Good morning, ladies and gentlemen. Welcome to Arion Bank's First Capital Markets Day. It's the first Capital Markets Day that we hold following our dual listing last year in Iceland and Stockholm. It's really good to see how many attending today. We'll be hosting another event in Reykjavik next Thursday, so people from Iceland don't have to fly over to hear our story. I think our story is actually an interesting one, being the only major financial institution in Iceland listed, the only one that is not government-owned. As you will hopefully learn today, we have for the last three years, I would say, been reshaping the business of Arion. As you will find out towards the end of the session, where Stefán Pétursson, the CFO, will go through the financials and the trajectory of the performance of Arion as of lately.
We are now quite convinced that this reshaping is finding its way into the bottom- line figures. If I just start by looking back three years, what happened in 2016, that's when the bank deliberately decided to postpone a big integration of an infrastructure system, a payment system, which the two other banks were occupied implementing, and decided to invest heavily into digital services. The digital journey effectively started in 2016. That has allowed us to rationalize our branch network since. As Ida Brá Benediktsdóttir, our Head of Retail Banking, will explain, we've come quite far, and we're still reaping the benefit from those investments. In 2016, we also acquired an insurance company. Before that, Arion had only exposure to life insurance, but bought the smallest P&C insurer in town, which also had a small life insurance business and was able to scale that up.
This business is now the fastest-growing insurance business in Iceland. As part of our digital journey, we have just recently opened up for sales of all of their products in our app, which we are quite confident will lead to further sales and higher market share going forward. In late 2018, following our listing, we changed a bit our emphasis when it came to our loan growth strategy, where we stated, I think in our Q3 reports, that the focus was now more on profitability rather than loan growth. This strategy has led the bank to reduce its risk-weighted assets, primarily in the corporate lending space, by some ISK 48 billion, if I remember correctly, this year, setting free around ISK 8 billion of Arion's capital. That has been done without actually undermining the operating performance of Arion.
We will explain in today's session how we actually intend to continue on that journey and further improve and increase our revenue generation from our capital that we deploy. Recently, we have been introducing a refined strategy in our corporate banking space, where we merged corporate banking and part of the investment banking, basically the private side of the investment banking arm. We are now stating that we are going to apply a more disciplined approach to capital allocation going forward. That will be explained by Ásgeir Helgi Reykfjörð, our Deputy CEO and new Head of CIB. Obviously, when we went out introducing that strategy, we also, as you probably all know, executed a cost reduction plan where we laid off around 12% of our FTEs. If we look 12 months back, the FTE reduction is around 16%.
This is all done obviously to enhance profitability of the bank and create shareholder value, but it's also important for our clients that the bank is well operated and in a position to offer better terms and better services. This goes hand in hand. On the agenda, we will have five speakers. I haven't mentioned Erna Björg Sverrisdóttir, our Chief Economist. She will go through the economic or the macro situation in Iceland, which I claim is quite favorable. I will actually start my presentation by going briefly over the economic situation in Iceland and why operating a bank in Iceland is more favorable than rest of the world, probably at the moment, despite a lower interest rate environment. Following Erna's presentation, Ásgeir Gylfason will be going through the CIB business, the enhanced focus and the more disciplined approach to how we allocate capital.
This is the most capital-intensive , if I can use that phrase, business that we operate. It has more than ISK 70 billion of capital tied up there. Whereas some of the other components to our business, which are performing nicely, have much smaller capital in its use. After a short coffee break, we will then listen to Ida Brá's presentation on our digital journey, which started in 2016. I think that's a very interesting story. We're the leader in the space in Iceland, I claim one of the world's leaders, especially for things that we've recently been introducing without the implementation of PSD2. The final presentation will be given by Stefán Pétursson, the CFO, who I think will summarize the whole journey into the numbers and demonstrate how we are on a different trajectory than our competitors at the moment.
We'll then end by a Q&A session. I urge you to ask us tough questions. Afterwards, we're offering one-on-one meetings in side meeting rooms here. Please feel free to contact any one of us and ask for a meeting afterwards. Beginning my presentation, which has the title Higher Profitability in a More Challenging Interest Rate Environment. This is something that banks are dealing with now. The interest rates are low. They're at historical low levels in Iceland, but still at 3%, the policy rates, which is obviously better than for the rest of Europe. Still, the deposit margin, which used to be Iceland's best performing, or Icelandic Bank's best performing product, is facing margin pressure. That's clear, and we're seeing that.
Just the 100 basis point cut in policy rates in the last few months without any countermeasures is a revenue loss of some ISK 500 million, if I remember correctly, or a little more than that. The strategy that we are pursuing now is to go for, and the reshaping strategy that started in 2016, as we will demonstrate today, is actually all about deploying capital in a more efficient way, focusing on asset-light businesses where we are the market leader, as we will tell you today, and applying a very different approach when it comes to the Corporate & Investment Banking. We're effectively the first bank who will go full force for a more partnership approach, originate to distribute, where we intend to keep the business relationship with the corporates, but not by offering our balance sheet for the whole financing piece.
The fact is that banks in Iceland have recently been subsidizing that component of their services to get the business relationship. Because of how much capital it deploys, it doesn't make any sense. It doesn't make any sense. Actually, currently, you can now bring partners to the table and offer better financing terms than the banks on a subsidized level can do. That's why we're quite confident that this strategy will result to much better income and higher profitability going forward and support the capital release story of Arion, which was very much a part of the IPO story. We've already distributed some ISK 25 per share of capital to shareholders. That's on top of the ISK 80 per share, or approximately, that the stock is trading at. We will demonstrate today that we actually have ample room to do more.
The key messages for today will be that we're operating in a strong and healthy economy. That's important because when you want to play the economy or the macro story of Iceland, you go and invest into a bank. We believe the macro story is quite favorable. Despite economic slowdown globally, we have a lot of things going for us at the moment. Our business model is quite diversified, and as I said previously, we are the market leader in most services that deploy less capital, so asset-light businesses, which will provide us with revenue generation that is incomparable with our competitors. The market position is strong there, but we also have a good market position in more capital-intensive, asset-heavy businesses.
I've mentioned the more disciplined approach to deploying capital and being a listed company, having a day like this brings discipline, having to face shareholders every quarter as well. Committing to a capital release program brings discipline. Now, in our daily business, we are up against a business decision. Do we have an investment that we can deploy our capital into, or that generates sufficient returns, or should we buy back some shares at a discount to book equity? That in itself brings discipline. That's why we are committed and will continue to release capital, Stefán Pétursson will, in his presentation, go through the main elements of that capital release story. I claim that the Icelandic economy is strong and healthy. Robust, that's another word for that.
Despite a downturn in the economy, as you see in the first graph, it's actually a short-lived downturn that is following or sort of comes on the back of quite a robust growth over the previous years that has left Iceland as one of the wealthiest nations in Europe. You see the GDP per capita is now higher than the average for the Nordics and much higher than the Euro area. What's interesting this time around is that the downturn has not led to a stagflation as before. I saw a presentation from the governor the other day where he claimed that this is the first time in Iceland's economic history that a downturn is not causing or triggering a stagflation. A recession inflation scenario, which happens because in the booming years, we were borrowing from abroad. The Króna was probably too strong.
When things got sour, the krona depreciated because of our previous borrowings, and inflation was imported. Around 40% of our consumer basket is imports. Inflation shot up, and that did not enable the Central Bank to tackle the previous downturns by lowering interest rates. You can see that currently the policy rates are at 3%, which is the lowest level ever for Iceland. We didn't borrow this time around. Look at the three balance sheets here, the household and non-financial corporate debt, and this general government gross debt. From a historical and international standpoint, we are now as unlevered as we've ever been. I think I can assume that. That is because we have enjoyed extremely high savings rates in the booming years now following the financial crisis.
I think one of the components to it is the successful resurrection of the banks, liberalization of capital controls, but also, the financial crisis changed the behavior of investors and households and corporates. They are now much more cautious, and they have delevered quite a lot. I would argue that operating a bank in an environment like that, despite lower interest rates, is actually going to benefit. There should be room for credit growth. There should be room for the government to start investing into infrastructure. We should see a pretty robust economy. As you see from the forecast here, we're expecting this downturn to be quite short-lived. Sort of maybe a final argument is that the economy is running on renewable energy, our own energy sources, which is quite an interesting story as well.
Coming to our business model, operating in this robust economy, our business model is very diversified. It's much more diversified than our competitors have. I mentioned the insurance business that we acquired in 2016. It's now become a growing contributor to our bottom line, and is currently the largest life insurance company in Iceland and the 4th-largest, okay, smallest P&C company in Iceland, but the fastest-growing. The market side, we are the leader in asset management. We have more than ISK 1 trillion of assets under management. This has historically been a good business for Arion. On top of that, we have a leading capital markets house and are the largest provider of custody services on the island. If you look at the RWA allocation, the markets division effectively is deploying around ISK 3 billion of capital.
The insurance business is deploying around ISK 10 billion of capital. That's on an unnormalised basis. I think if we tap out some of the excess capital in Vörður and issue some Solvency II instruments, we could reduce the capital deployment in the insurance business down to ISK 7.5 billion, ISK 8 billion at least. Compared to then the CIB operation, which has a risk-weighted asset allocation of some ISK 324 billion, which on our 21.6% CET1 ratio is around ISK 70 billion of capital. You can see that these are indeed asset light businesses, whereas this is an asset heavy business. That's why we have such a high focus now with the new leadership there to deploy discipline to the capital allocation, and as Ásgeir will explain it in his presentation, we will continue to take down the risk-weighted asset.
I think we might see this number go down by 20% next year, not undermining our profitability, as Ásgeir will explain. Finally, the retail banking business, which, yeah, sure, deploys some ISK 60 billion of capital, has been performing quite nicely. We have a 30% market share. We're the leader in digital services. That has enabled us to attract new clients and service our clients in a more cost-efficient manner. I think we have gone further than other banks in rationalizing our branch network and reducing FTEs in these operations. Actually, our clients are increasingly happy about our services. A bulk of the services provided in retail banking are now provided through digital channels. Now, Asset Management or the markets business and the insurance business is not going to be covered by any of the management here today.
I'm going to address that in two slides. We acquired Vörður in 2016. As you can see, the net profit, these are numbers for the nine months, ISK 1.5 billion approximately of profits. I would say that the net profit line has almost been tripled since we acquired the business. The market share has increased from 14.6% to 16.2%, which is quite good. This is without the digital services that we effectively launched in September 5th, which we have high hopes will increase the market share further for Vörður. Remember, I told you this on a normalized basis, the capital is around ISK seven and a half to eight billion. You can easily calculate that this is some high ROE business for us at the moment.
Asset Management, as mentioned previously, market leader, in I would say pretty well diversified services or asset classes, where we see great possibilities or opportunities in corporate credit, alternative investments, and real estate, which are asset classes that we believe the ever-growing pension fund system will not be insourcing. They will be buying third-party services to manage these asset classes. Now, in the digital journey that started in 2016, we are the market leader, and I'm going to tell you a story surrounding our product launch in 2019, which makes this quite a remarkable journey. In February, we deliberately opened up our app, so we made it available to all Icelanders, irrespective of whether they banked with us or others. At that point in time, nobody realized, what's the strategy? Why should I be using the Arion app if I am not banking with Arion? Very limited usability.
Well, obviously, you could onboard within a few minutes, you could apply for a credit score within few minutes, you could apply for mortgages and get it within a day or two. Also, we were preparing for the launch of the aggregation services, which we launched in July in a partnership with a fintech company called Meniga. This is remarkable because PSD2 has not been introduced in Iceland. We did this in collaboration with Meniga that has been piling data, storing it for their clients for a number of years.
When you now download the app as an Íslandsbanki client, you can go and aggregate your balances and accounts and credit cards from Íslandsbanki and have the balances and the sort of transfer history easily available in the app. Currently, you can't do anything, you can't transact, but at least it provides you an overview. Once the PSD2 is introduced, you'll be able to start moving money out of these accounts. This is quite a remarkable story, and I know that Ida will tell you more about it, and she has been giving presentations abroad about this, and has received a lot of attention. Our dual listing in Iceland and Sweden, and the stock listing in itself has further supported our emphasis on ESG matters.
We have a fairly international investor base, that is now reflected in our board, where three out of seven board members are non-Icelanders or non-residents. I would say that we sort of are applying international best practices when it comes to corporate governance. A side effect from being listed on Sweden is that without applying for it, we're part of a review by AllBright, who found out that we were in the 25th place out of 333 listed companies when it comes to gender diversity. We have been very focused on equal pay as well. Finally, to mention on this slide is that we became a founding signatory of the UN Principles for Responsible Banking. There we can contribute a lot because if you look at our exposure to the energy sector, 100% of it is to renewable energy sources.
We can educate our fellow banks in this collaboration about how we conduct business in the renewable energy space. As you all know, capital requirements, taxation, and competition has been increasing, that has been a headwind for Icelandic banks for some years. I think the expectation was maybe that the capital requirements could be relieved at some point in time, but we're at the point where the capital buffers are almost in full deployment. The bank levy has not been reduced even though we hope to see it being reduced in 2021 and ratcheting down in the following years. The pension fund system is growing quite heavily at the moment, and it's now outgrown the banking system. Even though they are allocating more than half of their investable funds every year internationally, they still have a lot of funds to invest locally.
Rather than looking at them as a competitor, we are now looking at them as a partner. We want to form partnerships with the pension funds and sort of reshape our strategy to accept that there are certain asset classes that they prefer to buy and hold. Currently, it's the first lien markets that they are quite aggressively increasing their markets herein. To be honest, we don't have any competitive advantage there. They don't have the capital requirements. They don't have the taxation that we have, and they have the long-term or long-duration liabilities that they have to match, whereas we have short-term liabilities deposits. Factually, this is their market, and we have to tailor to that. We also think that the current interest rate environment will increase their hunt for yield, so they will be seeking other asset classes in higher velocity than before.
Corporate credit, one, real estate, infrastructure. We want to position ourselves as the intermediary, facilitating, originating these assets and selling them off to the pension funds. It's very good to see that this strategy that we've been laying out in the last few months is generally well received by the pension funds. I'm not saying it's reflected in the ownership structure, but at least they have been adding on to their investments in Arion. It's clearly not discouraging them. Fintech, which are increasingly playing a role in the sector, we argue that our digital journey and our heavy investments into digital services leaves us in a really favorable spot. We can now team up with fintech companies that offer interesting solutions and roll them out and introduce them to our clients much more quickly than our competitors.
Going into these three components that are impacting our business, I think it's fair to say and state that capital requirements are extremely high in Iceland. The Icelandic banks have been deemed as systematically important businesses. One of the smallest banks in Europe to sort of being ranked there, but obviously this is a small economy and nobody wants to see these banks fail again. The capital buffers are, as I said previously, almost in full deployment by February of next year. The only buffer that has not been fully utilized from the regulator is the countercyclical buffer, where we have 50 basis points left. That's it. Nice flyover there.
That comes on top of us, the Icelandic banks, all operating with a standardized approach, which effectively, because if you want to do an apple-to-apple comparison on how banks are capitalized in Europe, you should do it on the leverage ratio rather than the CET1 ratio. You can see that the Icelandic banks are enjoying around 12.5 to over 15% leverage ratios. That compares to DNB, which has the highest leverage ratio in this graph here of 8%. The Danish regional banks with a leverage ratio of some 7%, and most of the Swedish bank with leverage ratios of 5%. It's easy to assume that this here is clearly an indication that the regulator wants the banks in Iceland to move away from asset-heavy operations where banks take on deposits, short-term deposits, and lend out to risky corporates over a longer duration.
We are effectively reacting to that. Let me give you one example here, because these requirements are now 4x higher than they were before the financial crisis. If before the financial crisis, we're lending money to a corporate, let's say, of ISK 100, you would be deploying ISK five of capital to that loan. The ancillary business would maybe generate, let's say, ISK one. It was a nice add-on return to a capital deployment to capital use of ISK five. Now, the same loan we would have to commit ISK 20 of our own capital to it, and the ancillary business would still be around ISK one or even lower because the derivatives market is smaller than it used to be and the FX volume is lower.
That in itself demonstrates this example that now it's much more difficult to subsidize corporate credit or corporate lending, in return for ancillary business that makes up for it. In fact, the equation doesn't match up. Taxation is also high. Even with the foreseeable reduction in the bank levy over the next five years, we're still at levels that are much higher than for the rest of Europe. These taxes, bank-specific taxes, are primarily balance sheet related. It's a tax on liabilities that weighs the most heavy here. We also have specific taxes on profits.
We have an add-on 6% tax on income or profits above 1 billion ISK, which is actually not done on a consolidated basis and brings us to one of the benefits of holding, even though it's obviously a requirement by the regulator, but our insurance business is not subject to the same conditions. They enjoy a 20% income tax on their profits of up to 1 billion ISK. The third tax is a salary-related tax. It's 5.5%, if I remember correctly, on salary and salary expenses. To the extent that we can reduce our salary expenses, we can control this tax. Effectively, this is the situation, but how we reshape our business and how we reshape our balance sheet can impact what we pay in taxes.
The third element to a challenging business environment and why we are having our business strategy the way it is the fact that national savings are piling up. We have extremely high mandatory and voluntary savings rates in Iceland and a pension fund system that is growing at a faster pace than before. You can see just the first half of the year, it expanded by more than half of our own balance sheet. This is now becoming the fortress balance sheet, and this is the balance sheet that Arion wants to work with and service. Now, how are we going to then build long-term shareholder value? I would say there are three pillars to that. We need to enhance our operational efficiency, cutting costs and improving margins.
We've done that this year by laying off people, and we are constantly looking at ways to save costs in our business, and Stefán will come to that. Obviously, IT is a big expense with us, and we're hoping that we will now be able to capitalize or reap the benefits from heavy investments, and we can reduce the IT spending to a more normalized level. We also need to look at opportunities to partner up, look at infrastructure, or shared infrastructure abilities, and this is being discussed within Iceland at the moment. I think having software development within a bank is always going to be expensive. To the extent that now we've built a foundation, we've digitized most of our services, we are now able to work with fintechs that do the development in a more cost-efficient manner.
Digital solutions will continue to be the core of all our activities and enable us to reduce costs further. Earnings volatility has been an issue. Ásgeir is going to discuss the cost of risk and how we're going to reduce and have a more normalized cost of risk without the volatility that has come with single name credit losses. We are obviously, as part of the strategy of working with others and not taking all credit exposures directly onto our balance sheet, we are diversifying, we're reducing risk. That should in itself lead to reduced earnings volatility. For example, as a part of that story, our board has recently reduced the risk appetite when it comes to single name exposures, reflecting that we are now moving away from bulky corporate credit loans. Our co-investment strategy through syndication and intermediation will be key elements to that.
We're also looking at all our products, cutting assets and products that are not generating sufficient return. The third pillar to this story is that we are now, and have been for a while obviously, looking to optimize our capital structure. We've been releasing capital to shareholders. We will continue to release capital to our shareholders, we're also looking at ways to shrink the balance sheet. Remember, the bank levy is one component that we can control, to the extent that if we shrink the balance sheet, we pay less bank levy. We enjoy high liquidity ratios, and we can use that to pay some of our more expensive legacy or wholesale funding. That in itself reduces the bank levy. One key element, as Ásgeir will discuss in his presentation, is the increase in capital turnover. What does that mean?
That means that if you look at the balance sheet as an inventory, we want to turn that inventory over much more quickly than before. Buying an asset and holding it for five years, it has to have quite high returns for us to do that. When you deploy your capital or increase the capital velocity in a manner like that, you should be able to generate more revenue because you're doing more volume through the engine, or more volume is coming through the bank. How does that all tie together? This is a bridge that we originally presented during our Q3 report. Sure, currently our ROE run rate is low at 2.6%, but it has explanations. We have been investing into Valitor, the largest card payment service company in Iceland, which is currently in a sales process.
That has been impacting, even though it's held as an asset for sale, it's been impacting our bottom line. We've also had some single credit name losses, which has impacted our bottom line. If you normalize for that, we have an underlying ROE of some 5.5% at the moment. The measures that I've discussed here today, the exit of non-core assets, the capital release, which we can do through paying our current surplus capital, and Stefán will go through that. The further issuance of Tier 2 and inaugural issuance of additional Tier 1, and a share buyback program where we're buying effectively shares at a discount to the book equity, which we currently are doing and launched end of October, is going to enhance our ROE.
As will our new financial target of revenues from RWA of 6.5%, which is a target that we set when we were focusing on increasing the capital velocity in our business and sharpens our focus quite a lot. Finally, the cost measures where we currently have a financial target of 50%. The run rate is around 53% now, so we haven't achieved it, but we are on our way to getting there. This will hopefully bring us to a ROE level of above 10%, even in a lower interest rate environment as we are currently operating in than before. I'm hopeful that we will do this, or being able to demonstrate this next year, sometime next year. I know Stefán will be probably more cautious on that guidance.
Key takeaways from my presentation, and hopefully key takeaways that you take from today's session is that we are operating in a strong and healthy economy, which is always a good thing when you're operating a bank. In that context, I did not mention the demographics where half of the population is under 34. It's one of the fastest growing nations in Europe in terms of population growth. We are the market leader in operations or financial services that deploy less capital, which is a competitive advantage in current capital regime. We are adopting much more disciplined approach when it comes to the more asset heavy, capital heavy businesses, which I think is different to the approach that our competitors are still taking.
You will see that in a slide that Stefán will go through, where our trajectory is moving in a different direction from our competitors. Finally, the capital release story of Arion is still very much part of our equity story. I would like to conclude on this note and welcome Erna Björg to the stage. She will now go more thoroughly through the macro story of Iceland and hopefully convince you that we indeed are operating in a quite robust economy. Thank you.
Good morning, everybody. My name is Erna Björg Sverrisdóttir. Although I'm the newly appointed chief economist of Arion Bank, I'm actually not new at the bank. I've worked in the research department for the past four years, where I was, for example, responsible for the bank's official macroeconomic forecast. As some of you might know, the Icelandic economy has undergone some major changes in the past couple of months, making my job much more challenging, I would say, because if we're honest, economists are notoriously bad when it comes to forecasting recessions. Technically, I'm not. I've been forecasting a recession since March. The only snag is that it's still missing. It hasn't shown up in the figures yet. According to the latest or most up-to-date forecast from the Central Bank, GDP will only contract by 0.2% this year.
Why the long face here in March, you might wonder? Before I begin the story, you must understand the background from where we are coming from. Iceland has three major export sectors, tourism, seafood, and aluminum. Many associate the country with the fishing industry. Understandably, it was the largest export sector for decades. In 2013, it was dethroned by the tourism sector, who has since then become the country's largest export sector by far. Our 2019 story, however, begins in the fishing industry. It begins with this small fish. This is called capelin, and at the beginning of the year, it was stated that there would be no capelin season. Not enough was located to allow fishing, so no quotas were issued. For large economies, one species probably wouldn't make a difference, but for Iceland, the economic impact is quite significant, with high export revenues at stake.
You've heard the saying, "Misery loves company when it rains, it pours." Well, it definitely poured in March when WOW air, the second-largest Icelandic airline, who carried close to 1/3 of every tourist who visited the country last year, it was declared bankrupt at the end of March. With WOW air out of the picture, it was pretty clear that we would see a significant drop in tourist arrivals, as has been the case. Finally, in the summer, we went for the triple whammy when one of the aluminum smelters hit a rough patch. Our three largest export sectors, who together account for over 70% of our total export revenues, were under pressure this year. Despite that, the economy has proven to be remarkably resilient.
We've seen 0.9% GDP growth in the first half of the year, which is a much stronger growth than most anticipated. There are two things on this graph that I want to draw your attention to. First of all, it's the small drop in exports versus the large drop in investment. The reason behind this is pretty simple. At the beginning of the year, WOW air sold four aircrafts to Air Canada. Being the small economy that we are, this transaction actually shows up clearly in our national accounts as it is booked as exports of goods and is subtracted from business investment. The second thing I want you to notice is a large drop in imports, and this goes both for goods and services. Because imports are decreasing more than exports, the contribution of foreign trade to GDP is positive despite the export shocks.
That being said, the export sectors, especially tourism, has fared much better than most people feared. Why? Well, the answer is pretty simple. Each and every tourist is spending more than before. For example, in the second quarter, spending per tourist increased by roughly 25% between years, 15% increase in the third quarter. What obviously distorts this picture is the exchange rate of the ISK. The ISK was much weaker in the second and third quarter this year compared to the same time last year, so that tourists were getting more ISK for their foreign currency, which might explain this development. Because of that, it's much more interesting to look at spending in foreign currency. I'm guessing that when people go abroad, go on a vacation, plan ahead, maybe draw up a rough budget, and you think of it in your own currency.
Because of that, one would expect that spending in your own currency wouldn't change significantly between years. The reality, however, has been that not only are tourists spending more in ISK, they're also spending more in foreign currency. This is the big change. This is what matters for our national accounts. This is what changes the big picture. This, of course, also leads to the question, what has happened? What has changed? Has composition of tourists really changed that much? Short answer, yeah. If you compare tourists that flew to the country last year with WOW air to those who flew to the country with Icelandair, you can see that tourists that came with WOW air, they spent on average less money on the trip to Iceland.
They stayed for a shorter amount of time. It chose relatively more to stay at Airbnbs and hostels compared to tourists that came with Icelandair. How does this rhyme with the actual figures? Since April, spending per tourist in ISK has increased by 19%, duration of stay has lengthened by 17%. Overnight stays at hotels per tourist have increased by 22%. We are getting better at wooing the high-yield tourists to come to the country, which is very positive for the tourism sector and for the economy as a whole. Our outlook for the tourism industry, I would say it's pretty moderate. We're expecting 2% increase in tourist arrival next year, followed by a 7% increase in 2021 and 4% increase in 2022. Even at the end of the forecast horizon, we still haven't reached the 2018 headcount.
This time, however, there is an upside risk to our forecast. There have been talks of resurrecting the old WOW air, WOW air 2.0. There's also a new airline in the pipeline. It's called PLAY, and according to a presentation given last week, they're in the last stages of securing funding. Our base case, however, is based on the assumption that there is only one operating Icelandic airline and that the grounding of the Boeing MAX aircraft will have significant effects on tourist arrivals next year. When it comes to the hotel market, well, occupancy rates have dropped, but you must keep in mind we're coming from very high levels that were clearly unsustainable in the long run. We're expecting occupancy rates to be close to 73%-75% in the coming years, and that is still much higher than on average in the other Nordic countries.
Even though we're looking at a slower growth in the tourism industry than we've gotten used to or grown used to before, the sector as a whole is doing pretty well considering everything. Looks like the revenue loss of the sector as a whole will be minimal, smaller than most anticipated. This has cushioned the blow to the labor market. Tourism is a very labor-intensive sector. For example, in 2009, 9% of the workforce worked in tourism industry. 10 years later, this figure has nearly doubled. Because of that, many feared that following WOW air's bankruptcy, we would see a spike in unemployment. It has risen, but the increase in unemployment hasn't been as steep as many feared because the tourism industry and tourism companies are doing better than expected.
What has also supported the labor market, in my opinion, are the wage agreements that were signed in the private sector earlier this year. I must admit that these wage agreements, they were more moderate than, for example, both us and the Central Bank expected because, well, I think for one of the first time ever in history, the warring parties actually took notice of the economic situation. I know what some of you might think, and I see Stefán, he was nodding his head earlier, that 5% nominal wage increases is not moderate by any stretch of the word. Believe me, in the Icelandic context, it really is. If we back up a few years, if we look at it in a historical context, from 1990, we have on average increased annual wages by 6.5% every year.
In this time period, there are only seven years where we have seen lower wage increases than are expected in the next years. Wage increases close to 5% in the Icelandic context, that's pretty moderate. This is kind of a new situation we find ourselves in. We've had negative export shocks, we've had relatively moderate wage increases, it looks like that the desirable soft landing is finally within reach. Here you have to remember where we are coming from. I spoke to an American journalist two weeks ago. He was very concerned for the Icelandic economy, that we hadn't recovered from the 2008 recession because McDonald's hadn't returned to the country. I assured him we were doing okay. We've had on average 4.5% GDP growth in the past five years, a slowdown was inevitable.
A soft landing for the Icelandic economy, that's not given. We're more of a boom and bust type of an economy. As you can see here, I have four forecasts. They're not exactly the same, but they all tell a similar story. Short, mild recession in 2019, followed by a gradual turnaround in 2020. A soft landing, I know that's a phrase that many would shy away from using for the Icelandic economy. Last time it was used was in 2007. I'm not going to tell you that this time it's different, but I am going to say that there are some indications that we've had some structural changes in the economy. Let me show you. If you look at the time period from 1946 to 2010, we almost had a chronic current account deficit.
Every upturn of the economy ended with overheating, overwhelming cost increases for companies. What do we do? Press the reset button, gain back our competitiveness by devaluing our currency. These are not some minor adjustments you're seeing here. These are major adjustments, and we are a small open economy. We are very dependent on imports, so a devaluation of our currency is always followed by very high inflation. This is the classical how to get out of trouble Icelandic style. This is our story. This is where we're coming from. Because of that, it makes our current situation that more interesting. We've had a relatively stable ISK despite WOW air's bankruptcy, and there are no economic fundamentals that indicate that the ISK should depreciate further.
We've had current account surplus for the past years, and according to consensus forecast, current account surplus will be close to 2% of GDP for the coming years. We have a positive net international investment position, as Benedikt said. We are lending to the world, we're not borrowing anymore. Finally, the Central Bank owns large FX reserves, which it has used in the past to stop spirals from forming in the FX market and thus stabilizing the exchange rate. Because of this, we are witnessing a new inflation pattern. This time around, it seems like inflation has peaked at 3.7% earlier this year, and since then, it has inched downwards and is now close to the Central Bank's 2.5% inflation target. If you look a little further ahead, according to consensus forecast, inflation will be close to the Central Bank's inflation target in the next two years.
This has actually given the Central Bank a chance to finally use interest rates the way they were meant to be used during downturns, by lowering them to help the economy get back on its feet. Now, somebody might be thinking this is all a little bit too good to be true, and believe me, I think every economist in Iceland has thought that once or twice in the past months. Of course, there are risks. We might be underestimating the downturn. We might be overestimating the tourism industry. We live in a world where there's Brexit. We have trade wars. Of course, there are downside risks. However, in my opinion, the Icelandic economy has seldom been as well equipped to handle a downturn. The last growth period was not driven by credit. It was driven by the export sectors.
We've seen households deleverage, so have corporates, so has the government. The private sector has built up savings. The economy is much more diversified than before. The Central Bank has large FX reserves, and we have a sustained current account surplus. Even if the economic environment deteriorates further, the economy is well prepared to withstand it. That will be all from me. I'm going to welcome Ásgeir h to the stage. Thank you.
In September, we introduced structural changes in corporate banking and the investment bank of Arion. We now operate a division that we call CIB, or corporate and investment banking, which is basically the private side of the information barriers, and the markets are on the public side of the information barriers. It's no secret that Arion's loan book has been lagging, and we are therefore amending the way we structure our business going forward. The plan is to increase discipline in capital allocation, both in sectors and in single name exposures. We currently have one large exposure as it's defined by the regulator. 12 to 18 months from this date, we will have none, and we will never have another one going forward. We're not going to take on any large exposures in the coming years and months.
As you will note, what I'm going to say here is nothing out of the ordinary. Many banks using the standardized approach have been doing this for years or are now amending the way that they do business very much in line with what we are going to do. I would like to point out one fact. We've been talking about this morning that we are going to diversify risk, sell off assets, syndicate more risks, increase velocity, like it's something that is sort of pulled out from the sky. This is something that all banks in the world do. The Icelandic banks have just been quite shy in doing it. We've already sold the ISK 48 billion mortgage portfolio to the Housing Financing Fund in Iceland, and that goes to show that the bank is both willing and able to sell off assets.
It can continue to service them and create fees. The clients do benefit from it, the bank does as well. Even though this is not a corporate credit portfolio, it is a significant portfolio by all means in Iceland, and probably the largest credit transaction this year. Now, this is the way our corporate loan book is composed at the end of Q3 this year. As you can see here on the, let's call this sea green. The sea green bars represent the Iceland Inc. debt side, or Iceland Incorporated. What we did is that we analyzed 25,000 Icelandic corporates and borrowers to take a look at what does the debt side of Iceland look like. Well, it looks like this. The blue side is the Arion corporate loan book. As you can see, we are quite in line with the Icelandic economy.
We're a bit overweight in the fishing sector, the wholesale and retail, lacking in industry, energy, and manufacturing, sort of close to par in financials. What does this say all in all? It is used as a tool for us to decide on how we're going to allocate our capital and why. We are going to increase our exposures to real estate development and construction. Why is that? Well, at first, it's a good collateral. Second, the construction business is high yielding, and on average, Arion has been funding between 100 and 200 apartments on a yearly basis. That's not much compared to the economy needs to be producing somewhere north of 2,000 apartments on a yearly basis. In my view, we're a bit underway in that sector, but we're quite heavy in rentals and commercial real estate.
We are overweight in the fishing sector. Okay? Why is that? Our fishing and seafood portfolio is very well diversified. The smaller players in the market, they bank with us. We're also active in the syndicate market in both North America and Europe when it comes to fisheries. Our fishing and seafood portfolio is very well diversified, and it yields quite nicely. I want to point out to this fact here, why we are lacking in or do not represent sort of the snapshot of the Icelandic economy when it comes to energy and infrastructure. The reason is simply that these companies, they finance themselves in the public debt markets or in foreign banks. Whichever bank you would look at in Iceland, they would show a similar result here.
I think that this will continue to go down because the energy companies in Iceland will be able to finance themselves in a better way through the markets. Okay. I just wanted to point out one more fact since we've been discussing tourism this morning. Hotels would fall into this space, and most of the tourism services would fall into this space. As you can see, Arion is not heavily exposed towards the tourism sector in Iceland. Now, we've had our fair share of, let's say, attention in the recent months and years. On this slide, you can see the corporate loan book of Arion trailing back to 2015.
To explain further what we did and how we are defining the cost of risk in this slide, we've taken our 12-month impairments for the corporate book alone and divided that number to the size of the corporate loan book at each time. As you can see, the blue line, which are our impairments at face value with no adjustments, it shows that our average cost of risk since the beginning of 2015 is roughly above 100 basis points, which is completely unacceptable. However, if you remove these four high-profile losses that we've had, you can see that the bank is very close to target for the corporate loan book, which lies here.
By bringing more discipline on the way of how we use our capital and making our loan book much more granular, we believe that the green line is the line that you will continue to see while we move forward, and the blue line will disappear. With Arion's target of reaching above 10%, it is clear that the corporate banking and the corporate loan portfolio needs to improve significantly. The whole focus, or most of our focus these days, is to, okay, how can we do that? Well, in the next 12 to 1 8 months, we are emphasizing on six targets. Number one, cost reduction and cost awareness. The FTE reduction in September hit the CIB team harder than any other division within the bank, or about close to 40%.
Other costs have been reduced and will continue to be rationalized in the coming months, both on the front and the back end of the bank. Number two, disciplined allocation of capital. We have already implemented certain measures for all new loans granted, and the outcome is promising. This includes fostering a culture of transparency and accountability within the bank. Number three, we want to create pricing power instead of being a price taker. I will get back to this in a few minutes, but we believe that there is ample opportunity in the market to service the need of mid-cap companies that use us as their house bank, that are multi-product clients, where they are not just seeking the lowest possible price, and we are only competing in the lowest possible price. We are competing in service. We are competing in relationships.
We're competing in know-how, and people are willing to pay for that. Number four, structuring. The structuring of financing within banks, as you all know, affects the need for the bank to tie up capital. By addressing such structures that we already have and restructure our loans in our loan book, we believe that we will be able to relieve some of the capital we use against our loan portfolio without hurting interest income. Distribution, number five. We're going to distribute risk as a way of mitigating risk and to generate fees. There is demand for Icelandic credit exposure both in the domestic and the foreign market. We already participate in syndicates both as agents and arrangers for domestic debt and participate in foreign ones.
As Benedikt stated earlier about the growth of the Icelandic pension system, it's quite obvious that that growth will be met locally by the pension funds participating more frequently in the public and private debt markets. Number six, we want to service clients instead of debtors only, and we're going to address the mispricing, as you can see on the following slide. This pie here represents the whole of the corporate loan book's clients, and as you can see, 60% of them are multi-product, 40% of them, and this is represented by risk-weighted assets, not numbers of clients. As you can see, 60% of them are multi-product clients. That means 40% of them only owe us money. They don't do anything else. They don't trade FX. They don't use our corporate advisory business. They only owe us money, and they only pay interest.
These clients are low-yielding for us, and we're willing to address that issue and either create a more better relationship with these clients, or we won't interrupt them on their way out. Now, we have a target of reducing our corporate loan book by 20% before year-end 2020. How can that be done? Well, if you look at We've analyzed all of our loan agreements and all of our documents, and we've realized that half of our loan book, represented by risk-weighted assets, will give us an opportunity to address the mispricing in the next 24 months. That's half where we can renegotiate, reprice, or simply help them to move to a different direction, be it the bond markets, other investors or syndicates or so forth. Half of the loan book can be repriced or restructured in the next 24 months.
Okay, where are we going with this? Part of our vision of how the loan book should be composed is that we believe that the Icelandic large-cap companies are bound for the debt capital markets. For those companies, Arion is a well-experienced, well-suited partner in handling listing, underwriting, and market making, as well as there are a number of players in the Icelandic market. Along with our analysis in which sectors the debt of Iceland Inc. lies, we took a look at, okay, who owes? How is the market composed? We divided them into three sectors. That's small cap. That means a revenue less than ISK 500 million. The number of companies there are 24,000. The total debt for them is 25% out of the 3,000 billion ISK, and the long-term debt to revenues is 73%.
This is the market that the retail bank can service quite nicely on the back of the best technology available in the country. The large caps, they are the ones who have revenue above ISK 10 billion. The number of those companies are only 100. These are the companies that everyone on the island is chasing daily, and even a lot of you guys here in the room. These are the companies that are bound for the debt capital markets, where the corporate advisory team is going to compete in assisting these companies in gathering financing from the public debt markets. The bank will continue to service those through revolving credit facilities, treasury functions, and just house banking stuff. We don't need huge chunks of these companies on our balance sheet, because in this space, you're mostly or almost solely competing in price. It's a race to the bottom.
This is where we want to be. The companies that have annual revenues between ISK 500 million and ISK 10 billion, the number of those companies are around 1,200. They owe about 35%, 40% of the debt, and their long-term debt to revenues ratio is around 50%. That means that for our corporate loan book today to be almost perfect, we would need around 300 of these companies. The good news is we're well on our way to reach that number. Who is going to replace Arion in the low-yielding debt-only market? It's going to be the public debt markets. The World Economic Forum and many others have divided the evolvement of bond markets into 5 stages, and we believe that we are now in Stage 2. Why is that? Enhancing infrastructure and processes for corporate bond markets. That has been done in recent years.
Regulation has been simplified. The Nasdaq introduced the First North market. The corporate bond market infrastructure now stands at a better chance of being competitive against the banking system. What we want to do, and I'm guessing many others, is that we want to widen both the investor and issuer base. We've been approached by a number of foreign banks and also locals who we are discussing with on how we can structure these bond issues. Why is this inevitable to happen? As Benedikt mentioned earlier, both the banks are using the standardized approach. They're heavily taxed. The message from the authorities and the regulator is quite clear. Move away from the big corporate chunks, leave that to the market. Fair enough. What does the market represent today? If you break it down, 94% of all bonds issued in Iceland have a strong government relationship.
Be it they are banks owned by the government, they are energy producers owned by the government directly or indirectly, or the government themselves. As you can see here, Iceland has the second-largest pension system in the Nordics after Denmark, compared to the relations with GDP. If you look at the bond markets, Denmark is at 190% and Iceland is lagging behind with its 40%. What do we want you guys to leave the room with? We are going to diversify by placing stronger emphasis on medium-sized corporates, and it's key to when we choose our clients and let them use our balance sheet. The second thing is our advisory business is going to play a large role in moving the private and the public debt market further.
By increasing the velocity and our syndication efforts, we will help our clients get better results, we will reduce our risk, and we will improve our returns. Thank you.
My name is Ida Brá Benediktsdóttir, and I'm the Managing Director of Retail Banking. I have been with the bank for a long time in various roles, but I have been in this role since mid-year 2017. In this presentation, I would like to go through how the digital journey of Arion Bank has impacted the bottom- line results of the retail bank. Where are we coming from? Our digital journey started in 2016. We saw that traditional banking models were already under a threat of disruption. Customers demanded more convenience and service. Regulators were removing barriers. We saw technological changes. A more competitive environment demands increased efficiency, faster development, and a clear differentiation. We asked ourselves, how can we, a big domestic bank, but a really small bank in international comparison, thrive in this environment?
We did so by radically rethinking our culture, service, and product offering. We had to leave as much as we could of the old way of doing things behind and rethink our processes and methods to become more profitable, more efficient, and stay relevant. We introduced a new marketing plan and also a new way of doing things where the focus was on fast development and to become the go-to market of digital solution. Our communication strategy, which describes what the bank stands for, was changed. It was decided on we work with our customers to prepare for the future. We decided that our main target group would be families with diverse financial needs. We decided on a very simple proposition, more convenient banking services. To achieve this, the future vision decided on was to become the leading digital bank in Iceland. This is how we did it.
Learning from other successful service companies as well as startup companies, we completely changed the product development within the bank. Like any company, we had gone through endless incremental changes, using multiple large IT project and technology. Usually those projects would not live up to our expectations. They were also usually too expensive and were not able to capture the business value intended in the first place. What we did was that we decided that we didn't want to improve our digital presence by, say, 20%. We decided that we wanted to make things 10 x better. We created a digital accelerator across the organization, and we call it Digital Future. We take people from all over the company. This was tough in the beginning.
We take lawyers, IT people from business, and people from marketing, and we put them in a room together for 16 weeks and close. No. They leave their daily jobs in the meantime. They focus on one project at a time, and they redesign the customer journey end to end. This has completely changed our distribution network. Last year, we had 43 million touchpoints with our customers, which means 43 million possibilities to cross-sell. Just to put things into perspective, we have 100,000 active customers, which is around 1/3 of the active banking population in Iceland. The size of Iceland is a little less than the size of England. The app is always getting more and more popular. We get 21.5 million visits to the app per year.
We are feeling that, or we hear from our customers that they would like to get more tailored advice through the app. They want to have more personal advice in the app. I will tell you a little bit more on that later. Last quarter, we saw that there were more users in the app than in the online bank. 98% of our customer touchpoints are now digital. I'm not getting tired of telling you that. I will probably tell you that a lot during this presentation. Our digital branches are also popular. They have almost the same visits as to the traditional branches, although there are only two of them and with eight employees in total. Some of those that are visiting our digital branches are not doing business with us. We have educational events, so we want people to come into those branches.
What has our digital service, what are we doing and how has it been evolving? For our customers, the focus is on user experience, but for the bank, it is on increased sales and increased efficiency. We have designed over 25 new products, some of which have won international awards as the most disruptive solution in banking. Our digital roadmap is split into three waves. First, we digitize the most common daily interactions, so to say. The concept there was a radical change, not an incremental change, where we take a typical banking process, and we completely redesign it. A good example of that is onboarding, a process that took up to an hour before, now takes three minutes. But the biggest revolution was the online credit mortgage assessments. A tedious and a boring process that could take up to three weeks, now takes 90 seconds or so online.
This completely changed the housing market in Iceland almost three years ago. I would like to, because you have not seen this, all of you, I would like to go through this process and show how it works. There we are using the electronic IDs, which everyone in Iceland uses. We are asking for the permission of the customer to go to the tax authorities and get the information there. We are also asking our customers if we can go to the credit bureau and get a credit score. This takes 90 seconds, although we have shortened it a little bit here, and then you can go and buy your dream property. In this resulted that new mortgages doubled between the year 2016 and 2017.
We have much more throughput in our system now with the same number of employees or even fewer employees. Yeah, perhaps worth to mention that mortgages are a very important product for us, as well as salaries account. They are the glue to the business relationship, so to say. They have 35% risk weight, and they have acceptable returns above the bank's long-term targets. The next wave was to winning daily interactions. Our app is the best financial app in Iceland, and for future purposes, it's very important that we get everyone in Iceland to use our app now. As Benedikt mentioned earlier, people didn't understand why we were opening the app up in February, but there is a story to it. It is a strategy to do it like that.
The next wave was on winning daily interactions, and a good example of that is our push notification when a bill is due, for example. We introduced an automated credit algorithm that takes automated credit decisions for car loans and consumer lending products. This is completely straight-through process. This nice credit algorithm has already taken 250,000 credit decisions or 70% of the underlying credit decisions. We also enabled our people that are also doing business banking with us to switch between their business account and personal account all through the same app. This has been highly appreciated by our customers, especially the SME customers. I think it is fair to say that we are on the right track since our app is seen as the best financial app in Iceland.
49% of our customers that use the app use it for almost all banking transactions, so they are not going to the online bank again. This is 27% compared with the other banks. The use of our app has tripled in the past two years. Digitization has led to increased efficiency, increased sales. In order to capture this increased efficiency, we had to do some changes to our branch network. We did that both by reducing the number of branches and also by changing the concept and the design of our branch network. When we were simplifying and streamlining the branch network in 2018, we wanted to have more of simplicity, more of digital banking solution, and more of advice and education, which explains why people are coming to our digital branches.
Less of queuing, less of square meters and barriers, of course, less of cost. We see that banking habits are changing with our digital branches. Younger people are more likely to visit our digital branches, there we have more simpler transactions and less time-consuming transactions. For the more complicated transactions, we use video conferences, this we are also using in the countryside, very efficient. We have some financial advisors then located in the headquarters, so we can use the time of the people better. Although, we find it is important for us to get those younger people into the branches, because although they are using our app 20 x per month, it is important for our brand to get those people in the branches to get to know us and put a face behind the brand every now and then to build trust.
Our role is to help people prepare for the future and assist them in their day-to-day activities. We want to take a constructive part in people's daily lives. That means we have to be efficient, reliable, and accommodating. This is where digital technology comes in. Our goal is to be the best digital bank in Iceland. Over the past three years, we've designed and marketed 25 new digital solutions that our customers have embraced. Icelanders are in no doubt when it comes to naming the best digital banking services. In a recent survey, 83% of our customers named Arion Bank as the best, but so did 26% of Bank A's customers and 28% of the customers of Bank B. This has exceeded our wildest expectations. The app is in constant development, and the majority of Icelanders have named it as the best banking app.
We have also introduced next-generation banking branches to support our digital journey. There, we focus on assisting and teaching customers everything about our digital products. The result, customers visit our branches more often and are more satisfied with our services than before. We're on a digital journey toward a convenient future.
It's fair to say that we are very proud of what we have been doing for the past three years or so. The results, we are considered industry leaders in banking innovation, but not only in Iceland, but also abroad. Market share, as measured here, is relatively stable. However, we have seen positive signs since Arion Bank took the digital lead, especially in the core target groups of younger, more affluent segments. Online sales has increased dramatically over the past two years, we are now amongst the world leading banks in digital sales. Digital sales have increased by nearly 300% in two years' time. The core products, this is a measure done by Finalta, it is comparable with how others do these calculations. 66% of our core products are now sold digitally.
84% of overdraft applications are now digital, 65% of mortgages are now processed through an electronic process, and 94% of all the credit assessments are now done digital. This is a huge success in our mind. This is also, digital services is changing customer behavior, and we are seeing the same trends as every bank in the world. Use of the online bank is stagnating, while the use of the app is surging and is up 16% this year. Visits to the traditional branches are going down. They have gone down by 32% since 2013, and the branch space has decreased by 45% since 2014. We are seeing steady growth in operating income. We see a nice trend line in the net interest income, although we have considerably less allocated capital now than we had in the beginning of the year.
We are also seeing commission income strong, especially after we saw a jump here after we opened a branch up in Keflavik Airport. That is also at a cost that you can see on the next slide. All in all, our fee income is quite well diversified. As I mentioned earlier, in order to capture this increased efficiency, we had to do some drastic changes to our branch network. We were not able to capture this by just gradually decreasing the number of FTEs throughout the network. We had to do something different. Instead, we have closed down seven less profitable branches, decreasing the traditional branch network by 1/3. We are also seeing a reduction in the number of FTEs. They are 22% down since end of 2017.
We are seeing this already in the operating expenses and a nice trend line in the cost-to-income ratio. We have been preparing for open banking, as perhaps everyone in the world. The next wave was on integrate into broader customer journeys. We are going to work more with others now, we are not going to do everything ourselves. We opened our app to everyone, and we offer personalized recommendation using analytics on all touchpoints. There, we are using machine learning, and I have a video on that later, how that works. Some would call it AI, but I think it is still just machine learning. We have a third-party mobile payment functionality in our app now. Insurance sales, as Benedikt mentioned earlier, now we are offering third-party insurance in our app, selling non-life, life, and health insurance using data.
This we are doing in cooperation with our subsidiary, Vörður. We have a third-party PFM solution in our app also. Here, this aggregation with all the banks in an app. This is very important on our road, where everyone in Iceland can now aggregate their account from the other banks to our app. Of course, we would like customers of the other banks that are not customers of Arion yet to get our app and aggregate their accounts to our app. We would like our app just to be the financial app in Iceland. That has been the road that we have been on for the past two years. Yeah, here is Rose, our new employee in the app.
Rose is a digital service interface that offers personalized recommendations on service and banking products. She really only has opinions on finance. She's here to help. Rose bases her recommendations on data collected through customer interactions and which products and services they already use. This data is fed into defined models that use machine learning to predict which services customers could need or want. Rose only acts upon customer approval, and we make sure none of the information she gets is linked to individuals. Rose communicates through the app or online bank, the call center, or when customers speak to advisors. It's up to the customer to simply approve or decline Rose's suggestions. Rose learns over time and becomes more precise, smart, and useful the more she is used. As a result, our service becomes even more convenient and personal. When we know the details, the big picture becomes clearer.
Rose is a little influenced by Siri. Some international bank has it like a person, but we decided to have it like a concept. This is the Arion Bank Rose that is moving around. Going forward, we are ready for the open banking environment. We have developed and deployed an API strategy to be ready for the PSD2 and the era of open banking. We foresee increased cooperation with third party to implement the solution and for our customers, and also to further develop new revenue streams. We would also like to become the best strategic partner in Iceland. As Benedikt mentioned earlier, I think we can do that to speed up technological changes and also to be able to offer more competitive prices on banking products. We are also going to further use data and machine learning, as Rose is an example of that.
We are going to use that for service, sales, and marketing, as we are already doing for our credit decision. Further streamlining our branch network to meet changing requirements of our customers. We would just like to reduce non-value-added transactions in our branches and focusing on delivering value. We have been focusing now on individuals in our digital journey, but now we would like to shift our focus towards SME. I think it is so important to mention that on our digital journey, we do not owe any IT CapEx, so to say. We could increase our market share dramatically without any major investment into IT. Now it is important for us to benefit from the journey and the investments that we have already made. Finally, maintain our leadership status as the best digital bank in Iceland and perhaps in the world.
Integrate into broader customer journeys, as we have already started by using third party, and become ecosystem orchestrator in the open banking environment. Thank you.
Good morning, everybody. My name is Stefán Pétursson, CFO of Arion Bank. Let me just start out by saying I don't have a single video for you. I'm still going to tell you a good story. I think there are four main points that I want you to take away from this presentation. Firstly, the bank and the bank's balance sheet is strong and simple. Secondly, as Benedikt said, we still have substantial room to distribute capital to our shareholders. Thirdly, I will actually maintain that we are already on a different trajectory. Fourthly, we are fully committed to our 10% ROE target. Let me start with the balance sheet. Strong and simple, as we say, 67% of our assets are loans to customers, evenly distributed between individual and corporates and loads of liquidity. We have never been as liquid before as we are now.
Our LCR ratio is 246%, is over 170% in ISK. This is expensive, by the way, but it is a great position to be in because we are now in a position where we can elect, do we want to increase our lending activities? Maybe, but at the right price. Do we want to distribute capital? Yes, we have already started that. Do we want to buy back some of our outstanding bonds? Most likely, we will be looking at that before the end of this year. Let me just go over the loan book very quickly. You've seen most of this before, but the point I want to make is it is evenly distributed between individual and corporates. It's well balanced, but we are seeing changes.
We are seeing changes going forward on the corporate loan side, where CIB is reducing the loan book, and we are seeing changes as well on the mortgage side, where we have sold around ISK 50 billion of mortgages to the Housing Financing Fund. The effect of that will come through in the fourth quarter. We have already disclosed that. The important thing is we, at the same time, repaid our most expensive wholesale funding, meaning that the transaction is NIM positive, RWA positive, and we will have increased commission income from servicing those mortgages going forward. Backing up a bit, the liability side, a very strong capital position. Our capital ratio is 23.6%. Our CET1 ratio is 21.6%, leverage 12.8, as Benedikt said. Our deposits, our core funding is going up.
We would like to see that go up obviously more because this is our primary and our prime funding tool. We also have solid wholesale activities. We issue covered bonds in the domestic market, senior unsecured in the international markets. Given our strong liquidity position, we have pretty much halted all wholesale funding activities for the remainder of this year. Very quickly going into the Q3 results. We discussed those in our podcast the other day, but I wanted to draw your attention to our continual operations. We are seeing a substantial improvement in our continuing operations, up 35% from the second quarter, up 108% from Q3 of last year. Looking at the revenue side, we are seeing pretty much a solid improvement, in all line items, with NII being strong, with insurance, as we have discussed, coming in strong.
We have a good story to tell. The expense side might look as if costs are increasing, but that is not the case. We have ISK 1.1 billion expensed due to the redundancies we did in the end of September. Costs are under control. That does not mean we don't want to lower them, but they are under control. It's also interesting that impairments in Q3 were positive. The underlying in our loan book is actually pretty good. We were reversing some of the IFRS 9 charges that we had taken in Q2. Bank levy is coming down very much in line with our strategy to reduce the size of our balance sheet. All in all, the continued operations of the banks, which are reflective of our operations going forward, are positive.
We had fair value changes and continued investments at Valitor in the discontinued operations line, which led to net earnings being lower than in the third quarter of last year. Just a few points on our net interest income. We are actually quite proud that we were able to maintain a 2.6% NIM in the third quarter. We are focusing very highly on returning or improving revenue from our activities. There are obviously factors that negatively affect NIM. We have been issuing Tier 2. That's just a part of our strategy to create room to pay out capital. Lower interest rates are positive for the economy. They're not necessarily positive for a bank.
We are now at a situation where a certain part of our deposits are pretty much at the bottom, and we cannot lower them anymore, meaning that a reduction in policy rate means less net interest income for us as a bank. We have had high FX deposits at a pretty massive negative carry. We are working to move those out of the bank in good cooperation with some of the deposit holders. Finally, inflation, because the bank is long inflation, we have more inflation-linked assets than liabilities. Inflation was very low in the third quarter, which affected our net interest income and net interest margin. Very briefly, if we look at the bridge from last year, we are getting less from credit institutions, meaning the Central Bank, because of a lower interest rate environment.
We are getting more from loans to customers, more from our securities portfolio. We are saving a lot on deposits, but our borrowings are more expensive, paying more. This is mainly Tier 2. The inflation effect from last year is hugely negative. Operating expenses in the third quarter, we are on a positive trajectory. Our cost income ratio is just above 53% if we exclude the ISK 1.1 billion one-off redundancy payment. You can see how our operating expenses, in a way, we are sort of on the salary side. We are trending down, and on other OPEX, we are as well. I'll talk about the employees in a sec. We have been talking about IT, me being the CFO, I've been bitching about IT costs for a number of years, but I must admit that I've seen the light. Digitalization works.
We're spending on IT, we are saving on other fronts. It should be said that our IT costs, they have moved up pretty drastically. We need to bring them down and will bring them down over the coming years. As Ida said as well, we have been investing heavily the growth component of our IT spend has been quite massive, hopefully now with the level which we are at, we will be able to scale back somewhat. Other themes that we are focusing on the cost side are actually pretty obvious. Obviously, we're looking at the branch network. We're looking at housing or property services. Outsourcing is a big theme at the bank now. We have already started that, we will definitely do more. Finally, the development of our headcount will continue to be an issue. Now let's turn back a little bit.
We did our IPO in June of last year, and our medium targets at the time sort of reflected our expectations of the market. Return on equity to exceed 10%, cost income to reduce to 50%, lending to be in line with economic growth, CET1 ratio to go down to 17%, and then some pretty hefty capital release over time. Things have sort of, in some ways gone as planned and as always, some have not gone in line with our expectations. Firstly, return on equity has been way under our ambition, and actually, the trajectory has been relatively negative, categorized by single name credit losses, which we have discussed now before and something we will change going forward. Our cost income ratio has been too high, again, as I showed, just over 53% now, on a normalized basis. We need to bring that down.
Most importantly, our NIM has been trending down. As Ásgeir said, this is to a large extent based on a race to the bottom in corporate lending. On the positive side, we have been able to reduce our risk weight density, sort of revenues on RWAs have been trending down. I'll talk about the reversal in a sec. Our capital, we have actually been compiling capital faster than we've been able to distribute it. That is good sort of if we look forward. This, in many ways, has been identical of the banking sector in Iceland, and the banking sector as a whole has responded with a reduction in headcount. Here you can see the three large banks, and I think it's fair to say that we have taken the clear lead.
These are the parent companies. Here you can see that we have taken a clear lead in basically downsizing the FTE situation, and digitalization has been a key sort of contributor to us being able to do this. The banks were also on the same path in 2016, 2017, and 2018. It was not until in the fourth quarter of 2018 where we started sending out the message, we will continue not on the same path. We will look at returns on our loans, not loan growth, or we will focus on returns, not loan growth. You can see sort of how the net interest income developed on credit risk. This was a pretty negative picture and not a picture that we are proud of. In a way, we turned the corner.
What we have been doing this year is that we have been decreasing our loan book. You can see that our friendly competitors, they have continued massively on the same path. More interestingly, if we look at the net interest income on credit risk, we have turned the corner and we intend to do better going forward. This is why I say that we are on a different trajectory to our friends. The capital position is, as I said, it's very strong. It is very much a part of our equity story, and we do have substantial room to distribute capital. Looking at our capital position of 23.6%, when we are fully issued Tier 2 and AT1, we will have around ISK 35 billion to distribute in addition to the ISK 4.5 billion share buyback that we have already announced.
The AT1 issuance, it hit, well, we call it a speed bump, when the tax authorities were not willing to grant us deductibility on coupon payments. This is being processed by the government now or being discussed, analyzed, and we are relatively optimistic that we will see a positive, let's call it a reversal of that ruling over the next few months, allowing us to issue AT1. We have modified our medium targets ever so slightly just to, in a way, build in a new reality. These are the targets as they were before. What we have done is, we are still very much focused on the 10% ROE, but what we have done is we have added a new target, which is revenues over RWAs, where we have been running around sort of 6.2%.
We want to push that up to 6.5% at a minimum. Reflecting the need for us to focus on core customers and the totality of revenue from those customers. We are guiding differently on loan book development, where we are saying, yes, the loan book will grow in line with economic growth, but the corporate loan book will actually continue to downsize over the next few quarters in line with the trajectory that we have been on over the last two quarters or so. CET ratio is the same and dividend policy remains the same. Just a few words about, I guess, the most important part of our story, which is the capital release story. We have already paid our dividend at ISK 25 per share, so we have been active.
We have started a share buyback of up to ISK 4.5 billion that is led by Kvika Bank in Iceland and Nordea in Stockholm. We have surplus capital of ISK 13.3 billion. In addition to our dividend policy, because we always need to take 50% of earnings aside. We have already started on the Tier 2, but we can issue more and will issue more. The AT1 issuance around ISK 16 billion that we can do on that front. We already have documentation filed and approved by the Icelandic regulators. We do have, in a way, idle capital, both at other subsidiaries, Vörður, where we can do, I would call it a bit of capital optimization, and Valitor because we are not using the capital of those subsidiaries in our operations.
As a caveat, we are reducing RWAs in our operations, and if we are successful in doing so, that may limit a bit the Tier 2 and the AT1 we can do. How has our performance been so far in the markets? I think it's fair to say that we have outperformed on the equity side. We have outperformed the EURO STOXX market. Obviously, we think and believe that we still have a lot of upside to deliver to our shareholders. Looking over to the debt side, we can say that we are performing pretty well in comparison with our local peers. We still believe with the credit quality of the sovereign, the credit quality of the bank, that our spreads are too high in the international markets.
To conclude, the things that I want to leave you with, fortress balance sheet and a simple balance sheet, substantial room to distribute capital. We have turned the corner. We are on a new trajectory. Finally, we are fully committed to our 10% ROE target. Thank you very much.