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Good morning, and welcome to this presentation of Arion banki's third quarter results. This was a particularly robust quarter, and we continue to deliver on our strategy in a challenging economical environment. For 2 consecutive quarters now, we have posted an above 10% return on optimized equity, and we posted a solid income growth in the quarter of some 6.2%. And our emphasis on operating efficiency is further demonstrated with the lowering of operating expenses by some 11% in the quarter and a strong cost-to-income ratio, which is now below 50% for the first 9 months. It helps to have a diversified income stream in sort of economic situations like this. And our distribution channels, which we have invested heavily in, in the last 2 years, have also demonstrated their value. So for example, volume-driven fees in retail banking are obviously down due to lower economic activity, but we saw a strong growth in -- continued strong growth in lending and guarantees business. And our digital distribution channels have been able to sort of mitigate against the fact that most of our employees are working from home at the moment. But at the same time, we're enjoying the highest growth in market's applications in bank's history. And this indeed has accelerated our transformation of our branch network into sales and service centers, which is focusing on providing customers with service and advice with the full product suite. Now Arion has a significant balance sheet strength, and Stefan will go into that later on and a high dividend capacity. The CET1 ratio is now among the highest in Europe, and leverage ratio is significantly stronger than European peers because we are one of few systematically important banks that operate with a standardized approach. We have -- we've currently over ISK 40 billion of surplus capital on top of our sort of CET1 70% target. But in fact, it's closer to ISK 70 billion in excess of regulatory requirements. So quite a strong equity position at the moment. And we have a unique position within our small economy as well because we have -- we say, a broad market access due to our dual listing and our international investor base, and that has demonstrated itself this year. We have -- we've used this strong investor access across Europe and globally to work on our capital structure. We issued additional Tier 1 earlier this year, and I'm sure this will continue to benefit us to -- for the benefit, obviously, of our clients. Now I said challenging economic environment, and they are indeed very challenging these days, the spread of COVID-19 and travel bans introduced have had a negative impact on the Iceland economy, especially tourism. But when we compare the GDP changes in the second quarter, for example, with our neighboring countries, we sort of rank in the middle. And what has been particularly good to see is the strong fiscal and monetary response, and even though unemployment rate has come up quite a lot those who are employed are enjoying, as our Chief Economist pointed out yesterday, in our macroeconomic forecast, the unemployed or the employed are enjoying quite a favorable environment where net disposable income continues to -- real net disposable income continues to go higher.Borrowing costs have come down by 30% in last 2 years and house prices continue to rise. So they are feeling the effect of homeownership. And I think that is helping the economy and explains why our markets portfolio is performing particularly strong despite the higher unemployment rate. And as you can see from this slide, the fiscal response has been strong compared to rest of the Nordics. And there is quite a substantial headroom to do more, as you can see from the leveraged position of the treasury. I mentioned the sort of our investments into digital channels and how that's benefited us in these challenging times. And it's very interesting to see that due to, obviously, lower interest rates and high activity in refinancing of mortgages, we are seeing the strongest growth from markets -- new markets applications in the bank's history. And as you can see from this slide, in the first 9 months, we have now processed more markets applications through our digital channels than we did for all of the markets applications in 2018 and more than twice what we did last year. So our investments are proving to benefit us and be a success. And we have our employees taking advantage of the digital channel streams and being able to service our clients even from home. Now we've been focusing as well on new products. And we are influenced by our ESG strategy here. Our new -- our latest product is the green mortgage offering, where we are offering those who are investing in residential property, which has been environmentally certified, a sort of a zero loan origination fee. And that is, for example, financed through the bank now with green deposits, which we rolled out earlier this year. And we're also taking part in making our car fleet greener because we have a better offering for car financing on vehicles which run entirely on electricity or other renewables. Before I hand over to Stefan, I just want to go briefly through the earnings spread for this quarter, which I'm particularly proud of. As I said, we're delivering on our strategy. The increase in core income is 6%, just over 6% in the quarter. And if we adjust for the redundancy costs that took place in the third quarter of last year, our operating expenses are down by 11%. Combined, this is -- this amounts to some ISK 1.3 billion in the quarter, which is close to actually 1% of our CET1 capital in the quarter or then close to 4% on an annualized basis, pretax, which is quite an achievement, but we will continue to focus on both items, both the revenue items and the cost items. And with that, I hand over to Stefan Petursson, the CFO.
Good morning, ladies and gentlemen, and thank you, Benedikt. Let me just sort of reiterate what Benedikt said, we are delivering on strategy. Our balance sheet is very strong. We do have ample dividend capacity. And thirdly, we are actually closing in on our medium-term financial targets. And if we look at the highlights of the third quarter, then on the strategy, our NIM is improving 30 bps year-on-year. We are seeing net interest income to credit risk improving year-on-year. Our core revenues, as Benedikt said, they're up 6.2%. And OpEx is down a massive 25%. But if we exclude for one-off items, it is down 10.7%, which is quite substantial. We are turning around the operations at Valitor maybe not fully out of the woods yet, but a massive improvement here in the first 9 months of the year. Our risk exposure amount remains stable, even as the balance sheet is growing and we have a surplus capital that we very much would like to return to our shareholders at the earliest opportunity. Looking at the medium-term targets, our return on equity in the quarter was 8.3%. It is actually 10.4% when we assume our 70% target CET1. Our operating income, our risk exposure amount was 7.2%, well above the 6.5% target that we have. Cost-to-income ratio, I tend to look more at the 9 months rather than the quarter result, but we are below our 50% target for the first 9 months at 49.5%. And then CET1 ratio, where our target is 17% is 22.5%. But that's both a challenge as well as an opportunity. Looking at the income statement, then we can see that, on a core basis, interest income, commission income and insurance income, the story is very positive maybe especially on the interest income side, where we had a 6 -- we had an 8% growth year-on-year on a relatively similar loan book. Operating income in total is 5% up year-on-year. And then over to the salary sites, a whopping 39% decrease from the same quarter of last year. But then again, we need to remember that we had substantial redundancy costs in the third quarter of last year. But still, total OpEx is down 25% and again, 10.7% if we exclude the one-off of last year. The bank levy has been reduced. It is now 14.5 basis points, down from 37.6 basis points that we started the year out with, and this lowering is here to stay. Net impairment in the quarter is ISK 1,340 million from 19 basis points, and earnings before tax are up 19% from last year. Income tax, relatively modest in the quarter. So net earnings from continuing operations are up 31% year-on-year. So as you can see, we are very much delivering on what we set out to do. We do have a markdown in our held-for-sale assets. So discontinued operations are negative by almost ISK 1 billion, taking net earnings to just under ISK 4 billion, which is up more than 4x from the same quarter of last year. We are very proud of our achievements in -- on the loan book and the funding side. We are seeing the NIM -- we are able to maintain the NIM at 2.9% in a challenging environment, sort of the base rate is at an historical low. We've been issuing Tier 2 and 81. We have, in a way, excess liquidity. But at the same time, we were able to maintain NIM at 2.9%, and we are increasing net interest income substantially year-on-year. And we are maintaining and actually increasing our net interest income over credit risk. So I think that says a lot about our management, both on the lending side and the funding side. And in a way, that is demonstrated at the bottom graph there on this slide, where we see that, yes, we do have lower income from bond holdings and loans to credit institutions and from our loans to customers. Our sub-debt is obviously more expensive than other funding, but that is more than made up by lower cost of deposits, lower cost of wholesale funding. And inflation, which is slightly higher this quarter than it was last quarter -- or same quarter last year, is also sort of assisting the situation. OpEx is trending down, which is very positive. This has been, and will continue to be, a focus point at the bank as is the case with, I think, every bank in the western world. As I said before, our core -- our cost income ratio during the first 9 months is under 50%. This is just over 40% in the quarter. We are seeing the number of employees down 5% year-on-year at the bank itself, and this is a trend that we can expect to continue. OpEx is stable and other OpEx already is stable, and that is something that we will obviously continue to look at very closely as well. The balance sheet is strong, simple. It grew by 14.3% from year-end, the increase mainly being liquid assets. Our loan book increased by 4.4% and is well sort of diversified between individuals and corporates. And our liquidity position is very, very strong, total LCR of over 200% and 177% in ISK, which means that we, as a bank, we are in a very solid position to either support our customers or eventually distribute capital. Loans to customers are rising, as I said, 4.4%. That is almost solely in the mortgage space, where we have been very active. And we have seen both new mortgage lending and refinancing amounting to almost ISK 70 billion in the quarter, ISK 150 billion year-to-date. There is a slight concern there in a lowering interest rate environment that the front book is -- comes at a slightly lower NIMs than the back book, especially when funding ratio and mainly deposit rates are closing in on 0. But luckily, we don't expect the base rate to fall any further than it already has. It is now at 1%. COVID-19 obviously has impacted the bank, and we have done a special study on sort of how COVID or basically how COVID has impacted our loan book. As we see it, obviously, we use IFRS 9. We don't feel that, that fully sort of fathoms the situation. So we have made certain management overlays on the loan book. But our conclusion is that COVID impacts around ISK 150 billion of book around 18%. Out of that, ISK 118 billion is collateralized with real estate. And what we have done in our assessment is that in our overlay, we have basically downgraded sort of the affected sectors as we see them or the affected groups of loans, we have downgraded those and increased impairments. We have also given out payment moratoria or payment holidays on both -- to individuals and corporates. And it is actually very interesting to see the development of this, and we see that on the right-hand side of the graph, we started this in March. And we saw individuals picking up on this very quickly, and payment holidays or payment moratoria for individual peak in May, but it has been coming down ever since and is now only at ISK 10.5 billion. On the corporate side, the corporate started slightly later, started in April, and it has been trending up. And in a way, we believe that the jury is still out on how that will continue on the corporate side. Same with loss allowance, that has been increased substantially. Clearly, as you see there on the right-hand side, the tourist sector, we have sort of been very active on that front. That sort of feeds into the corporate side for the most part. But the interesting thing is that we have not had to increase allowance on individuals. It has actually been stable. And as Benedikt said, most of our individual lending is mortgages, and that asset base is actually in very good shape. The liability side is, as before, well balanced, very strongly capitalized, and strong leverage ratio, good balance in our wholesale funding, both in covered bonds and senior unsecured. We have not been active this year on that front because we have been so liquid. And we have been liquid because of the growth in the deposit base. And we are particularly pleased to see sort of our core deposits go up by some 11% from year-end. And when we say core, then we're talking about retail, SMEs and corporates. We talk about capital strength all the time, and that's because it's true. Our capital ratio is 27.6%. It is down slightly from the second quarter for 2 reasons. We had a small increase in our risk exposure amount. And then we have started, again, what we did not do in the second quarter, we are deducting 50% of net earnings according to our dividend policy. And we feel that, that is an appropriate sign to the market that we want to pay dividends when the central bank opens up for that, and we hope that, that will be next year. Leverage ratio at 14.3%, which is obviously very strong in an international context. So to conclude, on our side, I mean, we feel that we are delivering on our strategy, but we aim to do better. We will continue on this path and build on what we have achieved over the last 2 quarters. Clearly, we're a part of the Icelandic economy, but we feel we are in a very good position to be a part of the rebound of the economy that we expect will happen next year. There's obviously a sort of economic uncertainty still to COVID , and we see what's happening both here in Iceland and around the world. Still we believe that we are seeing better sort of into our asset quality. Again, we have had massive impairments, not massive credit losses. They may start in the new year, but we hope that we have already impaired part of what may happen. We have not ruled out the possibility that this situation may lead to some opportunities. And it goes without saying that we are following closely the discussion that is taking place both in the U.S. and Europe on bank dividends, and we obviously realize how important it is for our shareholders that this bank is able to continue its capital release. So having said that, I think we give it over to the moderator for Q&A. Thank you.
[Operator Instructions] Our first question comes from the line of Johan Ström of Carnegie.
And I would perhaps like to start by congratulating on a really good quarter in challenging times. It's good to see the strong cost income ratio line. I would like to ask you to be a little bit more precise on how you think or how we should think about some P&L items. And first, on costs, the Q3 level is low, of course, and have really improved the cost development further. But how should we think about the run rate going forward? Is it fair to assume that quarterly costs will be below ISK 6 billion, for example, in the next couple of quarters?
Yes. Thank you so much. If I answer this, there is clearly seasonality in our salary line, and that is due to vacation. So when employees use up their vacation allowance, then we have already accounted for that as an expense, and that reduces the salary line. So I would not sort of -- I would encourage you to look at the seasonality from previous quarters as well. But -- and then there are, clearly, sort of impacts from -- sort of COVID-19-related impacts, traveling expenses are down and other sort of employee-related expenses are down because people are mostly working from home. But on the other side, I think we will continue to focus on costs. And one cost item that is under special sort of, what do you call this?
Scrutiny.
Scrutiny now is the IT cost, which is the largest cost item. And we've historically invested quite a bit. And now we sort of think that we can reap the benefit from that. So yes, a continued focus on costs and the effort is always to bring it further down.
If I add to that, I think, Johan, you need to look at the trend sort of over a longer period of time. And I think we cannot give out an exact number on that.
Sure. Okay. On commission income then, it's been kind of stabilized at very high levels now for the past 3 quarters. But is it fair to assume that we should look at these loan prepayments as a kind of a nonrecurring item? I mean you've come up, but especially the lending guarantees contribution to a quite high level, close to ISK 1 billion? How do you think about this? Is this nonrecurring or something that we should expect in the medium term as well or just kind of a short-term item?
Actually, it's to a limited extent because of loan repayments. Most of the mortgage portfolio does not enjoy that kind of a fee structure but there are some like seasoned vintages that have that. But it's primarily because our focus on capital velocity and charging sort of more for the use of our balance sheet that is resulting in this, and we're quite confident that we can continue on that path. I think, historically, the bank in comparison may be generated less of sort of fees and commission income from this activity. And I think we're now closing in on some of our peers.
For sure, it's something very positive. And then lastly, can you say a few words on the competitive situation in Iceland now? Are the pension funds able to follow you down on pricing? And if not, do you think that you can maintain the high growth pace as sufficient margins in the near term?
It's a really good question. Yes, currently, the real policy interest rate level is negative, yes. So the inflation is moving around 3% and the policy rate is at 1%, and that has made the banks more competitive when it comes to the mortgage space, and the most favorable product or the most sought after mortgage product is the non CPI variable rate product. I think more than 80% of the demand is in that asset class. And there, yes, the pension funds have not been willing to engage in competition for that product. They continue to offer the best rates when it comes to fixed CPI and even variable CPI in some cases. But that is not the product that our clients are preferring at the moment, and that's why we -- for first time in a long period, are enjoying favorable competing position and that belongs to all 3 banks. They're enjoying the same kind of increased activity?
and our next question comes from the line of Markus Pops of Goldman Sachs.
Just a couple of questions, please. So firstly, yes, it's good to see that you're now back to accruing dividends, 50% of your -- of your 2020 profits. But I was just wondering how would you think -- how do you think about proposing dividends for 2019 booked profits given the very strong capital position that the group has. And how would you -- is there any regulatory approval you would need if you wish to do so? Because obviously, we've seen a couple of few banks in Europe now have done that and then one in the Nordic space as well. So that's my first question. And second question, just on the corporate segment and, in particular, the repricing of the corporate book that you've been talking about in the past. So I'm just wondering, is it something that you're still pursuing or doing? Or what is the progress here, if you can just update on that?
Thank you, Markus. Good questions. The -- if I start with the sort of dividend, and I know what you're referring to, and we had a look at it. And actually, the Icelandic legislation does not sort of limit us as, for example, Norway when it comes to dividend. So any retained earnings that we have irrespective from what year can be distributed in later years, so there is not a cut-off at year-end for this. What we said -- previously said is that we just follow the guidance of the regulator, and we will like to see sort of -- what we would like to see is obviously that the regulator would put some kind of a quantitative measure on sort of capital strength and allow banks in Europe to release some of the excess capital than is with the stronger capitalized banks. And the sort of blanket dividend restriction is not a good thing in the long run for banks that tend to have fairly high capital and have to rely on equity investors to -- for the capital that is deployed in the business. So -- but retaining, Stefan, do you want to please elaborate a bit on sort of our -- sort of accounting method for retaining the dividends now?
Yes. I mean what we did last year because you asked about 2019 dividends, we actually did -- in our '19 disclosures, we did assume 50% payout. And we after that -- and we had a dividend proposal of ISK 10 billion. And when that was canceled, then we added that back to our capital position. So when paying that out, that will be an extraordinary dividend payment. But as Benedikt said, there's nothing that prohibits us from a regulatory perspective of paying extraordinary dividends. So in that -- in our case, that really doesn't matter too much. And as Benedikt said, the only sort of regulatory hindrance that we would have on distribution is on buybacks when we need a...
Formal approval.
Formal approval from the regulator. But obviously, we listen closely to what our regulators are saying on dividends and it is, obviously, very positive for us when we listen to what's happening in Europe, that the ECP seems to be worried about the effect on investors and obviously that a blanket ban is maybe not the best idea.
Precisely. On the corporate book, I mean this is a continued effort to reprice the book. But I think, actually, the same applies here, as for the mortgages now. When we have real interest rates, policy rates at minus 1.5%, minus 2%, I think the bank is in actually a pretty good position competing for some of the corporate credit here locally. The -- lot of sort of longer maturities are CPI-linked fixed rate, predominantly sort of invested by or financially provided by the pension fund system. But we are now enjoying sort of healthy demand for sort of non-CPI variable rate financing. And I think many of our clients, they have a pretty sort of -- they're comfortable with the interest rate levels now and don't see the policy rate moving higher anytime soon. And I think that is partially a function of the fact that Iceland is now -- even with a really small currency is supported by the strong sort of renewable export industries, both on the energy-intensive side and then for protein fish where we're seeing sort of salmon fish farming, the latest newcomer here with big growth coming from that sector. And then the fact that, as our Chief Economist pointed out yesterday in her our macroeconomic forecast that we have enjoyed 7 years of current account surplus and sees forecasting that we will have a positive balance of payments for the next 3, 4 years as well. So there is no -- even though there is temporarily a strain on the krona now. Once things normalize, she's expecting the krona to strengthening again, which is also supportive for sort of lower policy rates for longer. So the interest environment in Iceland is changing, and that's to the benefit of banks rather than sort of the pension funds.
Our next question comes from the line of Maria Semikhatova of Citibank. Please go ahead.
A couple of questions from my side. First of all, following up on repricing the corporate segment because there are different moving parts. You mentioned that you see front book pressure in the mortgage lending, also just want to check if all the rate cuts that have been implemented so far already filtered through your NII line, just maybe generally, how you see your margins developing from here. Second question on asset quality. Could you may be shed more light on payment holidays that you provided to our corporate customers when they expire, how customers behaved so far, if there's been any expiration, particularly on the corporate side. Maybe more generally, since you said that you have better visibility now in the asset quality outlook, are you comfortable to provide guidance for cost of risk for next year? And just want to confirm what is the outlook for 2020. And just finally on opportunities that you could see in the sector. Would it -- how aggressive would you be if there is still regulatory ban on capital distribution? And maybe if there's anything you can expand on potential consolidation in the banking sector?
Very good questions. On the sort of NIM going forward, as Stefan mentioned, there is clearly pressure on our mortgage portfolio, where the front book is sort of due to high refinancing activity is probably enjoying a slightly lower NIM than the back book. So that is pressuring -- that will put a pressure on our NIM, but we're hoping that we're able to mitigate against that with sort of continuing into reprice our corporate book and, to an extent, consumer finance, which we've not been very active in. The consumer finance portfolio is relatively small with the bank. So there is a -- might be an opportunity to selectively grow further into that space. So I would say sort of assuming that the policy rates do not move any lower, that it would be a good outcome if we were able to maintain the current kind of NIM position. Would you agree?
Yes. That's a very good way of putting it. Sort of -- the risk is more sort of on a slight downside, but obviously, we are fighting to maintain it.
Yes, precisely. On asset quality, as Stefan mentioned, there is sort of -- we've identified 18% of the portfolio with sort of COVID-19-related exposure, but a lot of that is collateralized with real estate. And we've sort of conservative -- we've been conservative on the LTV side. I think we discussed it in our AGM. If you remember correctly, the LTV in our commercial real estate portfolio averaged some 67% in the end of last year, but commercial real estate prices have come down somewhat. So -- but there is a buffer, as you can hear. The -- sort of the industry-wide payment holiday or payment moratoria elapsed end of September and going into that to our surprise because our clients were able to -- in the mortgage space to use their ability before end of September to extend for another 3 to 6 months. Most of our clients didn't, and that explains why we have such a low ratio of residential mortgage borrowers in moratoria at the end of the third quarter. But it's also low for corporates because this industry-wide effort elapsed. And what takes now -- what we will now do is do it on a case-by-case basis, and I expect that we will see payment moratoria creeping up again or increasing in the next few quarters, but that is primarily related to this 18% kind of exposure. Other industries seem to be doing quite well. And if we look at our sort of -- some of our largest exposure towards large sort of operating companies, some of them listed on the stock exchange, the leverage ratio is quite low at the moment in historical context. Now the third question mostly on...
Let me just add to the that Benedikt. I think also what you need to assume, we believe that cost of risk will come down. But it won't normalize next year, but we believe it will come down and normalize over, let's call it, 2, 2.5 years.
Yes. And we're hoping that we've already impaired, and we'll have to realize as losses in first and second and maybe third quarter of next year, will suffice that we've been foresighted in our provisioning.
Exactly.
We -- on opportunities in the sector, it's a very good question. We would like to grow our asset management business, and we're seeing opportunities to sort of grow externally or internally there by investments. I think in most other spaces I mentioned, consumer finance as a potential growth area, that would be an internal growth thing primarily. But I think due to our market position, there would be constraints to other acquisitions here locally. And we, up until now, have not defined our kind of core home market that's anything else than Iceland. But we have indeed sort of a decent sized portfolio towards the seafood industry in Europe and North America. And as part of that, we have been active in Faroe Islands, for example. So that could be an opportunity as well. But yes, due to our size, there's clearly limited sort of growth potential and investing into asset management, which is in itself not a capital-intensive business, will not require heavy investments.
Just maybe a quick follow-up. I don't know if I'm looking way too much into the future, but since you mentioned the normalized cost of risk, so what do you see normalized? I'm not pressing for timing when you think that's going to happen. But with your current portfolio breakdown, what you think is an appropriate cost of risk assumption?
Yes. We haven't given guidance on that, but one reference point that I would like to point you to is the fact that 43% or 42% -- 43% now of our loan portfolio are residential mortgages and they enjoy much lower cost of risk than anything else in our portfolio. And I think our models, if you look at our pillar, the latest Pillar 3 report, I assume somewhere between 5 and 7 basis points cost of risk. And it would -- and based on sort of our competitive position there and the activity in our business, residential mortgages will be a key pillar of our credit portfolio. And it would be really good to see other kind of exposures normalize at the cost of risk level, which is -- could you say low 50 basis points or even lower?
Yes, even though -- let's be careful on that because we haven't guided on that.
No. But at least...
[Operator Instructions]
Okay. And we don't have any audiences in the auditorium. So I guess this concludes our presentation. Thank you very much for listening in and all the good questions that you came with. And we'll see you in 3 months' time. Thanks.
Thank you.