Islandsbanki hf

ICEX:ISB

Good morning, and welcome to Íslandsbanki for the fourth quarter and full year 2024. I'm Bjarney Anna with Investor Relations, and I will be moderating today's session. I'm joined today by our CEO, Jón Gudni Omarsson; and CFO, Ellert Hlodversson. Before I hand the session over to them, I wanted to mention that as per usual, we will have a Q&A session following the presentation. [Operator Instructions]

Now I hand the floor over to you, Jón Gudni.

Thank you, Gudni. As we go into the numbers for the annual accounts the fourth quarter of 2024. It's interesting to note that now 1/4 of the 21st century has already passed. I remember in the '80s and the '90s, looking towards the 21st century and feeling that it was a very long, very far in the distance. But like I said, now already 1/4 of the century a lot of technology changes, obviously, over the past 25 years industrial revolution, we are bound to see even more changes going forward.

Here in Iceland, we have done quite well on the economy front. We have added 2 more pillars to our export industries being both tourism and also the intellectual property industry as a whole. GDP per person has developed favorably over this period. We remain in about ranking from 5 to 10, if you look at countries worldwide. And at the same time, as we have seen our GDP per person grow quite substantially, we have also seen an even distribution measured by the Gini coefficient, where we also rank around the 5 to 10 highest countries in the world.

The most interesting factor over these 25 years is that the balance sheet of the country has greatly improved. At the beginning of the century, our liabilities in excess of assets abroad amounted to about 60% of GDP, and that has completely changed largely due to these new export sectors. And now we have a net assets abroad of 40%. So overall change of full GDP over the course of these 25 years. This obviously puts Iceland in a very strong position and very -- in a good position to tackle the changing times ahead with obviously technology changes and changes in demographics.

Now moving to the annual figures and the fourth quarter. I would say that 2024 was a year of opposites. We had substantial turmoil on the political scene, both internationally and here in Iceland. As a result, for example, the planned sale of the remaining shares of the government shares of the bank that was planned last fall, that was delayed due to a change in government here in Iceland. And we are now hoping that, that will move along and then we will have some changes there in the second quarter of this year or at least during the course of the year. At the same time, on the economic front, we saw quite strong opposite, you could say, with very high rates in the first, let's say, 9 months of the year and difficult capital markets. And then in the last quarter, interest rates started to come down and the markets really picked up. Our customers have done very well to navigate through this environment, and we have seen, for example, very low impairments across the board.

Now if we move over to the figures. In this environment, we are quite happy to reach all our targets for the year. Return on equity was 10.9% for the year as a whole and 11.2% for the fourth quarter. The cost-income ratio was within our targets. And obviously, as before, we are very overcapitalized with an extremely robust balance sheet. We are very happy to see also that during the course of the year, we have not seen an increase in Stage 2 or Stage 3 loans, which is actually quite, you could say, almost surprising in this kind of environment of high rates and high inflation. Part of the reason there is that a lot of our customers have moved to inflation-linked loans to lower their interest rate burdens and which has some impact on our net interest income and volatility there, but the positive impact on impairments at the same time.

Looking ahead, in terms of our targets, we remain with our current targets of 10% return on equity. We were obviously safely above that in 2024 and plan to be safely above it going forward as well. We remain, you could say, relatively conservative in terms of the target setting, but the outlook for the coming, you could say, periods, months and a couple of years, the outlook is quite robust, but guidance in terms of earnings is obviously always subject to the economic environment and especially impairment levels. We plan to continue to optimize our capital. We have been quite active in buybacks during the course of 2024. And we will plan now to ask our Annual General Meeting will allow us to continue on that front and to have a ISK 15 billion buyback program.

Our business units did quite well in 2024, a lot of activity across the board. In terms of lending, we saw the biggest growth in corporate and investment banking with about 8% growth year-on-year, followed by Personal Banking with about 6% and 4% in Business Banking. In Business Banking, in general, was quite healthy growth, but somewhat lower growth in car leasing loans due to basically a reduction in the sale of electric cars, especially and the car fleet overall. In terms of deposits, we saw quite a substantial increase in individual banking with about 20% increase in deposits being obviously, I would say, the healthiest and most stable deposit base. Good increase also in business banking, but the decrease in corporate investment banking, where obviously we have the most volatile deposits.

On sustainability, we continue to plow ahead. Sustainable lending increased by 23% in 2024, and we, in general, met our targets on the sustainability front. And also note that in terms of Iceland funds, they had a very good year last year and especially a strong fourth quarter. And we are seeing now, for example, when we look 5 years back that we have the highest earnings in terms of our equity funds if we compare to the market here in Iceland. We are the largest investment bank here and we look at brokerage and both in foreign currency and debt and equities and corporate finance as well. So across the board in terms of investment banking. And obviously, a huge activity in terms of the corporates overall with very good volumes in terms of large corporates and also in business banking, very strong market share within SME clients with around 40% here in the Greater Reykjavík area. And also, we've seen a very good track record in the equity brokerage, where we had the highest market share in 10 months out of 12 during the course of 2024.

We have a strong focus on financial health. And during the course of last year and maybe 2023 as well in the environment of high rates, we have seen increased, you could say, need from our clients to focus on the financial health and find means to secure it. We have been providing a lot of educational material, both online and offline with meetings, which have been extremely popular with our clients. At the same time, we continue to develop our app and online bank to help customers to tackle their financial health and we'll continue to do so in the coming few months with quite a few new changes in the pipeline. The online bank is being updated, and we expect to launch that now in February, a new online bank, where we enhance our services to the clients and also will give us better opportunities for online sale to the SMEs, especially.

In terms of the momentum, we have seen quite a big momentum now in both in digital sales and also just in customer consumption overall with a big increase in the Net Promoter Score. And in terms of the customer satisfaction survey, we were the highest jumper this year with a very strong and good momentum among our clients. A bit more on the digital wins. We continue to make large investments there. And I realize that some of these numbers sound quite high and some of them come from a relatively low base. But for example, in terms of the improvement in processing time for car loans, where we have implemented new technologies and basically have managed to have streamlined processes and making it much more digital.

We are now really hoping, I would say, that the government will pass a law enabling us to have a fully digital process in terms of mortgages. I'm certainly hoping that, that will come through this year. We have the technology pretty much in place, but the legislation has to follow. And so that will have quite a big impact, especially in terms of our customer services that clients will be able to fully digitally have new mortgages.

In terms of AI, we have been making very steady and interesting investments there. We have a chatbot called SAM, which is internal on Teams, which our employees can use to obviously have translations and new text and suggestions. And we are now in the next couple of weeks, hopefully, opening that up to our quality handbook. So our employees here can use the chatbot to search throughout the whole quality handbook and obviously having quite a big impact on the daily work. Following that, obviously, we will be seeking to have AI implemented into our lending processes. But obviously, that has to be done quite carefully. So we are careful in terms of data leakage and protecting information about our clients. But a lot of opportunities ahead on that front.

We just recently announced our cooperation with VÍS, the insurance company, giving us a very speedy and thorough basically entry into the bank insurance market and bancassurance. And there, we obviously will be able to both offer our clients very good propositions in terms of insurance and also helping them ensure their financial health. We are working hard towards this cooperation and plan to launch it fully now in the second quarter.

We recently set a new strategy for the bank, which was done in a very good work with our employees here and obviously, with the Board and the management team as well. We, as a role for the bank or our purpose is to empower our customers to be a force for good. Iceland, as I mentioned before, has done quite well in the first quarter of the 21st century, and our role is to help make sure that, that continues in the years ahead. In terms of our values, our core values, I would say, collaboration and professionalism. And now we have added a new value of progressive thinking, basically focusing on new technologies and new ways to improve our services to our clients.

In terms of strategic priorities, we have added a new one called profitable growth. There, we are looking at that we have, you could say, a luxury problem of being overcapitalized quite substantially and have the opportunity to see growth ahead, which obviously has to be profitable. We call this the strategy lighthouse and the light shines and the guiding light is the financial health of our clients. Through all this, we plan to make sure that we focus on the health of our clients with them, obviously, we will grow into the future. So we have a clear strategy with focus on progressive thinking and profitable growth, and we are just getting started.

Having said that, I'm going to hand it over now to Ellert to go a bit deeper into the financials. Ellert, over to you.

Thank you, Jón Gudni. And before we dig into the financials themselves, let's just have a quick recap on the economy. So what we're seeing from an economic standpoint is that tailwinds are picking up speed. We have seen or the forecast assumes that we will be seeing economic growth for the coming 3 years followed by or on the back of subsiding inflation, which is assumed to be on average 3.6% over the year 2025. The reduction in inflation is also paving the way for further rate cuts. We have seen rate cuts commencing end of 2024 throughout Q4 and taking place as well earlier this February. The macroeconomic forecast assumes that we will reach a 6.5% policy rate by the end of 2025, bringing real rates, I would say, down to a more going concern level, if you will. The next rate decision is going to take place on March 19, and analyst consensus is predominantly that further rate cuts will commence there.

But looking at the quarter, we reported a profit of ISK 6.3 billion and ISK 24.2 billion for the year as a whole. And reflecting on the year, I can say that the profit is in line with expectations, where interaction between subsiding inflation and reducing policy rates as well as impairment reversals were the key drivers of profitability for the year. But moving on to net interest income. We reported a ISK 10.9 billion net interest income during the fourth quarter, which represents a 2.7% net interest margin. This is compared to a 2.9% for the year as a whole. During the quarter, we accounted for a 0.14% inflation compared to an estimate of 0.83% during the Q1 of 2025. As we have stated before, reducing asset quality and more volatility in asset quality as inflation subsides is a short-term pressure, which is going to alleviate once we see policy rates come down. At the same time, we have also seen nominal rate imbalance continue to subside as we will go further into later on.

Following relatively weak capital markets for the first half of last year, we saw a considerable pickup during the last quarter, which translated into growth on the fee income side. We have seen fee income for the fourth quarter reaching ISK 3.6 billion, growing both in IP, asset management and cards and payments. Year-on-year, fee income is growing by -- is growing in line with expectations. And we expect that once the economy reaches, I would say, a more stable point, this will pave the way for further fee income growth.

Turning our focus on to net financial income. Net financial income has and is still a limited part of our balance sheet. Looking at equity instruments, our exposure to market is around ISK 8.5 billion end of the year. Looking at the bond and debt instruments, obviously, the liquidity portfolio is considerably large, but liability management has reduced the size of the FX portfolio throughout the year 2024. As a whole, we reported a ISK 170 million profit from net financial income but ISK 700 million from the other operating income, which mostly relates to revaluation of assets. There, the largest segment is Kirkjusandur, which is a property which used to house our headquarters and is still being explored what we want to do with that, and we expect things to materialize over the course of this year.

From the cost side, we saw salaries grew by 8.8%, both on back of wage increases as well as having more FTEs on average over the year 2024 compared to 2023. However, towards the end of the year, efficiency gains were made, which resulted in FTE reductions. It is our expectations that we are going further into -- I would say, into efficiencies. However, we reported a 43.9% cost-to-income ratio. following a reclassification of cost where we took costs previously allocated as other operating expenses and reclassified as fee expenses. Should that not have been the case, the cost-to-income ratio for the year as a whole would have been 44.8%, still within our financial targets.

Turning to the balance sheet. We saw a healthy growth in the balance sheet during the year or of 5.9%. The composition of the balance sheet remains well balanced with 44% is within mortgages. We are seeing average LTVs dropping between years from 57% to 54%. And there is no significant mitigation between risk classes. So all in all, the balance sheet is in a healthy state. We're also quite happy that we saw sustainable lending grow by 23% during the year, strengthening our emphasis on sustainability all around the operation. This, of course, translates into impairments. As Jón Gudni stated before, we have had impairment reversals in the amount of ISK 645 million during the year or around ISK 350 million during the quarter. Some of these impairments over the year are on the back of model recalibration, although not in Q4. Despite this, we are not seeing any increase in delinquencies.

Stage 3 loans are staying flat at 1.6% and there are no considerable evidence of customer -- I would say, customer delinquencies within the loan portfolio. The same goes for the mortgage book. The NPLs remained flat at 0.9%, and we are seeing continuous alleviation of the fixed rate imbalance. During the year 2025, we expect ISK 51 billion as of now to be refinanced or interest rate reset from the mortgage book. However, we have continued to see the shift in the mortgage book from nominal rate loans into CPI-linked loans, where we are currently year-end at 62% rate within CPI-linked instruments. This, of course, tying back to the net interest margin is causing volatility in our earnings while this passes through our book. In terms of LTVs, things are very healthy where LTVs are also strengthening quarter-on-quarter.

And lastly, on CRE. CRE is of good quality, where we are seeing delinquencies flat, although we have seen a jump in Stage 3 between Q3 and Q4. This relates to a single exposure, which is owner occupied -- which is an owner-occupied building, not reflecting the CRE as a sector. There are high occupancy ratios within the CRE portfolio here in Iceland and the portfolio is of high quality.

Turning to the liability side. Deposit growth was the forefront over the last year, where we saw deposit growth from individuals by 16% and 21% from SMEs. So as a result, the composition of the balance sheet is now over 50% by deposits, making us less reliant on wholesale funding. From an LCR standpoint, the growth has predominantly been in favorable LCR categories. There's no composition in the -- there's no concentration in the deposit base. Customer to loans ratios are stable and all looks good on the deposit front.

On the wholesale front, as I stated before, liability management was in the forefront in 2024. During the year, we bought back [ for FX ] issuances, which were issued at wide spreads, leaving us in a position now where maturities for the year 2025 and '26 are very low, which allows us to be opportunistic in terms of funding. We are also quite happy to see the continuous growth in sustainable funding from the wholesale perspective. It is also good to see that over 50% of our borrowings are now in ISK, following a buildup on the senior market here domestically. During the year 2025, the bank will remain active in the domestic market, both in the senior and the covered bond space as well as opportunistic on the FX market sales. In terms of hand-in-hand with capital optimization, we will explore our options for T2 issuances as well as AT1 issuances, subject to market conditions and access to paper in terms of capital optimization.

Liquidity is strong and stable. Liquid assets are now 70% of our balance sheet, the second largest segment following our mortgage book, although we can see the reduction in FX liquid assets as planned hand-in-hand with our liability management throughout the year. We closed off the LCR at 126% for ISK and 188% for all currencies, net stable funding ratios also growing over time.

And lastly, capital. We closed off at 23.2% in capital ratio, 20.1% from a CET1 standpoint. Leverage ratios remain stable and high throughout the time, as we have stated before, on the back of the fact that we are a standardized bank. The Board has decided to suggest or make a proposal to the AGM that we will pay an ordinary dividend of ISK 12.1 billion, which amounts to 50% of profits, in line with our dividend policy. Further, ISK 15 billion have been allocated to share buybacks, either through ordinary buyback programs or through reverse auctions given market availability. Capital optimization remains a priority for the bank, subject to market conditions. It is clear that liquidity during the year 2024 was less than expected, especially during the first half of the year.

Towards the end of it and especially in Q4, we saw liquidity increasing and expect also that if the government sale will commence, liquidity will improve further, paving the way for market conditions, allowing us to reach those targets. With regard to CRR, we expect the latest version to come into effect in Q2 this year. We have stated in our previous earnings calls that we expect the reduction in REA to be around 4%, and we are guiding now for around 4.5% throughout the year 2025, some coming into effect instantly while other coming into effect over time. As to this, we will see CET1 ratio growing from 20.1% to 21.1%, moving the excess capital from around ISK 28 billion to around ISK 37 billion, assuming a fully optimized capital structure as of end of Q4.

So reflecting on 2024 as a whole, we are quite happy having met all of our financial targets. We reported a return on equity of 10.9%, cost-to-income of 43.9%. We had considerable CET1 excess of 470 basis points, 270 basis points ahead of the midpoint of the management buffer which is going to increase once CRR3 is implemented. And we are making an assumption of a 50% payout ratio with regards to the dividend. Guidance for 2025, as Jón Gudni stated, is that we will return equity over 10% yield. We are going to be below 45% cost to income, and we are going to adhere to our dividend policy of 50% of earnings, while capital optimization is still a priority and have planned for a ISK 15 billion buyback as of now.

With that, we turn it over to questions.

Thank you, Ellert and Jón Gudni. As I said, now we open up for a Q&A session. [Operator Instructions]

Operator, are there any questions on the line?

Yes. The first question comes from the line of Sofie Peterzens from JPMorgan.

This is Sofie from JPMorgan. So the first one, just on net interest income. I know you briefly touched on it in the presentation. But on Slide 14, we can see other interest was like ISK 1.15 billion. So I was thinking how should we think about that going forward? And what exactly is here? Is it more the kind of inflation impact from CPI? Or what is really this almost ISK 1.2 billion of, yes, quarter-on-quarter movement?

Thank you, Sofie. So we segregate on the slide, and we can just pull up a slide maybe. We segregate between margins as well as portfolio growth. Both for -- sorry, both for the lending and the deposit side. And the question relates to the other assets towards the right-hand side of the slide. So these are predominantly just all assets which are not within the -- I would say, the lending portfolio or the deposit portfolio. So predominantly things happening within treasury, et cetera. We are accounting for CPI through the -- I would say, through the lending margins there. So this is, I would say, an example of the liability management to name one example of what's happening there, where we're reducing the liquidity portfolio.

Okay. I see. And how should I think about this going forward? Should it kind of reverse? Or will it kind of be quite volatile going forward?

I think from a liquidity portfolio standpoint, we have reduced the FX side of it. I do not assume that we will reduce it any further. But obviously, as rate -- as the rate environment goes down, we expect yields on the liquidity portfolio to come down as well.

Yes. And we note also that this is obviously impacted as well by the CPI imbalance. And as we have noted there, that's fluctuating a bit between quarters with a negative impact in the fourth quarter, but a bit of a turnaround in the first quarter of 2025.

Okay. Clear. And how should I think about the net interest income outlook in 2025 because it's quite difficult to forecast given rates are volatile.

Well, I mean, we are returning a 2.9% net interest margin over the 2024 year. We expect to be at comparable levels over 2025. But obviously, there is going to be volatility, especially month by month due to the inflationary ticks.

Okay. That's clear. And you also mentioned in one of the slides that you are focusing on profitable growth. Where will this profitable growth come from?

Well, we're going to be open to both external and internal growth. And we are actually hoping now to see a relatively good pickup in the environment here. Interest rates are starting to come down. We see quite a bit of interest, for example, in our lending committees and new projects coming on. So we are, I would say, hoping to see growth across the board. And let's say, we remain also actively open to external growth opportunities.

And that would be more specifically M&A. Would you consider buying anything outside of Iceland?

Yes. So we have also been participating in syndicated loans outside of Iceland, and we continue to see some diversification opportunities there.

And we can state, obviously, that the rating agencies have stated for all the Icelandic banks that geographical diversification would be a good thing in, I would say, insuitable sizes to the size of our balance sheet.

But considering that you have plenty of excess capital and you want to grow more, is it fair to assume that you would potentially consider M&A outside Iceland?

I think it's safe to say that we will consider it. There's nothing immediate or no immediate targets, but something that we will consider.

Okay. And then my final question would be on the government ownership. You mentioned that it's -- the government is kind of considering an exit. Do we have any more details on when this could potentially happen? And what are the hurdles that we're still waiting for?

Yes. So we have heard from -- so the new government was formed at the beginning of the year, and it has been made very clear by them that they plan to continue the process. We are expecting possibly some minor changes to the legislation around the sales process. And hopefully, that will then go through Congress, and we can continue basically preparing. And like I said, we are optimistic that this could possibly happen in the second quarter. But in any event, hopefully, at least during the course of the year.

There are no more questions from the telephone. So I hand the word back to you, Bjarney.

Thank you, [ Ellert ]. And I have a few questions from Aker. I'll read out loud to you guys so you can respond. The first one, the bank was interested in acquiring TM Insurance, which didn't happen, and now you've announced a cooperation with these. Would you prefer to acquire the insurance business? Or do you think you can achieve similar results through cooperation? That's the first one. And I'll just read them all loud so you can respond in due course.

The second one regarding capital optimization. You've stated that it can be achieved through returning capital growth, either internal or external. Are there any external growth opportunities being considered? If so, can you shed any light on what kind of opportunities?

The third one, even when accounting for the proposed dividend and the recently approved ISK 15 billion share buyback program, the bank still has over 100 bps of CET1 capital in excess of its target. On top of that, the CRR3 implementation will add another 100 bps. Are you still confident you will reach your CET1 target this year?

The fourth, once the bank has moved closer to its CET1 target, do you expect to revisit your ROE target and increase it?

And the last, is it possible from a legal point of view for the bank to get approval from the AGM to buy back own shares by participating in the public offering when it takes place?

Okay. Let's see, I'll start. So firstly, in terms of the buybacks, I think it's unlikely that we will be buying back from the government sell-down, frankly, because we want to have basically equal treatment of all our shareholders. So buybacks that we will conduct will be basically more focused on all shareholders, giving everybody the same opportunity.

In terms of the ROE target, like I mentioned earlier, we are fairly conservative in terms of our targets as we are in our operations. But we are obviously safely above them in 2024 and plan to be safely above the target going forward as well.

Let's see, in terms of the capital optimization, I think that's -- and the potential growth there or maybe I'll start with insurance. Like I noted there, we have been open and exploring all kinds of opportunities in insurance. The insurance market here in Iceland has been changing quite a bit with maybe you could say 2 of our main competitors entering insurance. And the cooperation with these gives us a very -- basically a fast basically entry into that market and allowing us to offer our clients great products and services and a good value. So that was basically our main focus to make sure that we would be competitive on that front. Then we remain open to other opportunities as well going forward.

In terms of the capital optimization and the growth, so like I said, we expect and remain open to -- well, firstly, we do expect to see a continued internal growth with fairly good outlook for this year, I would say, in terms of GDP growth and opportunities here in Iceland. And also, we are seeking, like I said, opportunities abroad, mainly in syndicated loans, but some potentials as well on other growth opportunities. And on the M&A front, that's something that we remain actively open for as well. Yes. So, Ellert, over to you on the capital optimization.

Yes. Thank you. I mean we -- capital optimization remains the focal point for the bank. Liquidity has been lower than expected over the course of 2024. It picked up quite considerably towards the end of the year. So we were able to speed up our capital optimization through buybacks, which is our preferred mean of distribution in excess of ordinary dividends. Having said that, we obviously have the means to both grow from our own balance sheet as well as through external growth as well as distribute extraordinary dividends as market conditions allow. So this is still a focal point for the bank now as it has been before.

Yes. And as I see there being no further questions this Friday morning, we want to thank you all for joining us here in Íslandsbanki this morning for our webcast. We appreciate both the questions and the time you've allocated to join us today. So thank you all. Have a good day and a great weekend.

Thank you all.

Thank you.