Good morning, and welcome to Íslandsbanki second quarter investor call. As you can see here behind me, it's a beautiful day here in Iceland, with about 15 degrees. So very comfortable weather for the many tourists which are roaming around the country these days. In terms of the highlights for the quarter, you can see here, we had a very strong return on equity of 11.5%, and earnings of ISK 6.1 billion, exceeding our profitability targets. The main contribution is with the strong growth in income, especially net interest income, where we saw about 23% growth between years. Our cost to income ratio remains below our targets at 42.6%.
Having then excluded the, the cost of the settlement or the regulatory fine, along with the settlement agreement with the Central Bank of Iceland. It's very good to report that we have seen continued growth in deposits over the past few months, and at the same time, asset quality has remained very strong in spite of the higher interest rate environment here in Iceland. The second quarter was very eventful for the bank. Towards the end of June, we made a settlement agreement with the Central Bank of Iceland regarding a sale of a 22.5% stake of Íslandsbanki shares in March last year. The bank agreed to pay a fine of ISK 1.2 billion.
We had already charged ISK 300 million to our fourth quarter accounts last year, and therefore, we had now a charge of ISK 860 million in the second quarter. Along with the fine, the bank agreed on certain remedial actions to improve our operations and increase our risk culture and strengthen the culture. As you can see here, we are planning to work on 6 and actually 7 fronts in terms of improvements. We have already made certain changes. For example, we have now changed our rules in terms of taking up calls for customers and recording calls. Those are now in a very strict policy where we record all calls for the relevant units.
We also have the strictest regulations now in terms of employee participations and trading of listed shares. We will continue to work on various fronts to look into our corporate governance and how we can strengthen our risk culture. We will finalize all these steps before the end of September, so during the 3rd quarter. The board will then or the internal auditor of Íslandsbanki will then submit a final report to our board, which will be handed over to the Central Bank before the 1st of November. Relating to this and following a public and political debate after the settlement agreement, our Chief Executive Officer of 15 years, Birna Einarsdóttir, decided to step down.
It's regret, regretful that she had to step down in these circumstances after having led the bank for, as I said, 15 years, and been a strong leader within the Icelandic business community as well. Leading, especially, for example, in terms of gender equality and sustainability. Now on with the earnings. As I noted, our return on equity was 11.5%, so well above our 10% target. Cost income ratio below our target, and our Core Equity Tier 1 capital is still well above requirements with a 480 basis point buffer. During the quarter, we had a change in the, the SREP results from the Central Bank, reducing the Pillar 2 charge from 2.6% to 2.4%.
In terms of the Icelandic economy, the economy continues to perform very well. Tourism is booming here in Iceland, and we expect to see above 3% growth this year. The housing market has cooled down. A year ago or so, we had seen about 20% year-on-year increases. Following the rate hikes by the Central Bank, we have seen the market cool down considerably, and the year-on-year increase now is around 3%, which means around 5% real reduction in the housing prices. This obviously then again factors into inflation and helps to moderate inflation going forward.
As you can see on the bottom left, the debt levels here in Iceland are quite moderate if we compare to our neighboring countries, and that obviously helps us to deal with these kinds of shocks. As noted, the Central Bank was very active and an early, you could say, early adopter of higher interest rates, and that has obviously helped to push on inflation. We have not been seeing much impact on our customers, even though that obviously interest rates have gone up. In most cases, corporate clients are doing very well. Same for individuals. Some of them are moving into inflation-linked products to reduce a bit their monthly payment. Overall, we see a very good performance in our loan book.
In terms of our business units, we have seen a strong performance across the board. Personal Banking with return on equity of over 20%, and also seen good growth, both in deposits and loans. Business Banking actually have the same return on equity number as Business Banking, a coincidence there. But they still, still retain a very strong markets here in Iceland, and especially in the, in the capital area. In Corporate & Investment Banking, we have seen a return equity at 20% as well, and quite a bit higher than last year. There we factor in positive impairments, which obviously have a quite big impact on our earnings.
Iceland Funds had had a modest increase in fee income this year, and that has to do with a, a drop or, or, a drop in the, the capital markets that we have seen over the past year or so in Iceland. We have not seen the same increases in the stock market, for example, as, as, in, in some, some, some other countries. Therefore, the obviously, with a bit lower asset base, there's a fairly modest increase in fee income. However, there was a very considerable increase in our subsidiary, Allianz Ísland, in terms of net fee and commission income, about 33% growth on the back of, partly on the back of a bit of a change in the pension legislation here in Iceland.
We obviously continue to make investments on that front and make very good progress enhancing the services, both on the, in the online bank and also in the app. We have just recently added pension capabilities to the online bank, and now trading for legal entities is available in the app. I would like to note the Reykjavik Marathon. This is our biggest event of the year, and will take place on the 19th of August. Not only is this fun and a good exercise and a great day all around here in Reykjavik, but also there are many charities in here in Iceland that rely considerably on this event.
So I would really encourage all of you to take part and obviously help with the charities, if you possibly can. Bit more on the financials. You can see here a bridge in terms of the earnings between years. As in the past two quarters, the biggest impact is from net interest income, which has come up, obviously, largely due to the Central Bank rate. Other operating income is fairly weak in this quarter due to volatility here, volatility here in the capital markets, and the costs were quite high. The net impairment, however, was very positive in the quarter, and therefore, a positive impact when comparing between years. Overall, very good return in the second quarter.
Here you can see a bit more on the net interest income, and again, we are seeing the same picture as we have seen in the past two quarters. Good growth in both in volume, both in lending and deposits. The margins have been improving on the deposit side, coming down a bit on the lending side, but overall margin being quite stable now between quarters. On the fee income, we can see here that the, we say, the star performance in this quarter have been the cards and payment processing, with people, more people traveling and some changes that we have been doing in terms of our, our, our new systems there.
Also, the other fees and income, that's to a large degree from Allianz, where, where I mentioned before, we had a 33% growth between years. Asset management, I mentioned already. Investment banking was a rather soft quarter in the second quarter, and in loans and guarantees, we are seeing the volume coming down slightly, obviously due to the high, higher interest rate environment. In terms of net financial income, we had a very strong quarter in the first quarter, but that is now offset by, by some losses in the second quarter.
They come from, firstly, our, our, our liquidity book, which is fully marked to market, and with obviously movements in the, the interest rates, we have seen a bit of a negative impact there, and also some of our economic hedges. In terms of the costs, our cost to income ratio, as I noted before, 42.6% when excluding the, the settlement agreement, and that's within our target of, of, or below our target of 45% and, and within our guidance of 40%-45% during the course of this year. We have been, we, we have been seeing this in the past few months being quite cost heavy. We have been investing quite heavily, both in strategic projects.
We announced, obviously, earlier this year that we did a strategic review with McKinsey, and we have also been using advisors on other fronts. Obviously, we have some costs relating to the settlement agreement and also some investments in our headquarters here in Iceland. We will obviously continue to have a very strong focus on the cost side and make sure that we run the bank as efficiently as possible going forward. Now, I will hand over to Jóhann, who is joining me here, Jóhann Wathne, who's Head of Treasury, and he will now talk about our balance sheet.
Thanks, Jón Gunnar. Good morning to you all. Starting with the loan book, the loans, loans to customers grew by approximately ISK 19 billion, 1.5% during the quarter. Thereof, ISK 6 billion is due to inflation. As before, most of the bank's loan book is secured with very solid collateral. As can be seen from the graph, bottom left, real estate is the largest single collateral. The average LTV for the loan portfolio decreased from 59%-58% during the quarter, due to updated official real estate tax value. Loans to individuals are now approximately 50% of the bank's loan book. The bank is releasing ISK 1.2 billion of impairment this quarter. This is mostly due to reversals from a few distressed credit cases in the tourism industry, which most of you know, has a very strong outlook.
The probability rates of the economic scenarios were kept unchanged between quarters. The annualized cost of risk was minus 40 basis points during the quarter, and minus 9 basis points in the first half of the year. Loans in Stage 2 decreased from 3% to 2.6% during the quarter. Loans in Stage 3, or NPLs, remained at 3%. On to the mortgage portfolio. The book has increased by approximately 3% during the year. Maturity of the growth in the second quarter was due to inflation. The credit quality of the mortgage book remains strong, with 1.8% of the loan book in either Stage 2 or Stage 3 loans.
There has not been a significant increase in Stage 2 or in NPLs, despite increase in variable mortgage rates and high inflation, although some forbearance measures have been granted to households with mortgages. LTV for the book has been decreasing during the year, which can be explained by updated tax valuation. It's worth noting that even if a correction in the housing market would occur, LTV levels are expected to remain within acceptable levels. Households in Iceland are overall in a very good position. Nominal wages have increased, and unemployment rate in Iceland is low. About 11% of the bank's loans to customers is in real estate, and approximately 6% in construction. The real estate exposure is well diversified by collateral type, as can be seen in the graph, bottom right.
About 50% of the construction exposure is for residential apartments, 20% for commercial real estate, and the rest is mixed. The asset quality of the real estate portfolio is solid, as can be seen in the graph, bottom left. As before, deposits continue to be the largest, the bank's largest funding source. There was a 2.1% increase in deposits in the second quarter, or around ISK 17 billion. The increase mainly came from individuals and large corporates. As loans to customers increased by a similar amount between quarters, the customer loan to customer deposit ratio remained stable at 152%. On to long-term funding. Maturity, vast majority of the 23 maturities have already been funded.
The bank issued a EUR 300 million bond of its MTN program in May, and bought back approximately EUR 251 million of the EUR 300 million maturity in November. The bank continued its issuance of covered bonds in ISK during the quarter and sold ISK 14.4 billion, and bought back ISK 9.1 billion of the October maturity. The bank has a SEK 500 million Tier 2 bond that was issued in 2018, up for a call in August. The bank will be exercising the call option at the first call date. As before, all liquidity ratios are well above both internal and external requirements. It's worth highlighting that liquid assets at the end of June are approximately 20% of the bank's total assets.
The Central Bank Financial Supervision Committee recently announced the result of the SREP concerning additional capital requirements, Pillar 2 requirements. As of June 30th, the bank must maintain an additional capital requirement of 2.4% of the risk exposure amount, which is a decrease of 0.2 percentage points from the previous assessment. The bank's overall capital requirement, including capital buffers, was therefore decreased from 19.9% to 19.7%. The Financial Stability Board has announced an increase in the countercyclical buffer in Iceland from 2% to 2.5%, effective from March 2024. This change will raise the bank's overall capital requirement from 19.7% to 20.2%, assuming no other changes.
The bank's CET1 ratio increased to 20% during the quarter, this is 480 basis points above the regulatory requirement, and above the bank's financial target, which is to have the ratio 100-300 basis points on top of the regulatory requirements. The leverage ratio at the end of the quarter was 12.8%, down from 12.9% at the end of March. As the bank has stated in previous quarters, it continues to explore share buyback options. The bank plans to continue its ISK 5 billion share buyback plan over the coming few months, and to optimize its capital structure before year-end 2024.
... both being subject to market conditions. On to MREL. BRRD 1 has been implemented into Icelandic law. The MREL ratio stood at 38.5% at the end of the second quarter, which is 790 basis points above the requirement, which is 13.5%. The subordination requirement provided for in BRRD 2 has not been defined in Iceland yet. All right, that concludes the opening remarks. Now we are open for the Q&A session. You can participate in the session via the conference call using the dial-in details, and the operator will give you the floor. You can also submit questions in writing, using the webcast form. Operator, are there any questions on the line?
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Okay, very good. This was obviously very clear. Just to conclude, as you all know, I think, we have a shareholder meeting now at starting at 11:00 A.M. here, Icelandic time this morning, where we will explain to shareholders the FSA settlement and the remedial actions that we will be taking, taking, will be taking place following that. There will also be a vote in terms of of new board members, and we expect to see some changes to the composition there. As mentioned before, Iceland is doing very well. Good growth in the economy, unemployment very low, and especially we are seeing very strong tourism season here. The outlook for the bank, therefore, remains very favorable for the coming few months.
Thank you all for joining us on this call, and, have a good day.