Good morning, and welcome to this webcast, where we are presenting the financial result for Íslandsbanki for the fourth quarter and for the full year 2022. I'm Birna Einarsdóttir. I'm the CEO of Íslandsbanki, and with me here today is Jón Guðni Ómarsson. Thank you very much for taking the time to join us this Friday morning. We did publish our result yesterday afternoon. We are very happy with the outcome, and I'm looking forward to take you through the highlights, and then Jón Guðni will go into more details regarding the financials. We also announced yesterday that the Board of Directors agreed to start a preliminary discussion with Kvika banki to evaluate a possible merge of the two banks. I can say there are exciting times ahead to take this opportunity further.
Like before, following the presentation, we will have a 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, or you can submit the questions in writing using the webcast form. Moving over to the highlights, we are presenting here today a very strong financial result for the fourth quarter and for the full year, with 11.1% return equity for the fourth quarter, but 11.8% for the full year, which is above our target of 10%. On the income side, we saw solid growth year-over-year.
The main driver being the increase in the interest income, almost 43% because of a higher interest rate level, and also, we saw growth both in deposit and lending. We also saw a fee and commission income rise nearly 11%, mainly coming from the cards, but we also saw a strong result in all our business unit. The net impairment of around ISK 650 million in the fourth quarter, due to less favorable economic environment, especially because of the inflation. For the full year, we had a positive impairment of ISK 1.5 billion. The asset quality of the loan portfolio remains strong, and the loan portfolio, as we have often mentioned before, is well, very well collateralized.
But briefly on our target, I'm happy to share with you that all the financial target for the year 2022 were met. Return on equity above target and the income, cost income ratio, below 45% target. On the next slide, you can see our guidance for this year. Our target is the same, growth in line with the GDP growth through the business cycle. The forecast, it's good to mention that the forecast for economic growth this year, by our chief economist is 3.4%. Return on equity is expected to be in the range of 10%-11%, assuming that the impairment level will be 25-30 basis points.
We are expecting the cost income ratio to be between 40% and 45% in the year 2023, and we are proposing to pay ISK 12.3 billion in dividend in our annual meeting in March, in line with our dividend policy and target. The bank also intends to buy back ISK 5 billion over the coming months through a market-based share buyback program. The plan is now to optimize the capital structure before the end of 2024. Jón Guðni will go into that in more details later. We saw on the economic the economy of Iceland, if we just one slide here. We saw a strong GDP growth last year, nearly 7%, and as I mentioned before, our chief economist is forecasting 3.4% growth this year.
The main driver being the export industries, with tourism being the, our largest export industry, followed by the aluminum and seafood. All sectors doing well. We are expecting a good year in our tourist industry with forecast of visitors around 2.1 million. Inflation has proven persistent, 9.9% in January, which led to a tighter monetary policy by the central bank, which did increase the rates by 50 basis points earlier this week, and now the interest rate level is around 6.5%, increased from 2% in the beginning of last year.
The energy crisis has not affected Iceland as much as the countries around us because of the sustainability energy that we have, and we can see that the public and private debt level is moderate, and so we absolutely believe that Iceland is an attractive market. These slides, we are showing a overview of the business unit performance in the fourth quarter. All business units were performing well. Personal banking had a good year, enhancing our service offer to our clients. Business banking, with our robust lending activity, almost over 70% growth in the loan book. The corporate and investment bank was strengthening their securities brokerage activity, and this also continued to be the main player in the corporate finance in Iceland.
Assets under management by Iceland Funds are now ISK 388 billion, and our daughter company, Allianz, had a very good year with a strong growth in their income stream. One slide on the technical highlights. We saw a digital solution continue to receive, be very well received by our customers. We, as I mentioned before, have been enhancing the service level to our customers through the digital solutions. For example, I can say that 99% of all mortgages are now, all the mortgage applications are now digital, and 80% of credit cards limit changes, for example, are done online. Sustainability plays a big role in our operation, and we continue to take big steps forward, especially to try to integrate sustainability into all aspects of our daily activities.
In October, we did issue a report, the Road to Net Zero, the our targets to reach that goal. That was published, as I said, mentioned before, in October. We have set our sustainability goals for this year, and we'll continue to put a great focus on this important matter. Over to you, Jón Guðni.
Thank you, Birna. Good morning to you all, and thank you for joining this call. As Birna mentioned, we are obviously very happy and proud of the results for 2022. As you can see on this slide, the change between years is pretty much the same in terms of the reasoning behind it, both in the fourth quarter and the full year, where we are seeing a big increase in net interest income, obviously supported by the higher interest rate environment. Net fee and commission income has also been growing steadily. The net financial income, obviously, we had a very good year there back in 2021 due to strong markets, but, you know, not so supportive markets last year.
We have some increase in costs, and a bit more on that later. Then, obviously, higher taxes based on the higher profits before tax. A similar story for the fourth quarter as the full year. In terms of net interest income, we are obviously continuing to see rate increases from the central bank. The January print for the CPI was a bit higher than expected, and therefore, the central bank now increased rates by 50 basis points earlier this week, and also signaled that more hikes are to come. We are already at 6.5% in terms of the central bank rate.
Our chief economist is expecting rates then to start going down from the fourth quarter of this year and onwards. In terms of the net interest income, obviously, we have been seeing a growth in both deposits and lending, some increase in the margins on the deposit side, but the biggest change is coming from our liquidity book, obviously, is with the higher interest rate environment. In terms of the fees, we are seeing the same trend as in the past couple of quarters, where cards and payment processing is still picking up from COVID, and we're seeing good growth there.
As Birna mentioned, we also saw very good growth from our subsidiary, Allianz Iceland, which is selling insurance products from the German conglomerate and had a very good year last year. Overall, we had across units a strong year, and we are very happy on the fee income side. In financial income, obviously quite turbulent markets last year, and we saw some impact in our liquidity book. On the bottom left here, you can see the impact in terms of bonds and related derivatives in the fourth quarter. Overall, we were, however, quite happy with the results for the year, obviously having a modest market risk profile.
But I would mention, however, that in the fourth quarter, we did a reclassification in terms of our own debt issuance, and therefore, we moved some of earlier gains from the year over to OCI. This was to basically increase the effectiveness of our hedges. With our own issuance, we have, obviously, derivatives to hedge against the fixed rate risk. We saw that these were not as efficient as we want them to be, and therefore made the appropriate changes in the fourth quarter, and having this impact in the fourth quarter results, but will then reduce volatility in earnings due to this going forward.
We remain with a very small, as you can see on the top right, in terms of shares and equity investments, very small book there. Obviously, we are seeing now quite strong earnings in our liquidity book, as rates have gone up quite substantially. In terms of the costs were quite high in the fourth quarter for a few reasons. Firstly, we actually charged through our accounts the impact from retroactive changes through the general wage agreements. The wage agreements with the banking union were made now in January, some of the changes were retroactive into the final quarter of last year. We have already charged that through our accounts.
We also made a provision due to the potential settlement with the FSA here in Iceland, which we have disclosed already. Some extra costs due to strategic projects that we are running now at the moment. Finally, we are seeing some increase in costs with the pickup from COVID, with obviously a bit more travel and and a bit more, you could say, customer-related activity. Looking ahead, with inflation running, inflation in Iceland is still just below 10%, we can obviously expect some increase in our cost base this year in 2023. At the same time, we are seeing obviously rates at a quite high well rates quite high and and still moving upwards.
Therefore we are expecting our cost income ratio to remain between 40%-45% for this year. In terms of asset quality, on the top right, you can see that we are still making very steady improvements on that front. The Stage 2 loans have been coming down very steadily. This is obviously the loans in the tourism sector, which back in 2020, we moved all our loans in that sector to a Stage 2 due to increased risks. As that industry has been recovering, we have been seeing those loans and the Stage 2 numbers coming down very steadily.
I think we can say that we are now at a basically a normal environment on that front, having 2.5% in Stage 2 and 1.8% in Stage 3, which has been very stable throughout the past couple of years. On the top left, you can see in terms of our impairment account, and the negative numbers here mean a release of impairments. We have been seeing that for the past seven quarters. In the fourth quarter, in 2022, we actually had a net impairment, as well a charge to the P&L account of ISK 600 million. This was based on basically a higher inflationary environment. Looking ahead, the outlook is quite good here in Iceland.
We are seeing very low unemployment, GDP growth, which is expected. Major industries are doing well, and we are not seeing a pickup in delinquencies. The outlook for impairments at this point in time is fairly favorable. In terms of the loan book, very good growth of some 9% last year, mainly in loans to individuals and SME loans. As you can see on the bottom left, our loan to LTV ratio is quite low at only 58%. Overall, we are very happy with the quality of the book. In terms of the mortgages, a bit more deep dive there.
The mortgage book, as you can see, is obviously quite diversified in terms of the different products. We have the CPI-linked product here in Iceland, which has been working very well for the past 40 years or so. That means that customers which experience when rates go up and they experience a large increase in their monthly payment, they have the flexibility to move part of their loans or even full amount into CPI-linked, and thereby having less of an impact on the monthly payment. Obviously their equity value in the underlying house increases less over time or not as rapidly.
This product, as I had said, has been working well here in Iceland over the past 40 years, and it gives our borrowers a bit of a flexibility to manage their finances. As you can see on the bottom left, like I said, even though we have seen rates coming up quite steadily, we are not seeing an increase in Stage 2 or Stage 3 loans in the markets book. Same with commercial real estate. We are seeing very low delinquencies there in Stage 2 and Stage 3 loans, and that sector in general is doing quite well. Very active construction sector and both for commercial and residential housing. I think we can say we are seeing a fairly good balance now in terms of new construction versus demand.
Over the past two years, two, three years, we have obviously seen a bit of an excess demand compared to supply, and therefore we had obviously quite a steep increase in housing pricing. That is now we are seeing that now leveling off and then seeing a bit more harmony there and looking ahead also for the next couple of years. In terms of the funding, deposits obviously remain our largest sources of funding, and we have seen a good and a steady increase in the deposit base. Regards to borrowings, we continue to diversify our borrowing base.
Last year, we had our inaugural issuance of foreign currency covered bonds and also a Tier 2 bond in the domestic market. We also continue to build up the senior unsecured market here domestically. Here we have in the past few years, the covered bond market has been quite dominant, but we are continuing to build up the senior unsecured here as well. In terms of maturity profile, it's quite even between years. For this year, obviously, we continue to issue regularly covered bonds and, like I said, to continue to build up the senior unsecured market domestically. Then we can be expected to issue one benchmark issuance in EUR to fund our November maturity.
In terms of liquidity, extremely strong liquidity, and very high ratios, as you can see on these figures here. It's quite noteworthy at the bottom left, as you can see. We have about ISK 300 billion of liquid assets, about 20% of our balance sheet. In terms of capital, as Birna mentioned before, we are planning to pay a dividend of 50% of last year earnings in line with our dividend policy. We are now also planning to start buying back own shares in the amount of ISK 5 billion, based on the liquidity in the market here in terms of our own bonds. We can expect this to take five-six months.
We want to get started in terms of the buyback program. We had earlier plans to have a bit larger program. Firstly, we have obviously some uncertainty in the environment, even though that's actually improving quite rapidly these days. At the same time, there's still some uncertainty regarding the government. You know, what will their next steps be in terms of their sell-down and therefore participation in a buyback program. Based on this, we feel that it makes sense for us to start with a regular buyback program in the market. Like I said, ISK 5 billion to begin with.
As Birna noted also, we still plan to optimize our capital structure, based on the turbulence that we are seeing in capital markets. We are now saying that we plan to do so before year-end 2024, obviously subject to capital markets and the seeing, you know, favorable pricing in terms of Tier 1 and Tier 2 bonds, in terms of fully optimizing the capital structure. We are 22.2% in terms of over capital and in a very good position and obviously very well above the capital requirement from the regulator. In terms of MREL, same there. We have a good buffer, 400 basis points above the regulatory requirement and have basically pre-funded that throughout this year. Overall, a very strong position.
We have actually seen a decrease in REA between quarters, and partly that is due to a program, basically, an internal program to optimize the REA weights. But, yeah. Obviously very happy to see a decrease, as we can see from the half of the year, from 69% of total assets down to 64%. Overall, very good picture. Obviously, we are extremely happy with the results from 2022, and the balance sheet and asset quality of the bank continues to improve. Back on to you Birna.
Yeah. We are now opening up for a Q&A. As I mentioned before, you can participate by via the conference call, and the operator will give you the floor, or you can submit the questions in writing using the webcast form. Operator?
Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. If you wish to ask a question via the webcast, please click on "Ask a question," type your question in the box and click Submit. Once again, if you would like to ask a question via the telephone, please press star one and one on your telephone. We will now take our first question. One moment, please. The question comes from the line of Madhav Rathi from JP Morgan. Please go ahead. Your line is open.
Hi. Madhav here from JP Morgan. Can you hear me?
Yep.
Hi. I had a few questions. Regarding the size of the fine, relating to the ongoing FSA inspection, have you completely provided for the fine in this quarter, or do you expect some more going forward? I have another question regarding the timing of the share buyback, if you could just clarify on that, please.
Mm-hmm.
Yep. I'll take those. In terms of the fine, we don't have clarity there. We have, these are fairly early discussions with the regulator. There's no formula how to, you know, basically calculate what is the expected fine. We have done our intern, very rough estimate for what we think is appropriate. We will then obviously see in the coming months how that will come out. In terms of the timing there, we are now turning in our responses to the preliminary findings, and hopefully this will be concluded in a few weeks' time. In terms of the share buyback program, we are planning to start that basically in the coming couple of weeks.
Like I said, that will, the ISK 5 billion program, that will extend over probably the next, five months or so.
Does that answer your questions?
Thank you. Thank you so much.
Thank you.
Yep. Thank you.
Thank you. Once again, if you'd like to ask a question, please press star one and one on your telephone. I will hand the call back for web questions.
Are there any web questions?
Yes, there are two questions. The first is: Can you talk about why Kvika is potentially a good match for Íslandsbanki? The second one: Would you consider acquiring Kvika with cash if the talks proceed positively?
Is that... Yeah, okay. Why do we look at Kvika as a good match? It was just yesterday that the board of directors decided to go ahead with discussion with Kvika about a possible merge. Why do we look at this as a good opportunity? We think there's there are great synergies between those two companies on the cost side, and also opportunities in the product offering to our customers, both our customers. As you might know, that Kvika recently or two, three years ago, merged with an insurance company, something that is not a part of our product offering. So that is quite interesting for Íslandsbanki and to be able to offer that service to our clients.
In a way, we can say they are quite unlike banks as they stand today. That is why I think it is quite a interesting opportunity. I think we can also say it will be beneficial for our clients, for our shareholders and for all stakeholders.
Yes. In terms of the whether it's a cash transaction or a share based, I think our base case that is, it will be mainly be share based and then possibly fully share based. We are obviously overcapitalized, so we have some flexibility there to have part payment in cash, the general assumption that this will be a share based merger.
Okay. No more questions? Okay. That's it then. Thank you all very much for participating. As I mentioned before, we are very happy with the result, and we will continue to work hard to deliver good result. Have a great weekend, all of you. Thank you.
Thank you.