Good morning, and welcome to the webcast presentation of Íslandsbanki first quarter result. I am Birna Einarsdóttir, and with me here today to present is Jón Guðni Ómarsson, the CFO. We published our result yesterday, and the board meeting did approve the accounts. I'm looking forward to take you through the takeaways and highlights and then Jón Guðni will tell you more about the details of the financials. In the end, we will have a Q&A session, and you can participate by using the dial-in details, and the operator will give you the floor, or you can submit questions through the webcast form. Moving over to the highlights, we are very happy with the result.
ISK 5.2 billion profit in the first quarter, 10.2% return on equity, which is in line with our target, so another very good quarter. On the income side, we saw a strong growth of nearly 9% growth in the income on the income side, the main driver being the interest income that did increase over 12%. We also saw a strong growth in many of the fee and commission factors, such as asset management, investment banking, and also in the card business that is recovering well after COVID. I was not going to mention COVID during this presentation, and I failed on the first slide. Sorry. The
On the cost side, we are happy to see that we managed to reach our target to keep the cost flat, the same cost as we saw last year. That is our target to reduce the cost by the inflation. Of course, we didn't expect inflation to be so high, so that is why I'm very happy that we managed to reach that target during the first quarter. We had a positive impairment of ISK half a billion. We mentioned in our last presentation that we still had ISK 3 billion that we had not released after the COVID impairment that we had not released. Now we can say that we have around ISK 2 billion left.
Of course, we will watch carefully how the tourist industry will be doing this summer before we release any further. The capital position is strong and remains strong, and we have around ISK 35 billion-ISK 40 billion excess capital, and Jón Guðni will take you through that in more details later. The Icelandic economy is firmly on recovery path, and the financial position of both households and corporates are strong. The tourists are back, and we can say that Iceland is sold out this summer. Our chief economist is forecasting 4.7% economic growth this year. Of course, the Ukraine war is increasing short-term uncertainty, although direct impact is small due to limited trade relations.
However, the inflation is rising and was measured 7.2% in April. That is, of course, why the Central Bank did increase the interest rate last week, and we are now at the 3.75% level. The Central Bank said in the presentation that we can expect a further increase in the interest rate later on this year. On this slide, you can see an overview of how our business units were doing in the first quarter. The personal banking, they were all doing very well. The personal banking continued to see a growth in the loan book, and during the quarter, we did launch a new digital sales platform that will make it even easier for our clients to open new accounts.
We aim to see digital sales going up to 90%. We are at the 75% level now. Hopefully, 90% next year. The business banking had a record quarter with a very strong return on equity, and they have a very strong pipeline on the lending side. The corporate banking did also very well, and investment banking did also very well. We have the highest combined market share in our brokerage service, and we have many strong mandates in our corporate finance department. Iceland Funds continue to do well. On the sustainability front, we did launch a new savings account, Sustainable Savings.
We also did issue a EUR 300 billion sustainable bond and signed a loan agreement with NIB, green and SME lending. Jón Guðni will continue on this slide. You can see that the share price of Íslandsbanki has developed well since the listing last summer. On this slide, you can also see the split between the shareholder groups. During the quarter, the Icelandic government did continue the sale of its holdings in Íslandsbanki and sold 22.5% and is now no longer a majority owner with 42.5%. The sales did cause a political and public debate in Iceland regarding the ABB sales methods. The reason probably being that the ABB approach is not very well known in Iceland.
Íslandsbanki Corporate Finance unit did act as advisor to the ISFI during the process. Over to you, Jón Guðni , with more details on the financials.
Thank you very much, Birna, and good morning to you all. As Birna mentioned, we are very proud of the results for the first quarter. Return on equity was slightly above our targets and also above our guidance of 8%-10%. The main reason being obviously positive impairments. You can see on this slide the change between years, where the biggest impact is the net interest income and obviously the impairments as well. Moving on to the next one. In terms of net interest income, we are seeing quite a bit of movement between products, you could say. Well, firstly, we see increased volume both in lending and deposits, but the margins are changing quite a bit as the interest rate environment is changing.
Now when rates are going up, we see an increase in deposit margins, but a decrease on the lending side. On the bottom left, you can see the net interest margin, and there we have seen now a bit of a pickup to 2.6% on the back of a higher rates environment. At the same time, however, we point out that we have now, at the end of the first quarter, paid out the annual dividend of almost ISK 12 billion and are also planning for a ISK 15 billion buyback. By distributing those funds, that obviously has a negative impact on net interest income and our NIM, but a positive impact on our profitability.
Net fee and commission income, there we continue to see good growth between years. There's a bit of a drop between quarters, however. That's due to seasonality mainly, so seasonality in cards and payment processing. Then also we had quite a bit of performance-related fees in asset management in the last quarter of last year. That causes a bit of a drop between quarters. Like I said, a good increase year-on-year. We continue to see Icelanders traveling abroad to a bigger degree, and that helps us in cards and payment processing. We are quite hopeful for the second and the third quarter on that front.
In terms of net financial income, obviously we have seen quite a bit of movement in the capital markets, especially on the bond side. We had a bit of a drop in terms of our liquidity book, where parts of the book is in fixed income securities. Offsetting that, as you can see on the bottom left, offsetting that partly is the mark-to-market for some of our derivatives. There we have had derivatives, for example, to hedge against the fixed rate mortgages and have seen some gain on that front in the quarter.
You would maybe if you look at some of our competitors, some of them actually have these losses from their liquidity books going straight over equity, so not through the P&L. I just wanted to point that out when you're comparing accounts between the different banks here in Iceland. Looking ahead, obviously, we now hope that there will be more stability on the fixed income side, especially as rates have now come up quite substantially and are hopefully stabilizing at around this level. In terms of the costs, as Birna said, we had basically flat costs year-on-year, which we are obviously very happy with, and that gives us about 6.1% real reduction, obviously in a very high inflation environment.
FTEs continue to trend downwards and we are very focused, continue to focus on basically increasing efficiencies in every unit of the bank and still see quite a few opportunities ahead. The cost income ratio is in line with our guidance, which was between 45% and 50%, but slightly above our target of 45%. In terms of the impairments, you can see here on the top left how those have been developing. There you can see the positive figures are obviously then charges, basically the negative impact on the P&L. But negative figures are then as a release of impairments. As you can see, in the past now 4 quarters, we have had a release of impairments.
This quarter released ISK 800 million of impairments relating to the COVID era. As Birna mentioned, we noted in our Q4 results last year that we had about ISK 3 billion of impairments from COVID, and that's now down to about ISK 2 billion. Offsetting that, we increased impairments about ISK 400 million due to the economic environment, which is very much related to obviously the conflict in Ukraine and the secondary effect that's having on inflation especially and some bit of an impact on investment levels, but mainly the impact on inflation. So that's offsetting a bit the decrease in the impairment account that we're taking from COVID.
On the top right, you can see how the loan book has been developing. Non-performing loans continue to trend downwards, now at 1.8%, and we are not seeing any companies basically coming into non-performance, which is obviously very good to see. The stage two loans now down to 7.1%. Excuse me. Down to 7.1%. That's a trend that we hope to see continue in the coming few months. As Birna mentioned, and we have talked about before, the outlook for the tourism industry is quite good for the summer.
We will hopefully see this trending downwards quite rapidly over the summer months as the companies pick up and their revenue increases in the summer. In terms of the loan book, we saw good growth, 2% growth in the first quarter. It's a bit, not very evenly distributed. We saw about 3% growth in both mortgages and also in SMEs. We do expect to see now the mortgage growth slowing down a bit as rates have come up, obviously quite steeply in the past few weeks, with a 100 basis point rate hike earlier this week from the central bank. The SMEs, however, we continue to see very strong interest there. Now, so basically investment levels picking up after COVID.
Hopefully we will continue to see a good growth there. On the corporate investment banking side, as we have mentioned before, we are not focusing on growing that book at the moment, but rather keeping it rather flat, even though it obviously can fluctuate between quarters then syndicating some of the loans. Also we have a so-called loan fund which is run by Iceland Funds, our fund management company, where that fund has the opportunity to take part in some of the lending positions that we originate. That has been proving very successful as well. No major changes in the composition of the book, and the average LTV remains at a very moderate level.
We have a special slide here on mortgages because we have obviously been seeing a very rapid development there over the past year or so, and actually over the past two years, if you would look a bit further back. You can see the very strong increase on the top left. This results obviously in an increased market share, as you can see on the bottom left, where we have been picking up fairly steadily over the past couple of years market share, after it had been very stable for the years before that. The other banks are also picking up market share, as you can see.
The pension funds are losing a bit of a share and also the Housing Financing Fund which is in wind-down process. This was just to show, especially maybe our international audience, how the development has been over the past few years. On the top right, you can see in terms of the LTVs that remains still quite moderate at 65% on average. We note, however, that originated mortgages, the which has been newly originated within the past 18 months or so, there we have not taken in the increase in housing prices here into the LTV. Because we measure the LTVs based on the purchase price for the first 18 months or so.
Therefore, we would say because the real estate prices here, as elsewhere, have been rising quite rapidly by some 20%, that the actual LTV of the book, if you would base on market prices, is quite a bit lower than 65%. Finally, on the bottom left, bottom right here, you can see the composition in terms of the mix between fixed floating and the nominal rate and CPI rate. As you can see, it's the fixed floating in nominal rates is in fairly good balance. The fixed rate or fixed 3-5 years, CPI linked, this is a similar amount. But floating CPI much smaller.
The biggest increase in the past few months has been in fixed rate, in nominal, but now those rates have come up quite steadily, so we do expect to see the mix of new mortgages now moving into floating rate, nominal and maybe into inflation linked as well. As we noted, the market has been extremely strong, we are starting now to see some signs that it might be slowing down, but we will obviously see how the year develops. In terms of deposits, no major movements in there. Small decrease in some of the more stable deposits, but very limited movements from the end of the year.
There was an increase in deposits relating to the government sell-down, which was at the end of March. Those deposits have now moved out of the bank, but otherwise, no major movements there. On the borrowings, we issued a sustainable bond in January of EUR 300 million, and therefore, thereby refinanced most of the maturities this year. As you can see on the middle graph here, we had ISK 15 billion at the end of March outstanding in foreign currency. That has now been repaid already in April. We have now no outstanding maturities this year in foreign currency, but have the opportunity to prepay some of our outstanding bonds.
We have some maturities in covered bonds and obviously are actively issuing those here in Iceland. I would like to note here that we have now our MREL requirement under BRRD I of 21%. We are still awaiting exactly how the requirements will be under BRRD II. Depending on those, we will see how much of an opportunity we can have to issue covered bonds as well as part of our foreign currency funding. We have already updated our program so we can issue covered bonds in foreign currency. Like I said, both the quantum and the timing of that depends a bit on the MREL requirements that we will have.
In terms of the capital, you can see we saw a bit of a drop in the capital ratios in the first quarter. The biggest reason there was that we are now factoring in the ISK 15 billion buybacks that we are planning in the coming months. That has been taken out of the capital ratios for prudency, obviously. We have also seen a bit of an increase in risk exposure amounts. That's due to various reasons. We had some adjustments to our models, especially due to the SME factor, and then also quite a bit of an increase both in lending and loans to banks, which is a part of our cash reserves.
Which were at a quite high level at the end of March, and an increase in the derivatives as well. So that explains the increase in REA. As a result, we note now that our excess capital is around ISK 35 billion-ISK 40 billion, which we estimated at around ISK 40 billion at the end of last year. Again, we plan to buy back shares in the amount of ISK 15 billion in the coming months and fully optimizing the capital structure over this year and the next. We note, however, here that there has been quite a bit of scrutiny regarding the government recent sell down of 22.5%.
As a result, there's maybe a bit of an uncertainty now in terms of our ability to buy back shares and the interest from shareholders to sell shares into a buyback. Also we obviously highlight here we have always the possibility of distributing capital through dividends to our shareholders. So we still retain those two options. But you could say that's a bit of a luxury problem in terms of what is the optimal method to distribute capital. Just to finalize, we were very happy with the results, and the outlook for the rest of the year is quite encouraging.
The economy is picking up very well, and we note also in our accounts that due to a recent ruling we are expecting a ISK 700 million upside through our impairment account. Overall, we are quite optimistic for the remainder of the year. Over to you, Birna.
I think we just move over to the Q&A session now. Operator, are there any questions already on the line?
Yes. Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad. You can also submit your written questions via the webcast. We have a question from the line of Sofie Peterzens from J.P. Morgan. Please go ahead.
Hi. Here is Sofie from J.P. Morgan. I would have three questions. My first question would be kind of on the government selling down further. Has there been any indication from the Icelandic state when they potentially might consider kind of reducing their 42.5% stake further? And then my second question is that I note that you say in your presentation that your rate sensitivity is quite insignificant. But kind of when we look back over the past year, your NII is up over 12%. We are seeing lending margin pressure, and clearly we have also seen much higher deposit margins. But kind of of the 12% year-on-year increase in NII, how much would you say is attributable to higher interest rates?
If rates had stayed where they were, how would your NII have kind of performed if we look back? Then my last question would be on the cost outlook. Inflation is higher in Iceland and elsewhere in Europe. Could you just remind us how often do you kind of agree to the wages and when is your next wage discussion or when are you discussing the wages next time, and how should we think about kind of wage inflation in 2023 and 2024 from higher wages potentially and also higher kind of IT spend? That would be my questions.
Thank you very much, Sofie. The first question, did I understand you right? You are, if the government has said something about the further sale?
Yes.
Exactly.
Now, as I mentioned, the process, the ABB process, is being looked into or investigated, the whole process. The government has said that nothing more will be sold until the outcome of.
I'll just maybe move back here to the slide to your net interest income. So as you can see here, the change in lending margin and deposit margins, that's pretty much offsetting each other. So no major impact there, but slightly positive. Then we have the volume growth, obviously, both lending deposits, and then we have other interests. The biggest part of the other interest is due to the basically increased performance of the liquidity book, and there we are seeing the impact from the rate environment. I don't have the exact figure of what exactly, but I think that gives you the big picture of what is the sensitivities in terms of the rates.
Regarding the last question, the contracts that we have now, the salary contracts are until the end of this year and the next labor discussion will start this autumn. I think we will see some increase in wages. Yes, we will see that. Of course, the unions, they have been criticizing the interest rate increase and therefore are claiming higher increase in the salaries. We just need to wait and see how that will be developing. That's very clear. Thank you. Thank you very much, Sofie.
We have one more audio question from the line of Piers Brown from HSBC. Please go ahead.
Hi, everybody. Just to follow up on the issue around the investigation into the government stake sales. I mean, should we be thinking that the exit of the government is now likely to take longer than before? I think they had authorization to sell down to the end of 2023. Is that timeframe still realistic, given this investigation? And also, I mean, you intimated that your buyback is slightly dependent on this investigation. I mean, if we're thinking the investigation doesn't complete until the back end of this year, does that also mean that the buyback is not gonna start ahead of that? If you could just clarify that, please.
The second question was on the COVID overlay, the ISK 2 billion of remaining COVID overlay. How should we think about possible further releases? If you could just clarify that, please.
The budget, they are expecting now an additional sale this year of about ISK 25 billion and then the rest of the estate to be sold next year. That's still in the government budget and obviously the government has been running a deficit due to the COVID era. I think that is still a part of their plans. I think the timing, though, it's a bit more uncertainty there, and we will see the results from the investigations hopefully in the next month or so, and then we'll be better positioned to assess what the next steps will be. Like Birna said, we think it's
Hopefully we expect to see a bit more of a sell down towards the end of this year and then continue next year. We will see in the next few weeks. In terms of the buybacks, we obviously see here now that in terms of our shareholder base, that many of the shareholders have been building up their share base rather than selling.
Therefore it's a question for us if we go out with, for example, an auction process in terms of buybacks and there are no sellers, that would be a bit problematic. We need to assess basically in the coming few weeks, firstly, whether obviously the government continues to be a seller and in what shape and form. You know, whether other investors are keen on participating in such a buyback. We obviously have other options. The first one is to have basically a buyback program, where basically we have an independent broker here, buying in the market. That's something that we need to assess as well and whether we can pick up sufficient volume through those kinds of measures.
The third option, if we see that it will be difficult for us to source paper, is to simply pay out another dividend later this year. In terms of the COVID overlay of the remaining ISK 2 billion, it depends obviously on how the tourism does this summer. If we have a very good performance and all the companies and our clients are in good shape, then we have the possibility to release those impairments over the course of the year. I do expect that we will be conservative in the second quarter because the strongest summer months for the customers are in July and August.
Obviously having seen them coming through the summer strongly, we have the opportunity to release this in the especially last two quarters of the year.
Did that answer your questions?
That's very helpful. Could I just follow up on the ISK 700 million impairment release that you've mentioned? That seems a very big number for a single loan exposure. Can you give a little bit more detail on what that is? I mean, should we just plug ISK 700 million in its entirety into our-
Second quarter impairment forecast.
as a release. Thank you.
Thank you. This is actually a legal case that has been ongoing. It's from before 2008 and has been going through courts over a very extended period. It's been marked at zero in our books for quite a long time. I can confirm that this basically is a one-off upside of ISK 700 million.
In the next quarter.
Okay. That's great. Thanks a lot.
Okay. Any further question?
Don't have any further questions at this point.
Any written questions? Okay. If not, then we say thank you very much for taking part in this webcast. We are very happy with the result, as we mentioned before. Thank you very much.
Thank you.