- Return on Equity (ROE): 11.5%, would have been 12.7% excluding a one-off ISK0.6 billion settlement fine.
- Core Operating Income vs. Risk Exposure Amount: 7.3%, above the financial target of 7.2%.
- Insurance Income Growth: 12.8% in the second quarter.
- Cost to Core Income Ratio: 42.8%, below the 45% target.
- Tier One Capital: Up 18.5%, 330 basis points above the statutory minimum.
- Share Buybacks: ISK4.5 billion conducted, new ISK2.5 billion program launched.
- Assets Under Management: 10% growth, exceeding ISK1,500 billion.
- Net Interest Margin: 3.2%.
- Total Operating Income: ISK16.6 billion, up 14% from the first quarter.
- Net Interest Income: ISK11.9 billion, up from ISK11.2 billion in Q1.
- Net Commission Income: Increased by 18%.
- Insurance Service Results: ISK0.5 billion with a combined ratio below 90%.
- Operating Expenses: Increased by 9% between quarters.
- Impairments: ISK0.8 billion, representing a cost of risk of around 28 basis points.
- Effective Tax Rate: 32.5%, impacted by non-deductible settlement expense.
- Net Profit: ISK5.5 billion for the quarter, ISK10 billion for the year.
- Loan Book Growth: 2% or ISK24 billion during the quarter.
- Total Deposits: ISK847 billion, representing just under 62% of total liabilities.
- Common Equity Ratio: 18.5%, 330 basis points above requirements.
- Leverage Ratio: Just below 12%.
Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Solid quarter with good momentum in asset management, cloud services, and loans.
- Insurance business income grew by 12.8% in the second quarter.
- Core operating income versus risk exposure amount was 7.3%, above the financial target of 7.2%.
- Strong capital position with Tier one capital up 18.5%, 330 basis points above the statutory minimum.
- New ISK2.5 billion share buyback program launched, continuing capital optimization efforts.
Negative Points
- Return on equity (ROE) was impacted by a one-off ISK0.6 billion settlement fine, reducing it to 11.5%, below the 13% target.
- Operating expenses increased by 9% between quarters, driven by the settlement fine.
- High effective tax rate of 32.5% due to the non-tax-deductible settlement expense.
- Negative impact from the increase of the central bank's interest-free reserve requirements, lowering interest income by ISK200 million per quarter.
- Economic slowdown with leading indicators pointing towards a cooling labor market and slower growth in the tourist industry.
Q & A Highlights
Q: Can you please comment a bit on the growth in assets under management, i.e., what are the key drivers?
A: The growth in assets under management is not due to investment returns but rather positive savings in our pension fund products and a strong quarter for Stefnir, particularly with their new initiative involving the housing rental market.
Q: What are the funding ambitions in the next few quarters, especially on the senior and subordinated level?
A: We are optimistic about issuing potentially in the FX market, especially with a EUR senior bond maturing next year and a call date for AT1 in the first half of next year. We may also optimize the maximum allowance for different capital instruments.
Q: How do you project the CPI imbalance to develop into the second half as fixed-rate mortgages come to a reset?
A: We expect the CPI imbalance to grow due to refinancing activities where borrowers opt for CPI-linked mortgages. This could increase quarterly earnings volatility, depending on real policy rates.
Q: Can you elaborate on the impact of the settlement fine on the financial results?
A: The ISK0.6 billion settlement fine impacted our ROE, which was 11.5% for the quarter. Without this fine, the ROE would have been closer to our target of 12.7%.
Q: What are the key highlights from the insurance business performance this quarter?
A: The insurance business saw a 12.8% income growth despite a significant claim. The combined ratio was below 90%, and new sales to individuals were up 30% year-over-year.
Q: How did the net interest margin (NIM) perform this quarter?
A: The NIM held strong at 3.2%, with positive effects from the reset of the fixed-rate mortgage portfolio. However, the increase in the central bank's interest-free reserve requirements negatively impacted our interest income.
Q: What are the future expectations for loan growth given the current economic environment?
A: Despite high interest rates, we see solid lending opportunities and will manage loan growth dynamically. The loan book grew by 2% this quarter, and we continue to monitor the evolving economic environment.
Q: How is the bank managing its capital and liquidity position?
A: Our capital and liquidity positions remain robust. We have launched a new ISK2.5 billion share buyback program and have surplus equity of around ISK10 billion to ISK18 billion. We also have regulatory approval for an additional ISK5 billion buyback program.
Q: What are the key themes going forward for Arion Bank?
A: We aim to optimize our capital position, maintain strong momentum in core earnings drivers, and navigate the evolving market environment with a robust balance sheet and mature market position in all business units.
Q: How is the economic slowdown affecting Arion Bank's operations?
A: The economy is slowing down, with indicators pointing towards a cooling labor market, particularly in the tourist industry. We expect policy rates to start moving lower towards the end of the year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
