Q2 2026 Islandsbanki hf Earnings Call
Speaker #6: A three-day hike with everything on my back, so it's been a difficult start of the week, but an exciting one. Our guide for the hike was a guy called Leifur Örnsvafason, and I mentioned him because I find it quite interesting.
Speaker #6: He has summited the highest peaks in all seven continents, and been to the North Pole and the South Pole. And he's the only guy in the world that has done this twice.
Speaker #6: That's something I learned on the trip. So I can safely say I was in a very safe hands. Now, over to our earnings. And in terms of the call itself, I'm accompanied here with Ellas Hlöðversson, our CFO.
Jón Guðni Ómarsson: Over to our earnings. In terms of the call itself, I'm accompanied here with Ellert Hlöðversson, our CFO, and I'm Jón Ómarsson, the CEO of Íslandsbanki. We will go through the earnings. At the end of the call, we will take a Q&A. You can submit questions via the chat, written questions. Also press pound five towards the end, if you want to have verbal questions. In terms of the earnings, we were quite happy with the return on equity in Q2 at 13.3%, giving us a return on equity of 13.4% roughly for H1. The earnings of the bank obviously are impacted quite heavily by the macroeconomic environment. We are seeing high interest rates and high inflation. The high inflation feeds positively through our interest income. The environment obviously has negative impacts as well.
Jón Guðni Ómarsson: Over to our earnings. In terms of the call itself, I'm accompanied here with Ellert Hlöðversson, our CFO, and I'm Jón Ómarsson, the CEO of Íslandsbanki. We will go through the earnings. At the end of the call, we will take a Q&A. You can submit questions via the chat, written questions. Also press pound five towards the end, if you want to have verbal questions. In terms of the earnings, we were quite happy with the return on equity in Q2 at 13.3%, giving us a return on equity of 13.4% roughly for H1. The earnings of the bank obviously are impacted quite heavily by the macroeconomic environment. We are seeing high interest rates and high inflation. The high inflation feeds positively through our interest income. The environment obviously has negative impacts as well.
Speaker #6: And I'm John Omasson, the CEO of Íslandsbanki. We will go through the earnings, and at the end of the call, we will take a Q&A.
Speaker #6: You can submit questions via the chat, written questions, and then also press pound 5 towards the end if you want to have a verbal question.
Speaker #6: In terms of the earnings, we were quite happy with the return on equity in the second quarter. At 13.3%, giving us a return on equity of 13.4%, roughly, for the half year.
Speaker #6: The earnings of the bank, obviously, are impacted quite heavily by the macroeconomic environment. We're seeing high interest rates and high inflation. The high inflation feeds positively through our interest income, but the environment obviously has negative impacts as well.
Speaker #6: The inflation impacts obviously the cost numbers, and also the high interest rate environment has a negative impact on our fee income ability. And the generation.
Jón Guðni Ómarsson: The inflation impacts obviously the cost numbers. Also, the high interest rate environment has a negative impact on our fee income ability and the generation. Nonetheless, the overall impact and obviously from our business is that we are quite happy with the return on equity. The cost income is also in line with our targets at roughly 43%. Even though that we have returned about ISK 28 billion to shareholders through dividends and buybacks during H1 of this year, we still remain extremely well capitalized and well over our targets, giving us potential for future capital returns. In terms of our targets, we have now updated our guidance for the year. The guidance at the start of this year was that we expected to see around 12% return on equity. We are now guiding towards being above 12.5%.
Jón Guðni Ómarsson: The inflation impacts obviously the cost numbers. Also, the high interest rate environment has a negative impact on our fee income ability and the generation. Nonetheless, the overall impact and obviously from our business is that we are quite happy with the return on equity. The cost income is also in line with our targets at roughly 43%. Even though that we have returned about ISK 28 billion to shareholders through dividends and buybacks during H1 of this year, we still remain extremely well capitalized and well over our targets, giving us potential for future capital returns. In terms of our targets, we have now updated our guidance for the year. The guidance at the start of this year was that we expected to see around 12% return on equity. We are now guiding towards being above 12.5%.
Speaker #6: But nonetheless, the overall impact, and obviously from our business, is that we are quite happy with the return on equity. The cost/income is also in line with our targets, at roughly 43%.
Speaker #6: And even though we have returned about 28 billion to shareholders through dividends and buybacks during the first half of this year, we still remain extremely well-capitalized and well over our targets.
Speaker #6: Giving us potential for future capital returns. In terms of our targets, we have now updated our guidance for the year. The guidance at the start of this year was that we expected to see around 12% return on equity.
Speaker #6: We are now guiding towards being above 12.5%. And this is obviously quite impacted by, again, the inflation numbers and how that will pan out for the rest of the year.
Jón Guðni Ómarsson: This is obviously quite impacted by, again, the inflation numbers and how that will pan out for the rest of the year. Here we are assuming quite modest inflation, especially in Q4 of the year. But I think we can say that the risk is there on the upside in terms of inflation, thereby also in terms of our return on equity numbers. We are also assuming here that we will have normalized impairments in H2. The current outlook is that we are seeing quite a healthy loan book, so we are fairly optimistic for H2. But obviously in this fairly turbulent environment, it is difficult to tell how impairments will pan out. But as I said, the assumption is that we will have through-the-cycle impairments for H2.
Jón Guðni Ómarsson: This is obviously quite impacted by, again, the inflation numbers and how that will pan out for the rest of the year. Here we are assuming quite modest inflation, especially in Q4 of the year. But I think we can say that the risk is there on the upside in terms of inflation, thereby also in terms of our return on equity numbers. We are also assuming here that we will have normalized impairments in H2. The current outlook is that we are seeing quite a healthy loan book, so we are fairly optimistic for H2. But obviously in this fairly turbulent environment, it is difficult to tell how impairments will pan out. But as I said, the assumption is that we will have through-the-cycle impairments for H2.
Speaker #6: Here we are assuming quite modest inflation, especially in the fourth quarter of the year. But I think we can say that the risk is there only upside in terms of inflation, and thereby also in terms of our return on equity numbers.
Speaker #6: We are also assuming here that we will have normalized impairments in the second half of the year. The current outlook is that we are the we are seeing quite a healthy loan book, so we are quite fairly optimistic for the second half of the year.
Speaker #6: But obviously, in this fairly turbulent environment, it is difficult to tell how impairments will pan out. But as I said, the assumption is that we will have, through the cycle, impairments for the second half.
Speaker #6: The cost income ratio is guided towards 41 to 43%. In terms of the macroeconomic environment, we are expecting a slow growth this year. But then the growth will pick up in the following two years.
Jón Guðni Ómarsson: The cost-income ratio is guided towards the 41% to 43%. In terms of the macroeconomic environment, we are expecting slow growth this year, but then the growth will pick up in the following two years. The Central Bank is obviously trying to bring growth down, you could say, by having high interest rates, and that is especially impacting the construction sector, where we are seeing quite a steep slowdown in that sector. Also that is impacting unemployment, which has been picking up quite a bit over the past 12 months, and we do expect to see it picking up even more in H2 of this year. Exports continue to be fairly robust but slow growing, and again, the expectation is that we will see more growth next year and the years following. But having said that, the export sectors have been doing quite well.
Jón Guðni Ómarsson: The cost-income ratio is guided towards the 41% to 43%. In terms of the macroeconomic environment, we are expecting slow growth this year, but then the growth will pick up in the following two years. The Central Bank is obviously trying to bring growth down, you could say, by having high interest rates, and that is especially impacting the construction sector, where we are seeing quite a steep slowdown in that sector. Also that is impacting unemployment, which has been picking up quite a bit over the past 12 months, and we do expect to see it picking up even more in H2 of this year. Exports continue to be fairly robust but slow growing, and again, the expectation is that we will see more growth next year and the years following. But having said that, the export sectors have been doing quite well.
Speaker #6: The central bank is obviously trying to bring growth down, you could say, by having high interest rates. And that is especially impacting the construction sector, where we are seeing quite a steep slowdown.
Speaker #6: In that sector. And also, that's impacting unemployment, which has been picking up quite a bit over the past 12 months. We do expect to see it picking up even more in the second half of this year.
Speaker #6: Exports continue to be fairly robust, but slow growing. And again, the expectation is that we will see more growth next year and the years following.
Speaker #6: But having said that, the export sector has been doing quite well. The seafood sector has been enjoying extremely high prices for the products. And tourism is going quite well.
Jón Guðni Ómarsson: The seafood sector has been enjoying extremely high prices for the products, and tourism is going quite well. It will be a quite interesting day on 12 August, where we have a solar eclipse here in Iceland, and I can safely say that Iceland is completely sold out during that day. Now the inflation obviously has been rampant and the interest rates as well, therefore, we are still expecting to see one or two more 25 basis points hikes towards the end of this year. In terms of the tax environment, we wanted to note that even though Iceland has the highest taxes on banks in all the neighboring countries or the other countries that we compare ourselves to, especially Scandinavia.
Jón Guðni Ómarsson: The seafood sector has been enjoying extremely high prices for the products, and tourism is going quite well. It will be a quite interesting day on 12 August, where we have a solar eclipse here in Iceland, and I can safely say that Iceland is completely sold out during that day. Now the inflation obviously has been rampant and the interest rates as well, therefore, we are still expecting to see one or two more 25 basis points hikes towards the end of this year. In terms of the tax environment, we wanted to note that even though Iceland has the highest taxes on banks in all the neighboring countries or the other countries that we compare ourselves to, especially Scandinavia.
Speaker #6: It will be quite interesting day in August, on the 12th of August, where we have a solar eclipse here in Iceland. And I think in safely say that Iceland is completely sold out during that day.
Speaker #6: Now, inflation has obviously been rampant, as have interest rates as well. And so, therefore, we are still expecting to see one or two more 25 basis point hikes toward the end of the year.
Speaker #6: In terms of the tax environment, we wanted to note that even though Iceland has the highest taxes on banks in all neighboring countries, or the countries that we compare ourselves to, especially Scandinavia, where we have taxes when we compute the overall taxes on operating income, we can see that our taxes are 60 to 100% higher than we see in the neighboring countries.
Jón Guðni Ómarsson: Where we have taxes, when we compute the overall taxes on operating income, we can see that our taxes are 60% to 100% higher than we see in the neighboring countries. At the bottom right, you can see that not only are the taxes high, but they are quite on the various fronts, both on salaries, revenue, and on the liability side of the balance sheet. We wanted to note this because there are discussions now within the government to even increase the taxes more and making the Icelandic banking system less competitive thereby, which is obviously extremely surprising. The extent of the increase is still unknown and how it is going to be implemented. But we will see that obviously, I expect now in H2. But obviously, we hope that this will be less of an impact than initially has been noted.
Jón Guðni Ómarsson: Where we have taxes, when we compute the overall taxes on operating income, we can see that our taxes are 60% to 100% higher than we see in the neighboring countries. At the bottom right, you can see that not only are the taxes high, but they are quite on the various fronts, both on salaries, revenue, and on the liability side of the balance sheet. We wanted to note this because there are discussions now within the government to even increase the taxes more and making the Icelandic banking system less competitive thereby, which is obviously extremely surprising. The extent of the increase is still unknown and how it is going to be implemented. But we will see that obviously, I expect now in H2. But obviously, we hope that this will be less of an impact than initially has been noted.
Speaker #6: At the bottom right, you can see that not only are the taxes high, but they are quite well spread across various fronts—both on salaries, revenue, and on the liability side of the balance sheet.
Speaker #6: And we wanted to note this because there are discussions now within the government to even increase the taxes more and making the Icelandic banking system less competitive, thereby which is obviously extremely surprising.
Speaker #6: The extent of the increase is still unknown, as is how it’s going to be implemented. But we will see that—obviously, I expect now in the second half of the year.
Speaker #6: But obviously, we hope that this will have less of an impact than it has been noted. Now, moving on, in terms of our business, on private or personal banking, we introduced earlier this year our loyalty scheme.
Jón Guðni Ómarsson: Now moving on, in terms of our business on private or personal banking, we introduced earlier this year our loyalty scheme. We have now already 50,000 customers that have joined the scheme. We are seeing now that customers are then to get more points, rising up and getting more favorable rates. They are choosing more products. That's obviously part of the reason for the scheme is to have a bigger share of wallet from our customers. We have been quite keen on selling pension savings and have been picking up steam on that front. As you can see in the middle here, we have a very substantial increase in new sales there over H1 of this year. This is obviously extremely stable assets under management, but at the same time, enhancing the financial health of our customers.
Jón Guðni Ómarsson: Now moving on, in terms of our business on private or personal banking, we introduced earlier this year our loyalty scheme. We have now already 50,000 customers that have joined the scheme. We are seeing now that customers are then to get more points, rising up and getting more favorable rates. They are choosing more products. That's obviously part of the reason for the scheme is to have a bigger share of wallet from our customers. We have been quite keen on selling pension savings and have been picking up steam on that front. As you can see in the middle here, we have a very substantial increase in new sales there over H1 of this year. This is obviously extremely stable assets under management, but at the same time, enhancing the financial health of our customers.
Speaker #6: And we have now already 50,000 customers that have joined the scheme, and we are seeing now that customers are then to get more points and rising up and getting more favorable rates they are choosing more products.
Speaker #6: And that's obviously part of the reason for the scheme—to have a bigger share of wallet from our customers. We have been quite keen on selling pension savings and have been picking up steam on that front.
Speaker #6: And as you can see in the middle here, we have a very substantial increase in new sales there over the first half of this year.
Speaker #6: This is obviously extremely stable assets under management, but at the same time, enhancing the financial health of our customers. At the bottom right here, we note that we have been offering, especially to the older generation amongst our customers, the so-called Tech Café.
Jón Guðni Ómarsson: At the bottom right here, we note that we have been offering especially the older generation amongst our customers, so-called Tech Cafe where we invite them to come to the bank, where we introduce and guide them through the app and to show all the possibilities they have on the technology front. This has been extremely well-received and will be now rolled out throughout the country through the rest of the year. On the business banking side, we continue to enjoy the highest market share among the Icelandic banks. Been seeing a very good, strong loan growth in Ergo, which is our leasing arm, and overall quite substantial new lending in 2026 of around ISK 69 billion. The business environment for SMEs remains challenging as for large corporates, obviously as well, with these high interest rates and the high inflation.
Jón Guðni Ómarsson: At the bottom right here, we note that we have been offering especially the older generation amongst our customers, so-called Tech Cafe where we invite them to come to the bank, where we introduce and guide them through the app and to show all the possibilities they have on the technology front. This has been extremely well-received and will be now rolled out throughout the country through the rest of the year. On the business banking side, we continue to enjoy the highest market share among the Icelandic banks. Been seeing a very good, strong loan growth in Ergo, which is our leasing arm, and overall quite substantial new lending in 2026 of around ISK 69 billion. The business environment for SMEs remains challenging as for large corporates, obviously as well, with these high interest rates and the high inflation.
Speaker #6: We invite them to come to the bank, where we introduce and guide them through the app and show all the possibilities they have on the technology front.
Speaker #6: And this has been extremely well received and will be now rolled out throughout the country during the rest of the year. On the business banking side, we continue to enjoy the highest market share among the Icelandic banks.
Speaker #6: We've been seeing very good, strong loan growth in ERGO, which is our leasing arm, and overall, quite substantial new lending in 2026 of around ISK 69 billion.
Speaker #6: The business environment for SMEs remains challenging, as it does for large corporates as well, with these high interest rates and high inflation. We are hoping, obviously, that the economy will stabilize so that we will have a more normalized environment from next year onwards.
Jón Guðni Ómarsson: We are hoping obviously that the economy will stabilize that we will have a more normalized environment from next year onwards. We would like to note the two new clients that we have been working with. First, Askja, which is a distributor of Mercedes-Benz, Kia, Honda, and others, and Rúnar, which has expanded the Chinese car manufacturer. Extremely interesting to work obviously with new clients and household names like this. On the clothing front, also FÖRT and SKÓR, a new client which sells posh suits and the children clothing as well. Great new additions there to our client relationships. On the investment banking front, we continue to enjoy extremely good market share in terms of brokerage both in equities and bonds.
Jón Guðni Ómarsson: We are hoping obviously that the economy will stabilize that we will have a more normalized environment from next year onwards. We would like to note the two new clients that we have been working with. First, Askja, which is a distributor of Mercedes-Benz, Kia, Honda, and others, and Rúnar, which has expanded the Chinese car manufacturer. Extremely interesting to work obviously with new clients and household names like this. On the clothing front, also FÖRT and SKÓR, a new client which sells posh suits and the children clothing as well. Great new additions there to our client relationships. On the investment banking front, we continue to enjoy extremely good market share in terms of brokerage both in equities and bonds.
Speaker #6: We would like to note two new clients that we have been working with. First, Askja, which is a distributor of Mercedes-Benz, Kia, Honda, and others.
Speaker #6: And then Una, which has Xpeng, the Chinese car manufacturer, is extremely interesting to work with—obviously new clients and household names like these. And on the clothing front, also Furt & Skór, a new client, which sells Bosch suits and has children’s clothing as well.
Speaker #6: So great new additions there to our clients client relationships. On the investment banking front, we continue to enjoy extremely good market share in terms of brokerage, both in equities and bonds.
Speaker #6: At the same time, however, the turnover in the in that sector is quite low now. And in the capital markets in general. Down by almost 50% year on year.
Jón Guðni Ómarsson: At the same time, however, the turnover in that sector is quite low now and in the capital markets in general, down by almost 50% year on year. That's obviously having an impact on the earnings and the fee income generation from that business. At the same time, we have been quite active in issuing bonds, both on behalf of the bank and for our clients. The corporate finance concluded a transaction where we were mandated to be the advisor to sell a real estate company and with about ISK 13.1 billion in terms of the sales proceeds, Fasteignavefur Íslands. Obviously, very happy to see that concluded in the current environment. Then we concluded the financing of a new pelagic vessel for Skinney-Þinganes, a great ship that I actually got the opportunity to visit and see now earlier in the summer.
Jón Guðni Ómarsson: At the same time, however, the turnover in that sector is quite low now and in the capital markets in general, down by almost 50% year on year. That's obviously having an impact on the earnings and the fee income generation from that business. At the same time, we have been quite active in issuing bonds, both on behalf of the bank and for our clients. The corporate finance concluded a transaction where we were mandated to be the advisor to sell a real estate company and with about ISK 13.1 billion in terms of the sales proceeds, Fasteignavefur Íslands. Obviously, very happy to see that concluded in the current environment. Then we concluded the financing of a new pelagic vessel for Skinney-Þinganes, a great ship that I actually got the opportunity to visit and see now earlier in the summer.
Speaker #6: And that's obviously having an impact on the earnings and the income generation from that business. At the same time, we have been quite active in issuing bonds, both on behalf of the bank and for our clients.
Speaker #6: And Corporate Finance concluded a transaction where we were mandated to be the advisor to sell a real estate company. And with about ISK 13.1 billion in terms of the sales proceeds, the sale of Hella Islands, obviously very happy to see that concluded in the current environment.
Speaker #6: And then we concluded the financing of a new Pelagic vessel for Skinney Þinganes, a great ship that I actually got the opportunity to visit and see now earlier in the summer.
Speaker #6: Huge ship with great facilities, but only nine people that work on the ship. And it's very good facilities, I can say, for the employees there.
Jón Guðni Ómarsson: Huge ship with great facilities that only nine people that work on the ship. It's a very good facilities, I can say, for the employees there. Now moving on, in terms of the digital adoption, we continue to invest in our app and make improvements there for the service for our customers. Customers now can have better access to the fund overviews, fund subscriptions, and international payments. We have quite a few more additions that we'll be rolling out now in the next few weeks. AI obviously continues to be the buzzword across the economy, basically, and business-wise. We at the bank have been an early adopter there, and we see 87% of our employees being active users of AI. We use Copilot and Claude and all the tools.
Jón Guðni Ómarsson: Huge ship with great facilities that only nine people that work on the ship. It's a very good facilities, I can say, for the employees there. Now moving on, in terms of the digital adoption, we continue to invest in our app and make improvements there for the service for our customers. Customers now can have better access to the fund overviews, fund subscriptions, and international payments. We have quite a few more additions that we'll be rolling out now in the next few weeks. AI obviously continues to be the buzzword across the economy, basically, and business-wise. We at the bank have been an early adopter there, and we see 87% of our employees being active users of AI. We use Copilot and Claude and all the tools.
Speaker #6: Now, moving on, in terms of digital adoption, we continue to invest in our app and make improvements there for the service for our customers.
Speaker #6: Customers now can have better access to the fund overviews and fund subscriptions, and international payments. We have quite a few more additions that will be rolling out now in the next few weeks.
Speaker #6: AI obviously continues to be the buzzword across the economy, basically, and business-wise. We at the bank have been early adopters there, and we see 87% of our employees being active users of AI.
Speaker #6: We use Copilot, Claude, and other tools. So, obviously, we have now been having general education for our employees, but we'll now move more into specific education and adaptation within individual teams.
Jón Guðni Ómarsson: Obviously we have now been having a general education for our employees, but we'll now move more into specific education and adaptation into individual teams. We have also set up a subsidiary, which we call Bank Bank, which we use basically to have a more expedient development of certain products and the technologies, which is then outside of the bank, where we can move a bit faster in terms of development, and many more initiatives on that front. This is also what we call a marathon season here at Íslandsbanki. The Íslandsbanki Reykjavik Marathon is the biggest charitable event of the year, and we are obviously extremely proud to be the biggest sponsor there. Everything is colored by the marathon, basically here at the bank throughout August.
Jón Guðni Ómarsson: Obviously we have now been having a general education for our employees, but we'll now move more into specific education and adaptation into individual teams. We have also set up a subsidiary, which we call Bank Bank, which we use basically to have a more expedient development of certain products and the technologies, which is then outside of the bank, where we can move a bit faster in terms of development, and many more initiatives on that front. This is also what we call a marathon season here at Íslandsbanki. The Íslandsbanki Reykjavik Marathon is the biggest charitable event of the year, and we are obviously extremely proud to be the biggest sponsor there. Everything is colored by the marathon, basically here at the bank throughout August.
Speaker #6: We have also set up a subsidiary, which we call Bank Bank. Which we use basically to have a more expedient development of certain products and technologies.
Speaker #6: Which is then outside of the bank, where we can move a bit faster in terms of development, and there are many more initiatives on that front.
Speaker #6: Now, this is also what we call marathon season here at Íslandsbanki. The Reykjavík Íslandsbanki Marathon is the biggest charitable event of the year.
Speaker #6: And we are obviously extremely proud to be the biggest sponsor there. And everything is colored by the marathon, basically, here at the bank throughout August.
Speaker #6: Over the past few years, obviously, the charities here in Iceland have relied quite substantially on the marathon, with over ISK 2 billion raised since 2006.
Jón Guðni Ómarsson: Over the past few years, obviously, the charities here in Iceland have relied quite substantially on the marathon with over ISK 2 billion raised since 2006. We are obviously quite keen to see as many participate as possibly can, and obviously raising funds for the charities here and locally. Having covered that, over to you, Ellert, on the financials.
Jón Guðni Ómarsson: Over the past few years, obviously, the charities here in Iceland have relied quite substantially on the marathon with over ISK 2 billion raised since 2006. We are obviously quite keen to see as many participate as possibly can, and obviously raising funds for the charities here and locally. Having covered that, over to you, Ellert, on the financials.
Speaker #6: And we are obviously quite keen to see as many participate as possibly can, and obviously raising funds for the charities here locally. Having covered that, over to you, Ellert, on the financials.
Speaker #2: Thank you, Jón Gunnar. As stated earlier in the presentation, we are quite happy with the results, turning a profit of around ISK 7.1 billion for the quarter.
Ellert Hlöðversson: Thank you, Gunni. As stated earlier in the presentation, we are quite happy with the results, turning a profit of around ISK 7.1 billion for the quarter, and return on equity of 13.3% or 13.4% for the H1 of the year. Looking at the bridge between Q2 2025 to Q2 2026, we can see that we have considerable growth in net interest income on the back of inflationary effects as inflation has been drastically higher this year compared to the previous year, offset by, I would say, fee and commission income, which is impacted by this same high interest rate and inflationary environment. In terms of operating expenses, we are seeing growth between years, mainly related to the expense of variable compensation system as well as one-off items.
Ellert Hlöðversson: Thank you, Gunni. As stated earlier in the presentation, we are quite happy with the results, turning a profit of around ISK 7.1 billion for the quarter, and return on equity of 13.3% or 13.4% for the H1 of the year. Looking at the bridge between Q2 2025 to Q2 2026, we can see that we have considerable growth in net interest income on the back of inflationary effects as inflation has been drastically higher this year compared to the previous year, offset by, I would say, fee and commission income, which is impacted by this same high interest rate and inflationary environment. In terms of operating expenses, we are seeing growth between years, mainly related to the expense of variable compensation system as well as one-off items.
Speaker #2: And return on equity of 13.3% or 13.4% for the first half of the year. And looking at the bridge between Q2 25 to Q2 26, we can see that we have considerable growth in net interest income on the back of inflationary effects, as inflation has been drastically higher this year compared to the previous year.
Speaker #2: Offset by, I would say, fee and commission income, which is impacted by this same high interest rate and inflationary environment. In terms of operating expenses, we are seeing growth between years, mainly related to the expense of the variable compensation system, as well as one-off items.
Speaker #2: Should we take the one-off items aside, return on equity in the quarter would have been 13.9% instead of the reported 13.3%. And for the first half, around 13.7% compared to the registered 13.4%.
Ellert Hlöðversson: Should we take the one-off items aside, return on equity in the quarter would have been 13.9% instead of the reported 13.3%, and for H1, around 13.7% compared to the registered 13.4%. Digging into the interest rate, the bank reported ISK 15.3 billion of net interest income, as you can see on the top left-hand side. Comparing that in a margin environment on the bottom left-hand side, the net interest margin was 3.4% compared to a level of 3.3% in the previous year. We note that 143 bps of inflation passed through our books this quarter compared to 151 in the previous years, indicating that the growth in margin on the back of lower inflationary ticks indicates strong margin control and strong control of the interest rate in the bank. For Q3, we are expecting 135 bps of inflation to be accounted in our books.
Ellert Hlöðversson: Should we take the one-off items aside, return on equity in the quarter would have been 13.9% instead of the reported 13.3%, and for H1, around 13.7% compared to the registered 13.4%. Digging into the interest rate, the bank reported ISK 15.3 billion of net interest income, as you can see on the top left-hand side. Comparing that in a margin environment on the bottom left-hand side, the net interest margin was 3.4% compared to a level of 3.3% in the previous year. We note that 143 bps of inflation passed through our books this quarter compared to 151 in the previous years, indicating that the growth in margin on the back of lower inflationary ticks indicates strong margin control and strong control of the interest rate in the bank. For Q3, we are expecting 135 bps of inflation to be accounted in our books.
Speaker #2: And taking into account the interest rate, the bank reported ISK 15.3 billion of net interest income, as you can see on the top left-hand side. Comparing that in a margin environment, on the bottom left-hand side, the net interest margin was 3.4% compared to a level of 3.3% in the previous year.
Speaker #2: We note that 143 pips of inflation passed through our books this quarter compared to 151 in the previous year, indicating growth in margin on the back of lower support.
Speaker #2: On lower inflationary ticks indicate strong margin control and strong control of the interest rate in the bank. For Q3, we are expecting 135 pips of inflation to be accounted in our books.
Speaker #2: And for Q4, we are expecting a very low accounting tick of around 0.2%, indicating that we expect net interest margins and net interest income to come down in the fourth quarter.
Ellert Hlöðversson: For Q4, we are expecting a very low accounting tick of around 0.2%, indicating that we expect net interest margins and net interest income to come down in Q4. Focusing on fees, we are seeing drop in fees of around 2.4% for H1 of the year and around 10% during the quarter, where fee income is comparable between Q1 this year and Q2 this year. This is mainly due to slow activity in capital markets, adversely impacting revenues from both asset management as well as investment banking, as well as, I would say, reductions within cards and payments processing, mainly related to higher expenses due to loyalty schemes. As before, market risk is a limited part of the bank's balance sheet. We're closed off with equity risk exposure of around ISK 6.2 billion towards H1. Thereof ISK 3.1 billion for listed shares.
Ellert Hlöðversson: For Q4, we are expecting a very low accounting tick of around 0.2%, indicating that we expect net interest margins and net interest income to come down in Q4. Focusing on fees, we are seeing drop in fees of around 2.4% for H1 of the year and around 10% during the quarter, where fee income is comparable between Q1 this year and Q2 this year. This is mainly due to slow activity in capital markets, adversely impacting revenues from both asset management as well as investment banking, as well as, I would say, reductions within cards and payments processing, mainly related to higher expenses due to loyalty schemes. As before, market risk is a limited part of the bank's balance sheet. We're closed off with equity risk exposure of around ISK 6.2 billion towards H1. Thereof ISK 3.1 billion for listed shares.
Speaker #2: Focusing on fees, we are seeing a drop in fees of around 2.4% for the first half of the year, and around 10% during the quarter.
Speaker #2: Fee income is comparable between the first quarter this year and the second quarter this year. This is mainly due to slow activity in capital markets, adversely impacting revenues from both asset management as well as investment banking.
Speaker #2: As well as reductions within cards and payments processing, mainly related to higher expenses due to loyalty schemes. As before, market risk is a limited part of the bank’s balance sheet.
Speaker #2: We're closed off with equity risk exposures of around ISK 6.2 billion. Towards the half year, there are ISK 3.1 billion for listed shares. As before, other operating income and net FX gain tend to be a limited part of the operation as well.
Ellert Hlöðversson: As before, other operating income and net FX gain tend to be a limited part of the operation as well. Focusing on costs, our cost to income ratio closed off at 43.1% for the quarter. As before, it is mainly comprised of around 60% salaries and 40% OpEx. Salaries were rising of around ISK 800 million year on year or around 9%. Thereof, for the quarter, around ISK 430 million were related to employee variable compensations plan and are close to ISK 670 million looking at H1 of the year. In addition, around ISK 370 million were expensed during the quarter related to organizational changes both within the parent company as well as Íslandssjóðir. We had previously in our Q1 earnings call indicated around ISK 260 million related to organizational changes within the bank itself in April.
Ellert Hlöðversson: As before, other operating income and net FX gain tend to be a limited part of the operation as well. Focusing on costs, our cost to income ratio closed off at 43.1% for the quarter. As before, it is mainly comprised of around 60% salaries and 40% OpEx. Salaries were rising of around ISK 800 million year on year or around 9%. Thereof, for the quarter, around ISK 430 million were related to employee variable compensations plan and are close to ISK 670 million looking at H1 of the year. In addition, around ISK 370 million were expensed during the quarter related to organizational changes both within the parent company as well as Íslandssjóðir. We had previously in our Q1 earnings call indicated around ISK 260 million related to organizational changes within the bank itself in April.
Speaker #2: Focusing on costs, our cost-to-income ratio closed off at 43.1% for the quarter. As before, it's mainly comprised of around 60% salaries and 40% opex.
Speaker #2: Salaries were rising of around 800 million year on year, or around 9%. Thereof, around four in the quarter, around 430 million were related to employee variable compensation plan.
Speaker #2: And are close to 670 million looking at the first half of the year. In addition, around 370 million were expensed during the quarter related to organizational changes, both within the parent company as well as Íslandsjóður.
Speaker #2: We had previously, in our Q1 earnings call, indicated around 260 million related to organizational changes within the bank itself in April. Aside from that, other operating expenses were growing 1.2% less than inflation, thus contracting in real terms year on year.
Ellert Hlöðversson: Aside from that, other operating expenses were growing 1.2% less than inflation, thus contracting in real terms year on year. Focusing on the balance sheet, as before, it's a relatively simple balance sheet. From the asset side of things, around 18% is liquid assets and loan book comprises close to 79%. On the liability side of things, deposits account for 59% of the balance sheet and other stable funding close to 38%. Digging into the loan book, the composition remains healthy, as you can see on the top right-hand side, where the composition is comparable to previous quarters. The loan book closed off at around ISK 1,460 billion, having grown by 3.7% year to date, reflecting around 7.5% growth on an annualized basis. As before, it is highly collateralized. Around 94% of the book is covered by collateral, where LTVs are modest or around 52%.
Ellert Hlöðversson: Aside from that, other operating expenses were growing 1.2% less than inflation, thus contracting in real terms year on year. Focusing on the balance sheet, as before, it's a relatively simple balance sheet. From the asset side of things, around 18% is liquid assets and loan book comprises close to 79%. On the liability side of things, deposits account for 59% of the balance sheet and other stable funding close to 38%. Digging into the loan book, the composition remains healthy, as you can see on the top right-hand side, where the composition is comparable to previous quarters. The loan book closed off at around ISK 1,460 billion, having grown by 3.7% year to date, reflecting around 7.5% growth on an annualized basis. As before, it is highly collateralized. Around 94% of the book is covered by collateral, where LTVs are modest or around 52%.
Speaker #2: And focusing on the balance sheet, as before, it's a relatively simple balance sheet. From the asset side of things, around 18% is liquid assets and the loan book comprises close to 79%.
Speaker #2: And on the liability side of things, deposits account for 59% of the balance sheet and other stable funding close to 38%. Taking into the loan book, the composition remains healthy.
Speaker #2: As you can see on the top right-hand side, where the composition is comparable to previous quarters. The loan book closed off at around 1416 billion ISK.
Speaker #2: Having grown by 3.7% year to date, reflecting around 7.5% growth on an annualized basis. As before, it is highly collateralized—around 94% of the book is covered by collateral, where LTVs are modest, or around 52%.
Speaker #2: Currently, around 5% of loans are to customers which are international parties. In our previous earnings calls, we have indicated that we have wanted to grow this part of the business from a position of around 1% when we started.
Ellert Hlöðversson: Currently, around 5% of loans are to customers which are international parties. In our previous earnings calls, we have indicated that we have wanted to grow this part of the business from a position of around 1% when we started, and are aiming for this segment to grow somewhere between 5% and 10%, and are now, as I said before, stating that we have reached these around 5% levels. Despite slowdown in the economy, asset quality remains high. If looking at stage 3 lending on the top right-hand side, stage 3 grew from 2% to a 2.6% level from Q1 to Q2, which is mainly related to exposure within the construction sector, and mainly related to a single exposure in the construction sector, as seen on the bottom left-hand side. Impairments in the quarter amounted to close to ISK 500 million or cost of risk around 13 bps.
Ellert Hlöðversson: Currently, around 5% of loans are to customers which are international parties. In our previous earnings calls, we have indicated that we have wanted to grow this part of the business from a position of around 1% when we started, and are aiming for this segment to grow somewhere between 5% and 10%, and are now, as I said before, stating that we have reached these around 5% levels. Despite slowdown in the economy, asset quality remains high. If looking at stage 3 lending on the top right-hand side, stage 3 grew from 2% to a 2.6% level from Q1 to Q2, which is mainly related to exposure within the construction sector, and mainly related to a single exposure in the construction sector, as seen on the bottom left-hand side. Impairments in the quarter amounted to close to ISK 500 million or cost of risk around 13 bps.
Speaker #2: And are aiming for somewhere between 5 and 10% for the second to grow somewhere between 5 and 10% and are now, as I said before, stating that we have reached this around 5% level.
Speaker #2: Despite the slowdown in the economy, asset quality remains high. If you look at stage three lending on the top right-hand side, stage three grew from 2% to 2.6% from Q1 to Q2, which is mainly related to exposure within the construction sector, and mainly related to a single exposure in the construction sector.
Speaker #2: As seen on the bottom left-hand side, impairments in the quarter amounted to close to 500 million, or cost of risk around 13 bps. As before, these reflect borrower specific circumstances.
Ellert Hlöðversson: As before, this reflects borrower-specific circumstances. We do note that sale of new residential real estate remains prolonged, and as Jón Guðni stated before, there are signs that status for the construction sector are turning to worse. As of now, we do not view this segment of our loan book to be in structural difficulties. Looking at the liability side of things, similar story. Around 52% of the balance sheet is funded through deposits. Customer loans to deposits ratios remain strong, and deposit growth has been healthy of around 3% in Q2, along with the same for retail deposits. This, of course, translates into favorable LCR ratios, with total liquidity coverage ratio closed off at 188%, compared to a level of 151 for the ISK part.
Ellert Hlöðversson: As before, this reflects borrower-specific circumstances. We do note that sale of new residential real estate remains prolonged, and as Jón Guðni stated before, there are signs that status for the construction sector are turning to worse. As of now, we do not view this segment of our loan book to be in structural difficulties. Looking at the liability side of things, similar story. Around 52% of the balance sheet is funded through deposits. Customer loans to deposits ratios remain strong, and deposit growth has been healthy of around 3% in Q2, along with the same for retail deposits. This, of course, translates into favorable LCR ratios, with total liquidity coverage ratio closed off at 188%, compared to a level of 151 for the ISK part.
Speaker #2: We do note that sales of new residential real estate remain prolonged. And as Jón Guðni stated before, there are signs that the status for the construction sector is turning.
Speaker #2: But as of now, we do not view this segment of our loan book to be in structural difficulties. Looking at the liability side of things, it's a similar story.
Speaker #2: Around 52% of the balance sheet is funded through deposits. Customer loans-to-deposits ratios remain strong, and deposit growth has been healthy at around 3% in the second quarter.
Speaker #2: Along with the same for real estate for retail deposits, sorry. This, of course, translates into favorable LCR ratios, where our total liquidity coverage ratio closed off at 188%, compared to a level of 151% for the ISK part.
Speaker #2: This allows the bank to be flexible when it comes to wholesale funding. The bank is fully Emerald funded for the year. And as you can see on the top right-hand side, maturities are very low for the remainder of the year, or close to ISK 12 billion.
Ellert Hlöðversson: This allows the bank to be flexible when it comes to wholesale funding, and the bank is fully umbrella funded for the year. As you can see on the top right-hand side, maturities are very low for the remainder of the year or close to ISK 12 billion. For the next year, we are reporting maturities of around ISK 100 billion. They are of around ISK 40 billion in an FX covered bond, which is a highly specialized market. We are pleased to see that the development of our Euro funding spreads remain stable in line with market positions, and believe that this is a factor of good funding strategy where we are diversifying across products, maturities, geographies, and other aspects. We note that in September, our original AT1 subordinated bond is callable, and we expect that to be called on the first call date.
Ellert Hlöðversson: This allows the bank to be flexible when it comes to wholesale funding, and the bank is fully umbrella funded for the year. As you can see on the top right-hand side, maturities are very low for the remainder of the year or close to ISK 12 billion. For the next year, we are reporting maturities of around ISK 100 billion. They are of around ISK 40 billion in an FX covered bond, which is a highly specialized market. We are pleased to see that the development of our Euro funding spreads remain stable in line with market positions, and believe that this is a factor of good funding strategy where we are diversifying across products, maturities, geographies, and other aspects. We note that in September, our original AT1 subordinated bond is callable, and we expect that to be called on the first call date.
Speaker #2: For the next year, we are reporting maturities of around ISK 100 billion. Thereof, around ISK 40 billion in an FX covered bond, which is a highly, highly specialized market.
Speaker #2: We are pleased to see that the development of our EUR funding spreads tends to remain stable, in line with market positions, and believe that this is a factor of good funding strategy, where we are diversifying across products, maturities, geographies, and other aspects.
Speaker #2: We note that in September, our original 81 81 subordinated bond is callable. And we expect that to be called on the first call date.
Speaker #2: Refinancing is subject to capital at that point in time. We will also choose which market to refinance through at a later date. And lastly, capital.
Ellert Hlöðversson: Refinance is subject to capital at that point in time, and we will also choose which market to refinance through at a later date. Lastly, capital. Capitalization remains strong at the end of the quarter, as Jón Guðni stated. From a CET1 standpoint, the bank closed off at 19.1% compared to a target level of 17.2%, which is assuming the midpoint of the management buffer, and from a total capital standpoint, 23% compared to a level of 21.5%. The bank received a decision by the Financial Supervisory Authority towards the end of June indicating additional capital requirement of 1.8% of REA for our Pillar 2 requirements.
Ellert Hlöðversson: Refinance is subject to capital at that point in time, and we will also choose which market to refinance through at a later date. Lastly, capital. Capitalization remains strong at the end of the quarter, as Jón Guðni stated. From a CET1 standpoint, the bank closed off at 19.1% compared to a target level of 17.2%, which is assuming the midpoint of the management buffer, and from a total capital standpoint, 23% compared to a level of 21.5%. The bank received a decision by the Financial Supervisory Authority towards the end of June indicating additional capital requirement of 1.8% of REA for our Pillar 2 requirements.
Speaker #2: Capitalization remains strong at the end of the quarter, as Jón Guðni stated. From a CET1 standpoint, the bank closed off at 19.1%, compared to a target level of 17.2%, which is assuming the midpoint of the management buffer.
Speaker #2: And from a total capital standpoint, 23% compared to a level of 21.5%. The bank received a decision by the Financial Supervisory Authority towards the end of June indicating an additional capital requirement of 1.8% of REA for the R Pillar II requirements.
Speaker #2: REA ratio, as you can see on the bottom right-hand side, closed off at 58.4%, having come down quite a lot following a very favorable CR3 implementation at the end of '25, as well as further reduction when the central bank accepted the loan splitting approach for IPRE mortgage exposure.
Ellert Hlöðversson: REA ratio, as you can see on the bottom right-hand side, closed off at 58.4%, having come down quite a lot from following a very favorable CRR III implementation end of 2025, as well as further reduction when the Central Bank accepted the loan splitting approach for IPRE mortgage exposure. This, of course, is related to the fact that the bank is still a standardized, is using the standardized approach, so REA ratios remain high and leverage remains low, where leverage ratio closed off at 11.7% end of the quarter. End of Q2, the bank held around 23.1% in distribution capacity, either for growth as well as for distributions to shareholders, assuming a fully optimized capital structure, which is on back of the fact that during H1, the bank has distributed 27.8%, thereof 15.2% through buybacks.
Ellert Hlöðversson: REA ratio, as you can see on the bottom right-hand side, closed off at 58.4%, having come down quite a lot from following a very favorable CRR III implementation end of 2025, as well as further reduction when the Central Bank accepted the loan splitting approach for IPRE mortgage exposure. This, of course, is related to the fact that the bank is still a standardized, is using the standardized approach, so REA ratios remain high and leverage remains low, where leverage ratio closed off at 11.7% end of the quarter. End of Q2, the bank held around 23.1% in distribution capacity, either for growth as well as for distributions to shareholders, assuming a fully optimized capital structure, which is on back of the fact that during H1, the bank has distributed 27.8%, thereof 15.2% through buybacks.
Speaker #2: This, of course, is a factor of—or is related to—the fact that the bank is still using the standardized approach. So REA ratios remain high.
Speaker #2: And leverage remains low, where leverage ratio closed off at 11.7% end of the quarter. End of the second quarter, the bank held around 23.1% in distribution capacity either for growth, as well as for distributions to shareholders, assuming a fully optimized capital structure.
Speaker #2: This is on the back of the fact that during the first half, the bank has distributed 27.8%. Of that, 15.2% was through buybacks. As before, the bank remains committed to its efforts to optimize its capital structure.
Ellert Hlöðversson: The bank remains committed to its efforts to optimize capital structure. To close off, we are quite happy to see the strong performance in the quarter, having returned a 13.4% return on equity in H1, 13.3% for Q2. Excess capital remains strong with a position of 23.1%, and we are also pleased to announce an updated guidance of being above 12.5% ROE for the year 2026, and state that we will either reaffirm or revise that guidance following our Q3 results. With that, we turn the floor to questions.
Ellert Hlöðversson: The bank remains committed to its efforts to optimize capital structure. To close off, we are quite happy to see the strong performance in the quarter, having returned a 13.4% return on equity in H1, 13.3% for Q2. Excess capital remains strong with a position of 23.1%, and we are also pleased to announce an updated guidance of being above 12.5% ROE for the year 2026, and state that we will either reaffirm or revise that guidance following our Q3 results. With that, we turn the floor to questions.
Speaker #2: And to close off, we are quite happy to see the strong performance in the quarter, having returned a 13.4% return on equity in the first half, and 13.3% for the second quarter.
Speaker #2: Excess capital remains strong, with a position of 23.1%. We are also pleased to announce updated guidance of approximately 12.5% ROE for the year 2026.
Speaker #2: And state that we will either reaffirm or revise that guidance following our Q3 results. With that, we turn the floor to questions.
Speaker #1: Thank you, Ellert. Maybe we will start with the written questions, but note that those who want to ask verbal questions can press pound five. We'll start with the written questions.
Jón Guðni Ómarsson: Thank you, Ellert. Maybe we will start with the written questions, but to note that the ones that want to have verbal questions, you can press pound five. Starting with the written questions, do we have any such questions?
Jón Guðni Ómarsson: Thank you, Ellert. Maybe we will start with the written questions, but to note that the ones that want to have verbal questions, you can press pound five. Starting with the written questions, do we have any such questions?
Speaker #1: Do we have any such questions?
Speaker #3: You have three questions from Akur. Stage three rose from 2.0% to 2.6% in the quarter, largely in construction. Can you talk us through how you're thinking about credit quality right now?
Ellert Hlöðversson: You have three questions from Akur. Stage 3 rose from 2.0% to 2.6% in the quarter, largely construction. Can you talk us through how you're thinking about credit quality right now? Is this quarter's migration something you see as contained to a handful of known projects or the start of a broader trend, and how comfortable are you with current provisioning coverage against it?
Ellert Hlöðversson: You have three questions from Akur. Stage 3 rose from 2.0% to 2.6% in the quarter, largely construction. Can you talk us through how you're thinking about credit quality right now? Is this quarter's migration something you see as contained to a handful of known projects or the start of a broader trend, and how comfortable are you with current provisioning coverage against it?
Speaker #3: Is this quarter's migration something you see as contained to a handful of non-projects, or the start of a broader trend? And how comfortable are you with current provisioning coverage against it?
Speaker #3: The second question: loans grew by ISK 14.8 billion in the quarter, yet REA fell by ISK 5.7 billion, resulting in a lower REA density. Is this a result of loan mix or something else?
Ellert Hlöðversson: The second question, loans grew ISK 14.8 billion in the quarter, yet REA fell ISK 5.7 billion, resulting in lower REA density. Is this a result of loan mix or something else? Finally, the third one, CPI imbalance of ISK 231 billion after the covered bond maturity. Is this target range or a transitionary peak to be managed down?
Ellert Hlöðversson: The second question, loans grew ISK 14.8 billion in the quarter, yet REA fell ISK 5.7 billion, resulting in lower REA density. Is this a result of loan mix or something else? Finally, the third one, CPI imbalance of ISK 231 billion after the covered bond maturity. Is this target range or a transitionary peak to be managed down?
Speaker #3: And finally, the third one: CPI imbalance of ISK 231 billion after the covered bond maturity. Is this a target range or a transitory peak to be managed down?
Speaker #1: Very good. I'll start with the first one. In terms of the construction sector, obviously the higher interest rates are having an impact, and we are seeing that, especially in terms of apartments. It's taking longer to sell new apartments, and oftentimes they are selling at lower than the asking price.
Jón Guðni Ómarsson: Very good. I'll start with the first one. In terms of the construction sector, obviously the higher interest rates are having an impact and we are seeing that, especially in terms of apartments, it's taking longer to sell new apartments and oftentimes they are selling at lower than the asking price. Having said that, we have seen single name exposures that have had difficulties where the bank needs to step in in a couple of cases. Those are quite isolated, like I said, to single names. In general, our borrowers in that sector are very strong companies and doing quite well, and have had very strong earnings for the past two years that they can now use as buffers through this environment. Also having said that, we expect to see this to be a relatively slow environment over the coming months.
Jón Guðni Ómarsson: Very good. I'll start with the first one. In terms of the construction sector, obviously the higher interest rates are having an impact and we are seeing that, especially in terms of apartments, it's taking longer to sell new apartments and oftentimes they are selling at lower than the asking price. Having said that, we have seen single name exposures that have had difficulties where the bank needs to step in in a couple of cases. Those are quite isolated, like I said, to single names. In general, our borrowers in that sector are very strong companies and doing quite well, and have had very strong earnings for the past two years that they can now use as buffers through this environment. Also having said that, we expect to see this to be a relatively slow environment over the coming months.
Speaker #1: Having said that, we have seen single name exposures that have had difficulties, where the bank has needed to step in in a couple of cases.
Speaker #1: But those are quite isolated, like I said, to single names. So in general, our borrowers in that sector are very strong companies and doing quite well.
Speaker #1: And have had very strong earnings over the past few years that they can now use as buffers through this environment. And, also, having said that, we expect to see this to be a relatively slow environment over the coming months.
Speaker #1: We are hearing, obviously, there are fewer new projects coming on, so less construction activity than we have seen over the past few years. So, that obviously can feed into and have an impact on unemployment as well.
Jón Guðni Ómarsson: We are hearing, obviously, there are fewer new projects coming on, less construction activity than we have seen over the past few years. That obviously can feed into and have an impact on unemployment as well, impacting then some other industries. Overall, we are quite positive. The macro environment is obviously fairly harsh at the moment. When the Central Bank of Iceland has managed to get, let's say, calm things down and can go to normalized environment, we see here at the banking system that we have seen a huge growth in deposits. Once the rates come down, we have plenty of liquidity in the system to restart and enhance investments across the board. We have impaired sufficiently, obviously, against these exposures, we are happy on that front.
Jón Guðni Ómarsson: We are hearing, obviously, there are fewer new projects coming on, less construction activity than we have seen over the past few years. That obviously can feed into and have an impact on unemployment as well, impacting then some other industries. Overall, we are quite positive. The macro environment is obviously fairly harsh at the moment. When the Central Bank of Iceland has managed to get, let's say, calm things down and can go to normalized environment, we see here at the banking system that we have seen a huge growth in deposits. Once the rates come down, we have plenty of liquidity in the system to restart and enhance investments across the board. We have impaired sufficiently, obviously, against these exposures, we are happy on that front.
Speaker #1: Impacting then some other industries. But overall, we are quite positive. The macro environment is obviously fairly harsh at the moment. But when the central bank has managed to, let's say, calm things down and can go to a normalized environment, we see here at the banking system that we have seen a huge growth in deposits.
Speaker #1: So, once rates come down, we have plenty of liquidity in the system to restart and enhance investments across the board. We have impaired sufficiently, obviously, against these exposures.
Speaker #1: So we are happy on that front, and we think that we are just adequately, basically, impaired. And we don't foresee additional impairments on these single name exposures.
Jón Guðni Ómarsson: We think that we are just adequately, basically, impaired, and we don't foresee additional impairments on these single name exposures. Having said that, obviously in the current environment, there's always uncertainty regarding impairments. As I noted before, in our expectation for the year, for the ROE of 12.5%, we are assuming through-the-cycle impairments. At this moment, I can say that I'm entirely optimistic that it can be lower. Again, given the caveat that it's difficult to expect and to project impairments into the future. In terms of the other two questions, over to you, Einar.
Jón Guðni Ómarsson: We think that we are just adequately, basically, impaired, and we don't foresee additional impairments on these single name exposures. Having said that, obviously in the current environment, there's always uncertainty regarding impairments. As I noted before, in our expectation for the year, for the ROE of 12.5%, we are assuming through-the-cycle impairments. At this moment, I can say that I'm entirely optimistic that it can be lower. Again, given the caveat that it's difficult to expect and to project impairments into the future. In terms of the other two questions, over to you, Einar.
Speaker #1: Having said that, obviously in the current environment, there's always uncertainty regarding impairments. And as I noted before, in our expectation for the year, for the ROE of 12.5%, we are assuming through-the-cycle impairments. But at this moment, I can say that I'm fairly optimistic that it can be lower.
Speaker #1: But again, giving the caveat that it's difficult to expect and to project impairments into the future. In terms of the other two questions, over to you, Ellert.
Speaker #2: Thank you. With regards to REA, it's been favorable to see the development of the REA density. I mean, we are coming down from a level of close to 65% down to the current level of 58.4%.
Ellert Hlöðversson: Thank you. With regards to REA, it's been favorable to see the development of the REA density. We are coming down from a level of close to 65%, down to the current level of 58.4%. This is mainly related to, I would say, beneficial implementation of CRR III towards the end of last year, as well as the additional IPRE exposure adaptation during this year, which further reduced REA by around 2 percentage points. This result is a combination of many aspects. I would say it's a composition of the loan book, but it's also with regards to how we have structured our products, how we have structured our terms within certain products to take advantage of credit conversion factors, et cetera. It's a mix of many things.
Ellert Hlöðversson: Thank you. With regards to REA, it's been favorable to see the development of the REA density. We are coming down from a level of close to 65%, down to the current level of 58.4%. This is mainly related to, I would say, beneficial implementation of CRR III towards the end of last year, as well as the additional IPRE exposure adaptation during this year, which further reduced REA by around 2 percentage points. This result is a combination of many aspects. I would say it's a composition of the loan book, but it's also with regards to how we have structured our products, how we have structured our terms within certain products to take advantage of credit conversion factors, et cetera. It's a mix of many things.
Speaker #2: And this is mainly related to, I would say, the beneficial implementation of CR03 towards the end of last year, as well as the additional IPRE exposure adaptation during this year, which further reduced REA by around 2 percentage points.
Speaker #2: So, this is a combination of— I would say, this result is a combination of many aspects. I would say it's a composition of the loan book, but it's also with regard to how we have structured our products, how we have structured our terms within certain products to take advantage of credit conversion factors, etc.
Speaker #2: So it's a mix of many things. However, we still believe that REA density is high on back of the fact that we are obviously a standardized bank, which is impacting comparability and, I would say, competitiveness in an international standpoint.
Ellert Hlöðversson: However, we still believe that REA density is high on back of the fact that we are obviously a standardized bank, which is impacting comparability and, I would say, competitiveness in an international standpoint. The bank is looking into further REA reducing efforts, which will provide us with additional metrics from that sense. With regards to the CPI target, we are currently at around 235 billion ISK following the maturity of covered bond in May. We are happy with that level, we aim to be competitive when it comes to offering loan products. What we have seen historically is that the lending as well, aside from, I would say, lending less new issuances, is roughly funded, net zero. We have maturities as well. There are some maturities on the CPI link side over the course of 2027, which may impact the imbalance.
Ellert Hlöðversson: However, we still believe that REA density is high on back of the fact that we are obviously a standardized bank, which is impacting comparability and, I would say, competitiveness in an international standpoint. The bank is looking into further REA reducing efforts, which will provide us with additional metrics from that sense. With regards to the CPI target, we are currently at around 235 billion ISK following the maturity of covered bond in May. We are happy with that level, we aim to be competitive when it comes to offering loan products. What we have seen historically is that the lending as well, aside from, I would say, lending less new issuances, is roughly funded, net zero. We have maturities as well. There are some maturities on the CPI link side over the course of 2027, which may impact the imbalance.
Speaker #2: So the bank is, I would say, looking into further REA reducing efforts, which will provide us with additional metrics in that sense.
Speaker #2: With regards to the CPI target, we are currently at around ISK 235 billion following the maturity of a covered bond in May. We are happy with that level, and we aim to be competitive when it comes to offering loan products.
Speaker #2: What we have seen historically is that the lending as well aside from, I would say, lending less new issuances is roughly is roughly funded is roughly, I would say, net zero.
Speaker #2: And then we have maturities as well. There are some maturities on the CPI linked side on, I would say, over the course of 27, which may impact the imbalance, but there is there's no ambition to grow with drastically or as well as we are not afraid to have it at the current levels, given, I would say, given the real rate in the banking book.
Ellert Hlöðversson: There's no ambition to grow it drastically or as well as we are not afraid to have it at the current levels given the real rate in the banking book.
Ellert Hlöðversson: There's no ambition to grow it drastically or as well as we are not afraid to have it at the current levels given the real rate in the banking book.
Speaker #1: Very good. Any other further written questions?
Jón Guðni Ómarsson: Very good. Any other further written questions?
Jón Guðni Ómarsson: Very good. Any other further written questions?
Speaker #3: No further written questions.
[Company Representative] (Íslandsbanki): No further written questions.
[Company Representative] (Íslandsbanki): No further written questions.
Speaker #1: Okay. Then we'll hand it over to the operator. Are there any verbal questions online?
Jón Guðni Ómarsson: Okay, we'll hand it over to the operator. Are there any verbal questions online?
Jón Guðni Ómarsson: Okay, we'll hand it over to the operator. Are there any verbal questions online?
Speaker #4: There are no questions on the call, so I hand the word back to you.
Operator: There are no questions at the telco. I hand the word back to you.
Operator: There are no questions at the telco. I hand the word back to you.
Speaker #1: Okay, very good. As we noted before, we are quite happy with the second-quarter earnings, and obviously, the bank is in very good shape in terms of capital.
Jón Guðni Ómarsson: Okay. Very good. As we noted before, we are quite happy with the Q2 earnings, and obviously, the bank is in very good shape in terms of capital. Some uncertainties in terms of the economic outlook here. At the same time, all the fundamentals are quite robust. We thank you for joining this earnings call, and hope you enjoy the rest of the summer. Thank you.
Jón Guðni Ómarsson: Okay. Very good. As we noted before, we are quite happy with the Q2 earnings, and obviously, the bank is in very good shape in terms of capital. Some uncertainties in terms of the economic outlook here. At the same time, all the fundamentals are quite robust. We thank you for joining this earnings call, and hope you enjoy the rest of the summer. Thank you.
Speaker #1: There are some uncertainties in terms of the economic outlook here. But at the same time, all the fundamentals are quite robust. We thank you for joining this earnings call and hope you enjoy the rest of the summer.
Speaker #1: Thank you.
Operator: Call recording is off. Your participation in the conference has been terminated by the host. Goodbye.
Operator: Call recording is off. Your participation in the conference has been terminated by the host. Goodbye.
