fixed-rate imbalances.

Impact of Economic Environment

The overarching economic conditions in Iceland, particularly high inflation around 6%, are affecting consumer behavior and the bank's operations. Borrowers have been moving to inflation-linked products to mitigate the impact of high interest rates, which are currently around 9.25%. Predictions indicate that inflation may start to decline in the fourth quarter, potentially paving the way for interest rate reductions thereafter, which would benefit banks by stabilizing margins.

Loan and Deposit Growth

The bank saw a solid loan growth of 2.3% during the quarter, with total loans standing at ISK 1,277 billion. The mortgage book, which constitutes the largest segment, remained strong with Loan-to-Value (LTV) ratios flat at 57%, indicating conservative lending practices. Deposits also grew robustly, up 4.2% quarter-on-quarter, totaling over ISK 900 billion, reflecting a strong financial position among households. Notably, individual deposits accounted for about 50% of this growth.

Cost Management and Efficiency

The bank’s cost-to-income ratio slightly exceeded its target at 46.4%, recorded at 45.6% for the first half of the year. A significant factor contributing to this was a 7.9% increase in salaries due to new hires and wage negotiations. However, there is optimism that costs will stabilize in the upcoming months, aided by seasonal factors typical in Q3.

Risk Management and Asset Quality

Despite an increase in 30-day delinquencies, particularly in small and medium-sized enterprises (SMEs), Islandsbanki maintains strong asset quality. The percentage of Stage 2 loans dropped notably from 3.3% to 2.5%, attributing this decline partially to the reclassification of certain loans. The bank has effectively managed its risk exposure, with the cost of risk remaining low at approximately 18 basis points.

Future Growth and Capital Strategy

Islandsbanki has ISK 25 billion in excess capital, excluding dividends and approved buybacks, and is actively considering both internal growth and potential acquisitions. The current strategy includes continuous share buybacks, with ISK 6.7 billion still available for purchases. Furthermore, the bank aims to optimize its capital structure by the end of 2025, which may include special dividends contingent on market conditions.

Regulatory Environment and Forward Guidance

The bank's capital position remains robust with a common equity tier 1 (CET1) ratio of 19.9%, exceeding regulatory requirements. Following a recent review, the total capital requirement for the bank has slightly decreased from 10.4% to 9.8%. The management remains optimistic about achieving an ROE above 10% in the medium term, targeting potentially additional earnings resulting from reduced inflation and stable interest rates.

Conclusion and Strategic Direction

Looking ahead, Islandsbanki is positioned to navigate through challenging economic conditions, leveraging its capital strength and prudent risk management. The anticipated decline in inflation and interest rates could enhance profitability. Continued investments in digital transformation and customer services are also expected to drive growth as the bank prioritizes the financial health of its clients.

Earnings Call Transcript 2024-Q2

[BjarÂney BjarÂnadotÂtir, executive]

Good morning all, and welcome to Islandsbanki this Friday where we present the Financial Results for the Second Quarter of 2024.

I'm Bjarney Anna with Investor Relations, and today, I'm joined by our CEO, Jon Gudni Omarsson; and our CFO, Ellert Hlodversson.

Before I hand the session over to them, I want to mention that as per usual, we will have a Q&A session following the presentation. [Operator Instructions] You can also submit questions in writing using the webcast forum or email us at [e-mail].

Now, over to you, Jon Gudni.

[Jon Guoni Omarsson, executive]

Thank you, Bjarney.

As I am traveling, we have a bit different setup from what we usually have, but I hope you can all hear us loud and clear. And also hope that you have been or will be enjoying your summer holidays. I took mine in the Puglia region this year in the Southern Italy, which I highly recommend, even though the temperatures reached close to 35 degrees, which is something we definitely have not seen in Iceland this summer, where we have had a relatively cold summer and even some snow as far out as in June in the North of the country.

But moving to our financial results and if we go to the next slide, our ROE and then earnings are very much in line with our own guidance and in line with consensus estimates as well. The cost-to-income ratio slightly over target in the quarter, but we hope to see that coming down a bit in the third quarter, which is due to seasonality, usually fairly low in terms of cost due to the holiday season. Our capital position obviously remains extremely strong and we continue our share buyback program, and we have actually seen an improvement in our asset quality measures with the Stage 2 ratio, especially coming down in the second quarter. And that's largely due to the fact that we have moved some of our exposures to the town of Grindavik into bonds and debt instruments. So that's not a part of the loan book, but we have at the same time also not seen an increase from our ongoing loan book. At the same time, however, we see some increase in 30-day delinquencies, especially in the SMEs, and some signs of the high interest rate environment having an impact on individual borrowers as well. But overall, as you can see in our numbers, we're still seeing very strong asset quality.

Now, moving to the next slide. In terms of our targets, we are obviously slightly below in terms of return on equity in the second quarter and in the first half of the year, and in line obviously with our guidance, which we keep at around 10% for the year. The biggest impact here is the interest rate environment, where we are seeing that many of our customers have moved over to inflation-linked products to basically move a bit away from the very high interest rates. So the Central Bank rate is at 9.25%, which means that our customers often time have 10% to 12%, 13% interest rates, and in some cases have moved over to CPI-linked rates to lower a bit the monthly payment burden. This can have some impact in terms of fluctuations in our earnings and then Ellert will describe that better for you a bit later on.

Now moving to the next slide. In terms of the economy, we are transitioning from high growth after the COVID times where we obviously had very high growth in 2022 and then quite high last year as well. So we expect to see quite modest growth this year, somewhat impacted by the tourism, where we are seeing -- we expected to see actually growth this year in terms of the number of visitors, but based on the latest numbers, we actually now expect to see some reduction -- a small reduction in numbers and that's partly due to the volcanic activity that we have had earlier this year and is ongoing obviously and also due to the fact that Iceland is obviously, fairly pricey at the moment, but we are quite optimistic for the future of the industry. The housing market remains very robust and we have actually seen prices moving upwards, though at a relatively modest pace based on what we have seen, for example, following the COVID period. And we are seeing strong demand for departments and some expectations that we might be having a shortage of supply. But we expect to see this -- also see the housing prices grow modestly in real terms over the coming few quarters.

Iceland remains fairly low in terms of leverage, both for the households, corporates, and the central government if we compare to the Nordic countries and even obviously lower in the comparison internationally. So that helps us obviously in terms of when we're going through this high interest rate environment. The inflation is, as you can see here at the bottom right, this is expected to come down relatively slowly. There were expectations that it would come down quicker earlier this year, but we are still running at around 6% and now expectations are that it will really start coming down in the fourth quarter and then into next year and then interest rate reductions, obviously decreases will follow. There have been expectations to see the first decrease in August, but the market consensus is now moving towards the fourth quarter this year in terms of interest rate decreases. That obviously has a big impact in terms of the capital markets, asset management, and then the fee income as we'll describe a bit later on.

Now moving to the next slide. In terms of the quarter, just a few operational highlights. We obviously continue to invest in the digital development and the selling of digital products. And our chat-bots just recently received a strong reward there, so we're doing quite well in terms and services there. We concluded or basically made an agreement with the FSA in terms of our AML issues that we had outstanding; that resulted in a fine of ISK 570 million, ISK 470 million of which are charged now in the second quarter of this year and very good to get that basically out of the way and finalized, and now we can focus on the future basically to continue to build up our AML capabilities and that's part of the reason for the increase in costs this year is that we have been investing quite heavily there and strengthening our team on that front. We continue to have a very strong market share in terms of SMEs and also in equities in terms of trading in the Icelandic Stock Exchange. And then I will discuss a bit later on in terms of the next steps in terms of the government sell down of their shares in Islandsbanki. So we will get back to that later in the presentation.

So moving to the next slide. We just want to highlight here that we are focusing quite heavily on financial health of our customers these days, both through customer service and selling products that support financial health. We are seeing this high interest rate environment and high inflation having some impact obviously on our customers and therefore we deem this to be particularly necessary now, both in terms of services, both in the digital front and overall, and then also in terms of education, where we have been extremely strong and continue to support our clients in that way as well.

Now we'll move into the finances, and Ellert, over to you.

[Ellert Hlodversson, executive]

Yeah.

[Jon Guoni Omarsson, executive]

No, sorry. I missed Reykjavik Marathon, which I obviously would like to cover. This is basically we're now moving into August, which we call the marathon month, basically at the bank. This is the biggest charity event of the year in Iceland, where we are a very proud sponsor. And this is actually the 40th anniversary of the marathon in Iceland, and we're hoping to see a very good attendance and obviously, large funds being raised for the [Technical Difficulty].

Over to you, Ellert.

[Ellert Hlodversson, executive]

Thank you, Jon.

If we look at the quarterly results, as Jon Gudni stated, our profit for the quarter was ISK 5.3 billion, compared to our ISK 6.1 billion last year. Our return on equity reported at 9.7%, but if we adjust for the FSA fine, this would mean that our return on equity would have been 10.6%, all the things equal. Contraction in core income between years amounted to 1.8% where fixed rate imbalance and CPI balance were impacting the banking book. The main difference between the quarter's year-on-year is however, in impairments as impairment reversals were realized both quarters, although more significantly larger last year. But looking at interest income, we are seeing quarter-on-quarter from Q1 growth in interest income, however we are seeing fixed rate imbalance and CPI imbalance continuing to affect the operation. In April, the Central Bank raised the fixed reserve requirements from 2% to 3%, which is also impacting year-on-year comparison.

Looking at things in actual terms, our interest income grew by 3% between quarters compared to a loan growth of 2.3%. Net interest margin amounted to 3.1%, growing from 3% in Q1 and 2.9% in Q4 2023. Policy rates remained flat during the quarter of 9.25%. During the quarter, we recorded inflation in the amount of 1.93% and the CPI gap for the second quarter amounted to ISK 204 billion. We have previously stated that as inflation subsides, NII will become more volatile and pressured given the current loan book composition as inflation comes down, if policy rates do not follow in the same pace. As of now, we have two of the three inflation ticks for Q3 already in the public domain published by Statistics Iceland. Should the forecast on monthly ticks by Islandsbanki Research materialize, we anticipate that we will record inflation ticks during the third quarter of 1.24%. Comparably, should the macro forecast realize, we anticipate that inflation in the fourth quarter is going to be recorded as 0.8%.

Looking at fees, as before, card and payment processing is the largest NFCI contributor, reducing slightly year-on-year on the back of increased cost of services. Islandsbanki had the highest turnover rate in equities on Nasdaq Iceland and a good position also in bonds. Nevertheless, investment banking and asset management banking fees remain pressured as market conditions have been unfavorable, although both yields and equity valuations support overall positivity for the coming months. Allianz continues to contribute healthily to NFCI, showing significant year-on-year growth. Market condition also had adverse effect on NFI during the quarter. We continue to be cautious with regards to market risk where exposure to listed equity instruments amounted to ISK 4.6 billion end of the quarter. As before, bond and debt instruments on the bank's balance sheet are predominantly related to the liquidity portfolio. On the lower right-hand side, you will see a contraction in the FX part of the liquidity book, which can be attributed to a repurchase of EUR 300 million bond issued by the bank which we bought back and settled end of June.

As Jon Gudni stated, our cost-to-income ratio is in excess of target of 46.4%, yielding our cost-to-income ratio of 45.6% for the first half as a whole. Salary growth during the quarter was 7.9%. End of the season or end of the quarter, the bank employed 726 employees compared to 691 end of Q2 2023. Growth in salaries is therefore related to additional FTEs, which the bank has taken on to strengthen its regulatory infrastructure. In addition, we have had general union wage negotiations of [3.25] also having an effect on year-to-year comparison. We note that seasonality is significant in salaries due to accrual of leave where Q3 tends to be lower in terms of salaries. Other operating expenses rose by ISK 264 million, of which the lion's share is owed to investments in IT, aimed to strengthen the bank's product offerings and infrastructure.

In 2023, the FSA conducted an on-site inspection to the bank's measures against money-laundering. During the quarter, as Jon Gudni stated, we announced a settlement on that case and paid a fine of ISK 570 million, of which ISK 470 million are recorded as charged during this quarter, as we had already made ISK 100 million provision in our 2023 financial statements.

Over to the balance sheet. End of Q2, the lending book amounted to ISK 1,277 billion and grew by 2.3% during the quarter where all business segments were contributing. As before, mortgages are the largest part of the book, the rest remaining well diversified between industries. LTVs remained flat from previous two quarters at 57% across all types of securities, despite high interest rates and high inflation. Portfolio continues to be concentrated towards the lower-risk class borrowers, a reflection of our conservative credit culture.

During the quarter, we realized impairment reversals of 4 basis points, leaving the trailing 12-month cost of risk to approximately 18 bps, including a management overlay taken into account Q4 2023 due to the seismic activity in Reykjanes. Impairment reversals during the quarter were mainly owed to the recalibration of models, as well as few distressed cases -- sorry, where a few distressed cases and other changes have an opposite effect. Stage 3 loans were reducing in the quarter from 1.9% to 1.8%, a further reflection on the loan book's quality. Stage 2 loans reduced from 3.3% to 2.5%, partly attributable to the reclassification of mortgages related to real estate in Grindavik, which Porkatla has taken over. We currently classify that as bond instruments, meaning that they are leaving their loans to customers, thus out of Stage 2.

Looking further at the mortgage book, the same goes there, the development of credit quality. Stage 3 loans are flat from previous quarter where Stage 2 loans decreased by 6.6 percentage points, mainly related to the previously mentioned reclassification of loans in Grindavik. The conversion for nominal loan forms to CPI loan forms has continued during the quarter and the mortgage book is currently 58% in CPI-linked instruments compared to 56% in the previous quarter. On the other hand, the fixed rate imbalance will continue to subside by ISK 10 billion to ISK 15 billion over the next quarters, over the next year and a half or so. In total, ISK 76 billion are subject to interest rate reset until end of 2025.

Since credit assessments were conservative, when those loans were taken during the low interest rate environment, borrowers are well prepared for the higher interest rate environment. Overall, the mortgage book is in a healthy state with NPL lowering quarter-on-quarter. Exposure towards real estate companies grew by 1% during the quarter and to construction by 3%. End of the quarter, the sectors amounted to 12% and 7% of the loan book, respectively. As before, this portfolio is predominantly CPI-linked, naturally hedged by borrowers on the back of CPI-linked rental agreements. Occupancy ratios for the largest real estate companies remain around 95%. The portfolio is well secured through liens or in relation to construction progress. NPLs are also showing a trend of lowering from 1.7 end of Q1 to 1.6 end of Q2.

On the liability side, deposits are the largest funding base, accounting for over 50% of our liabilities currently, following a repurchase of EUR 300 million towards the end of the quarter. Deposits grew by 4.2% during the quarter and now in excess of ISK 900 million, of which individuals account for 50%. Concentration is both low and stable.

On the wholesale funding side, the banking was active during the second quarter as we issued SEK 300 million and NOK 200 million, 3-year senior preferred bonds, as well as ISK 7 billion of both 3-and 4-year senior preferred bonds. In addition, we issued corporate bonds to fund our mortgage operation.

Given our high liquidity level, our strong capital and ample MREL buffers, we opted to tender for annual all of EUR 300 million bond issued in 2023, which was issued at historically white levels. The bond was bearing a high-interest expense of 7.375%. The uptick of the tender yielded 91%, allowing the bank to utilize a cleanup clause for the remaining bonds at fair value, thus relieving the bank of interest burden. Further, we called our SEK 500 million Tier 2 bond in June, which was due in 2029, both without direct refinancing. Following this, our maturity profile for the coming years is low. This allow us to be opportunistic in our issuances, a favorable position, given that spreads on the international markets have tightened considerably throughout the year. In April, we received a rating uplift from Standard and Poor's, where we are now rated at BBB+ with stable outlook. In addition, we hold an A3 rating from Moody's, also on stable outlook.

In terms of liquidity, the bank is, as before, well in excess of requirements, closing at 190% LCR for total coverage ratio and [129% in ISK]. End of the quarter, our liquid assets amounted to ISK 271 billion, second largest segment on the balance sheet of 17% of total assets. This, however, is a ISK 54 billion reduction from end of Q1, mainly related to the repurchase of EUR 300 million bond end of June as we have discussed before.

And then lastly before I hand over to Jon Gudni, again on capital. End of June, we received the results from the annual SREP process. Following that, a decision was made by the regulator that the bank must maintain an additional capital requirement of 1.8% of REA, which is a 0.6 percentage point reduction from the previous decision. This resulted in the total SREP capital requirement going from 10.4% to 9.8%. Given the combined buffer requirement, our overall capital requirement is then 19.7%, thereof, CET1 requirements are 15.4%. End of the quarter, our capital ratio closed off at 23.1%, reducing slightly from the end of Q1 on the back of among other buybacks. The CET1 ratio, however, was 19.9% at the same time. Taking into account the midpoint of the bank's management buffer, our total access CET1 capital was 250 basis points, excluding already approved buybacks and assumed dividend payments in accordance with dividend policy.

We are a standardized bank. The bank's REA ratio closed-off at 63.9% end of the period and the leverage ratio is high at 13%. Implementation of Basel IV is expected to reduce REA, thus providing additional capital or growth capacity, as we have discussed before. As before, we plan to optimize our capital structure before end of 2025. To that extent, we may look towards both internal or external growth on our balance sheet, further capital distributions, either through ordinary share buybacks which are underway, additional transactions in the form of reverse auctions and/or extraordinary dividends, given market condition.

And with that, I give it again to Jon Gudni.

[Jon Guoni Omarsson, executive]

Thank you, Ellert.

So we move to the next slide, a bit more in terms of our shares. Like Ellert just described, we have obviously, been quite active in share buybacks, both regular ones in the market, and then also through the auction process. And we now own just below 4% of our own shares and still have the ability, based on the approved buybacks, to buy back ISK 6.7 billion more. And like Ellert said, we plan to finalize the optimization of the capital structure before the end of next year. So this is an ongoing process.

The share price has been fairly modest, I would say, in the past few quarters, along with the Iceland domestic market, where interest rate levels obviously, and high inflation is having quite a big impact on the market prices and we are 2 or 3 quarters behind what we have seen internationally, where obviously the top of the interest rate curve and a potential lowering of interest rates has had a positive impact. And we obviously hope to see that here in Iceland as well in the second half of this year.

The Icelandic parliament passed a law in June, allowing the government to continue the sell-down of their shares in Islandsbanki, and the Ministry of Finance have already hired financial advisors, and we believe they are also in the process of hiring [indiscernible] to manage the next sell-down, which is planned to be through a fully-fledged share offering with prospectus, which obviously will then entail a lot of hard work for the bank and then the advisors to prepare that prospectus and all the related documents, obviously and then in masterwork to obviously go through our equity story and give investors the best picture possible of obviously the ongoing strength of the operations of the bank and the future operational results. So that's going to be ongoing now in the next few months and something that we are really looking forward to meet investors and then tell our story.

Then moving to the next slide, to sum up. We are fairly happy with the results this quarter with earnings in line with both our guidance and the consensus. We obviously, will see, like Ellert described, expect to see some fluctuations in the coming months due to the interest rate and inflation environment, but definitely, plan obviously, and to have earnings well above our 10% requirement going forward in the medium term. The inflation environment in Iceland is hopefully coming down and stabilizing, and hopefully, we will see a reduction in rates in the second half of this year. And there are definitely some signs that, for example, private consumption is coming down, which will then allow the Central Bank to start lowering rates. We are extremely well positioned in terms of both the capital and the loan book and the quality of the loan book, and have seen very good growth in both loans and deposits for the past few quarters, and capital optimization remains a very key point for us going forward to enhance our earnings and then optimize our capital structure.

With that, I think we'll move over to questions. So back over to you, Bjarney.

[BjarÂney BjarÂnadotÂtir, executive]

Thank you, Jon Gudni. We will now open for a Q&A session. You can participate in the session via the conference call, and the operator will give you the floor. You can also, if you prefer, submit questions in writing using the webcast form. So, operator, are there any questions on the line?

[Operator]

We have questions. [Operator Instructions] The first question comes from the line of Sofie Peterzens from JPMorgan.

[Sofie Peterzens, analyst]

So I have 2 questions. I knew you had some one-offs in your second quarter results, but your return on equity was slightly below your target of 10%, and your cost-to-income ratio was slightly above your target. How should we think about the Islandsbanki delivering a return on equity above 10% or kind of over the next 2 years or so, what are the main levers? And if kind of lend-off is normalized from 4 basis points of recoveries to 25 basis points, which you guided, it's a normalized level? So if you could just kind of talk about the different moving parts to maintain a 10% plus return on equity.

And then the second question would be just if you could elaborate a little bit more on your ISK 25 billion of excess capital, which excludes the dividend accrued and the current share buyback. You mentioned internal and external growth opportunities, but maybe if you could elaborate a little bit like size, geographic location, is it purely Iceland or somewhere else? How easy is it to do more share buybacks? And kind of how do you do weigh, like, share buybacks compared to special dividends? So maybe a little bit around your thinking around distribution of excess capital.

[Jon Guoni Omarsson, executive]

Okay. I'll maybe start with in terms of the excess capital. There, obviously, as we have been doing, we have been seeing that optimization both through buybacks and also through growth. And for example, first half of this year seen quite strong loan growth, and so that's the plan going forward as well, that we will have a mix of those two. Loan growth continues to be quite strong in Iceland, and we also see some opportunities abroad with some modest growth there in both, obviously, where we have been active in the seafood sector internationally, and then in loan participations as well. Then obviously we cannot rule out some M&A here in Iceland, even though there's nothing on the table at the moment. So through those means obviously, we plan to optimize the capital before the end of next year.

In terms of the ROE, we believe our underlying business supports well above the 10% target. And so when we look at into the near term or the medium term over the next few years, we quite strongly believe that we can be definitely above the 10%, and just a question of how far above it. But then, in the short-term, the question is obviously, in terms of the fluctuations in the inflation and the interest rate environment. And as we have noted quite strongly and giving more input now into the expected inflation ticks in the coming few months, we can have some fluctuations due to that in the short-term, but in the medium to long term, we see this as a net positive, and at the same time, we are seeing then imbalances in our net interest or the interest rate book basically in terms of fixed interest rates that will be running off in terms of the fixed-rate mortgages. So in the medium to long-term, the prospects are quite good on that front.

Anything that you would like to add there, Ellert?

[Ellert Hlodversson, executive]

Not much. But I mean, maybe on the capital return side, obviously, as the government -- should the government move forward with the potential sale, we expect liquidity to increase on the market, which would allow us to be, I would say, to source more paper for buybacks. So I think buybacks are going to be, I would say, conducted throughout the year. On the back of that, in terms of the ROE, also note that we are making some investments, especially in IT on the back of which we are going to expect increased efficiency.

[Operator]

The next question is from Piers Brown from HSBC.

[Piers Brown, analyst]

I've got 3 questions. The first is on the deposit growth. By just looking at the overall deposits up about 4% quarter-on-quarter, and the individual deposits up about 5%, just seems sort of surprisingly strong pace of growth, given obviously, all the inflationary pressures on households at the moment. Is there anything seasonal in that rate of growth or is that a reflection of just the underlying trend on deposits? That's the first question.

The second question is on, you've given that number of the percentage of the deposit stock, which is term, the 19%, I think that's the first time you've given that number. I might be mistaken on that, but in any event, the question is how that sort of compares to longer-term history on the term percentage of overall deposits.

And then the final question is, have you got a figure for the contribution of the CPI imbalance to net interest income this quarter?

[Ellert Hlodversson, executive]

Maybe on the deposit growth first, yes. I mean, the deposit growth has been quite strong throughout the year. We are, however, seeing that across all the banks. I think the overall financial position of households is quite strong, as indicated by the quality of our loan book also. We are seeing, for example, repayment from the tax authorities on tax exemption, on financial gain being higher than ever on the back of higher, I would say, deposit rates during the last year. We are not seeing any specific seasonality in the deposits, but more reflection of the overall strength of the households, especially the growth has predominantly been in that segment.

When it comes to term deposits, I think we have published this figure, Bjarney, before in our Pillar reports. I might be mistaken, but I believe so. This is on at comparable levels to what we have seen in the recent history. There has been, I would say, limited appetite for term deposits here or limited, let's say culture for term deposits domestically, which is growing still.

With regards to CPI imbalance, yes, I mean, we obviously, have a figure in mind, but we have, I would say, attempted this quarter to give some flavor on it in the NII slide on the expected CPI ticks and the underlying size of the imbalance. The last part to it is then the pricing of the CPI loans, which is, as always, subject to change.

[Jon Guoni Omarsson, executive]

If I had to add to that a bit on the CPI imbalance, we expect that the impact on our earnings in the second quarter to be modest. Basically, that inflation plus real rates are similar to the normal rates, so it's not a big impact there. But in the second half of the year, we can see some negative impact there if the inflation comes down, but the Central Bank is hesitant to lower rates. So that's the question, the dynamic there which can cause some volatility in our earnings as we have been noting. But when we have seen that transition going through, we expect to see rather a positive impact on the CPI impairments.

[Piers Brown, analyst]

Could I just have 1 final follow-up on the government stake sale? I mean, you mentioned all the work you need to do on prospectus, et cetera. Is there anything on timing as to when that may come?

[Ellert Hlodversson, executive]

I think what the Minister has stated is that they want to get this over with during the -- I would say during the current term, which is I would say we're headed for election, I would say no later than fall of '25. So I think they have stated that something should happen this year, but that is, I would say more of a question for the government.

[Jon Guoni Omarsson, executive]

And obviously, subject to market conditions.

[Operator]

There are no more questions. Yeah. No more questions from the telco at this time. So I hand the word back to you, Bjarney, for maybe written questions and closing remarks.

[BjarÂney BjarÂnadotÂtir, executive]

Yes. Thank you, [Ener] And we have two questions from Namita Samtani. I'll read them out loud for you to respond to. The first question is why does Basel IV have a positive impact on RWAs for Islandsbanki?

And the second question, loan growth was quite strong this quarter. How do you expect loan growth going forward?

[Ellert Hlodversson, executive]

Maybe first on the Basel IV question. Islandsbanki is a standardized bank, so we weigh our REA based on the standardized approach. We expect to see, I would say, reduction in REA coming from multiple factors. The largest effect are going to be related to mortgages where we are moving from 35% weight into the REA base to a more, I would say more LTV-based approach. So as on the back of that, we expect to yield some reduction in risk-weight assets. Same goes for, for example, some of the construction loans, some of the overdrafts, which we are structuring in a way that we will reap benefits due to this. So this is mainly on the back of the fact that we are standardized currently and moving with Basel IV a bit more into the same direction as the IRB banks have had.

On the loan growth, loan growth has been strong during the quarter. We're seeing good signs from the companies especially, construction is picking up. We're seeing new indices coming into Iceland, both in terms of infrastructure as well as other. We expect loan growth to be I would say in the mid to high mid single digits over the year.

[BjarÂney BjarÂnadotÂtir, executive]

Since there are no more written questions, we want to thank you for joining our webcast this morning. We appreciate both the time you've committed to joining as well as the questions raised. So thank you and have a great weekend.

[Jon Guoni Omarsson, executive]

Thank you.

[Ellert Hlodversson, executive]

Thank you, all.