Good morning, all, and welcome to Íslandsbanki this Friday, where we present the results for our first quarter 2025. I'm Bjarney Anna with Investor Relations, and I'm joined today by Jón Guðni Ómarsson, our CEO, and our CFO, Ellert Hlöðversson. Before I hand the session over to them, I want to remind you that, as per usual, we will have a Q&A session following the presentation. You can participate in the session via the conference call dial-ins and press hush 25, and the operator will give you the floor. You can also submit questions in writing using the webcast form or send us an email through ir@islandsbanki.is. With that being said, I hand the floor over to you, Jón Guðni.
Thank you, Bjarney, and thank you all for joining this call on this morning. Iceland, the Icelandic economy continues to be quite robust, and we were quite happy with our underlying core operations in the first quarter of the year, where we saw the core operating income of net interest and fees grow almost 6% in the quarter. At the same time, we were affected by the turmoil in the capital markets, where we saw extremely weak net financial income, having the impact that the overall return on equity was 9.4%, obviously slightly below our target of 10%.
What happened here deer?
to the screen? Yep, it comes back. Sorry. Yeah, the overall return on equity is slightly below our target of 10%. Like I said, we are very happy with our underlying core operations and good growth in the revenue generation. The capital remains extremely strong.
We saw a bit of a drop in the first quarter. That was due to the ISK 15 billion that we have set aside for buybacks in the coming few months. Apart from that, obviously, we remain with our capital well above our targets. Asset quality also remained very strong. As I said, the Icelandic economy is on a good track. For example, we are not seeing any direct impact from the tariffs and the international impact of that. The asset quality has remained very strong across the board. We have confirmed our guidance for above 10% return on equity for the year as a whole. In spite of the impact from capital markets and net financial income in the first quarter, we are still confident that we will reach the 10% target for the year as a whole.
We also aim to have the cost-to-income ratio below the 45% target. We remain, obviously, with our dividend payout ratio target of 50%. As I mentioned, we have set aside ISK 15 billion for proposed buybacks in the coming months. In terms of the economy, we are expecting to see growth this year. On the top right, you can see a bit in terms of our exports. On the far right, you can see that obviously the biggest export partner is the Eurozone, but then the U.S. with about 17%. To the left of that, as you can see there, in terms of our exports to the U.S., the bulk comes from seafood and then pharmaceuticals and medical equipment. The proposed tariffs of 10% obviously can have some impact, but the tariff level is a bit lower than we have seen in most of our neighboring and competing countries.
In general, the balance of trade with the U.S. is quite level. From what we have seen, we are seeing quite a limited direct impact here on our customers. Obviously, we can expect to see some impact in terms of growth globally and possibly imported inflation. Talking about inflation, the inflation in Iceland has been a bit more sticky than we expected. Our Chief Economist is now expecting to see inflation over this year slightly below 4%. In terms of the interest rate levels, we are now at ISK 7.75% from the central bank, and we are expecting to see that coming down quarter by quarter and ending up around 6.5% at the end of the year. Like I said, overall, we are seeing a fairly good investment level, quite good activity across the board in terms of new lending.
We are quite optimistic in terms of the economy here in general. As I mentioned, apart from the market turmoil, which impacted our net financial income, our core business units did very well in the quarter. You can see here at the top that all units were well above our 10% target in terms of return on equity, with business banking having the highest of close to 18% in the first quarter. If we look at new lending, we saw the most growth in business banking, actually, at around 3% growth in lending and a very good and robust appetite, you could say, across the board. In deposits, we saw good growth in personal banking from individuals, where we saw about 1% growth for the quarter, which continues then basically a very robust growth from last year, even though at a bit slower pace.
Overall, very good activity across all the business units. For example, in corporate investment banking, we maintain the highest market share in brokerage and are seeing now more activity in corporate finance as well. We continue to invest quite heavily on the digital front. In the first quarter, we are actually extremely happy to both launch a new internet bank and also quite a few big changes to our app. I firmly believe that we have now the best app in the banking market here in Iceland. The internet bank is basically launched on a new technology, replacing a legacy technology. We are now in very good shape on that front. It is a so-called soft launch, basically, where we use this year to add features to the new bank and move our customers which still have access to our old internet bank.
So far, this has proven to be very successful. Like I said, we have now made great progress on our app, which is in extremely good shape now. We are now putting more emphasis on financial health of our customers, for example, enabling them to rename accounts, pay into or track, for example, their mortgages in the app, and quite a few more features on that front. Plenty more to come on that in terms of the app development over the coming few months. At the end of January, we noted that we had come to an agreement with insurance company VEES to cooperate in terms of insurance. We had an extremely, you could say, demanding timeline, and we wanted to have this up and running on the 5th of May.
I can almost say that to our surprise, we did exactly that. Earlier this week, we launched the cooperation. Our customers can now see insurance in the app, and we are already creating leads on both sides. I can say that actually the amount of leads far exceeds what we expected in the first few days of the cooperation. We are off to a very good start on that front. Like I mentioned, business banking, we have seen very good growth in the loan portfolio there. On the far right here, you can see some examples of new lending. Like I said, this is quite widespread across the board. We are seeing, like I said, very distributed and across industries, basically in terms of business banking, lending to SMEs.
I could almost say a bit surprising, given the high interest environment that we are seeing such a good growth on the lending side there. Also note on the left side here that we are now leading both on the equity side and the debt side, the financing for Samherji, salmon garden. As you have heard before, there are quite a few projects now ongoing in Iceland about land-based salmon farming. That is something that is going to be a big part of the growth here, the economic growth in Iceland in the years ahead. We are extremely happy to lead the financing for Samherji on this front. On the debt side, we have both domestic and international banks participating. The same on the equity side, where we have seen oversubscription and great interest in taking part in this extremely exciting project.
When this will be fully operational, this facility will produce about 30,000 tons of salmon, which is quite interesting to compare to the overall cod quota in Iceland, which is around 100,000 tons. This obviously will give a good boost to the economy and obviously, hopefully also to the investors that have taken part in this extremely exciting project. In the first quarter, we issued our inaugural green senior preferred issuance. We actually issued a longer dated instrument than we had done in the past two years, at five and a half years, extending a bit the maturity of our borrowings. Having done this, now actually we have now finalized most of our borrowing needs throughout this year. We are extremely happy to see the interest from international investors, where we saw a very slight new issue premium of only five basis points and 3.3 times oversubscription.
Very strong issuance there in the first quarter. Now looking at our shareholder base, as you note here, the Icelandic government is still a majority shareholder with about 45% stake. Yesterday, Congress here in Iceland approved legislation enabling basically the Minister of Finance to make the next steps in terms of the sell down. In the government budget, they have stated their plans to sell about half of the stake this year and half of the stake next year. Having this bill now being passed through Parliament and preparations have been made here on our side to enable this. The government has spoken quite openly that they plan to have a fully fledged offering with a prospectus and open to both the general public and obviously to professional investors at the same time.
We are extremely excited to take part in this process and do our part to obviously present the bank to investors and hopefully seeing new investors coming into our investor base. Exciting times ahead on this front. Now over to you, Ellert, on the financials.
Thank you, Jón Guðni. The bank turned a profit of ISK 5.2 billion in the quarter, assuming a 9.4% return on equity. Taking a look at the composition of income, net interest income was showing healthy signs of growth, as well as net fee and commission income. That was offset by financial expenses, as Jón Guðni explained, partly due to the capital market development. The composition of income also turned down a high effective tax rate. Should we adjust the return on equity for the effects of capital markets, the adjusted return on equity would be close to 11%, just to give investors some feeling on the effect there too. Focusing on interest, the bank turned a 3.2% net interest margin in the quarter compared to a 3.0% in the same quarter last year and a 2.9% over the year 2024 as a whole.
This is due to subsiding imbalances, strategic pricing on both assets and deposits, as well as repayment of our quite widely spread EUR issuances done in 2023, which was paid back throughout 2024. During the quarter, the bank accounted for 1.04% of inflationary tick and assumes to account for 1.5% in inflationary tick in the second quarter. As before, we guide towards fluctuations month on month while the economy stabilizes in line with the seasonality of inflation, although we note that the CPI imbalance has started to come down in line with our projections. Turning over to fees, card and payments remain the largest segment of our fee income. Here we see growth year on year.
In terms of capital markets, after a strong start beginning of the year, markets started to show volatility in, I would say, mid Q1, which continued throughout the quarter, affecting both investment banking revenues as well as asset management revenues. We expect this to normalize and lower rate environment to boost both capital markets as well as lending activity as the year progresses. Net fee and commission year on year increased by 1.9%. However, as we have stated, there was some EUR issuance this quarter, which fell in Q2 last year. Fees related to that were therefore accounted for during this quarter, while being Q2 in 2024. Adjusting for that, net fee and commission income reflecting underlying operation grew by 5.2% year on year. The bank turned a loss of close to ISK 1 billion on net financial income due to pressure in capital markets.
This relates both to market making operations, losses related to economic hedges, as well as the group-owned market positions. Nevertheless, the equity risk on our balance sheet remains small, closing off from the listed side at 6.3% end of the quarter compared to an overall balance sheet size of over ISK 1,600 billion. However, we turned a profit of around ISK 500 million for other operating income, mainly related to revaluation of a non-core asset at Kirkjusæter 2, a plot formerly residing our old headquarters. There, progress has been made and the bank assumes that steps will be taken in further development and/or sale of the asset as time passes. In terms of efficiencies, the cost-to-income ratio closed off at 47.6%. Adjusted for the effect of net financial income, the cost-to-income ratio would have been 44.8% within our financial targets.
Salaries grew by 7.7% between years, but we are starting to see headcount coming down from previous year by a number of five FTEs. Other operating expenses decreased by 1.2% between years. We remain committed to our financial targets of being below 45% cost-to-income ratio for the year as a whole as we have been before. Turning the focus to the balance sheet, the loan portfolio closed off relatively flat compared to the previous quarter at around ISK 1,300 billion, reflecting a 0.3% growth quarter on quarter. As before, the composition is largely unchanged. 44% mortgages and the rest reflect quite healthily the Icelandic economy. The loan portfolio continues to be skewed towards the lower risk classes as shown on the bottom right-hand side, over 93% covered by collateral and LTVs coming down to a position of an average LTV of 53%.
This of course translates into impairments. Impairments were zero this year or close to zero, reflecting a zero percentage point cost of risk. Asset quality measured in stage three is strong between quarters, closing off at 1.8%, while stage three remains largely flat. Overall, we can state that there are no structural issues within any sector, sizes, or geographical concentration in the book, as can be seen by the drop in, or a steady decline rather, in loans with four parents. The same goes for the mortgage book and turning the focus to the bottom right-hand side, where asset quality, stage three loans closed off at 1%, comparable to the, I would say, to the previous quarter. Asset quality remains well there. Average LTV for the book is at 54%, which is going to be a favorable position with the implementation of CRR3.
It is expected to come into play mid this year. Fixed rate imbalance, as indicated on the top right-hand side, continues to run off in line with projections. This also contributes to our net interest income as this imbalance continues to run off. For the commercial real estate portfolio, that continues to be diversified and of good quality. Addressing first the, I would say, the increase in stage three on the bottom left-hand side, as we discussed in the last earnings call, the growth between Q3 and Q4 2024 relates to a single exposure being moved to stage three, a technical CRE, a traditional Propco versus Opco structure, not in, I would say, not in that sense a traditional CRE. Further growth mainly relates to the reduction of the overall balance.
Growth in stage two relates to a single borrower and dispute between that borrower and the municipality, which has since been resolved, thus lowering stage two again in April, although this is the stand at quarter end. As before, the residential real estate sector in Iceland remains well diversified. Funding for the companies is quite long and stable, and occupancy ratios are in excess of 95%. Overall, the sector remains healthy. Turning to balance sheet, as we stated before, deposits grew by 1.3% in the first quarter, mainly due to financial institutes and individuals. Retail deposits remain the largest segment at 53% currently, growing by four percentage points year on year. There is no deposit concentration in the book, and loans to customer deposit ratios remain stable. This, of course, makes us more flexible with regards to wholesale funding.
During the first quarter, we issued, as Jón Guðni stated before, our EUR 300 million inaugural five and a half year green senior preferred bond, the longest duration which we have issued in years. We experienced a quite healthy book oversubscription. In addition, we issued in SEK and NOK. As a result, the bank has pre-funded its operations to a large degree, limiting exposure to current market volatility. We note also that despite high issuances in the foreign capital markets, our wholesale funding remains over 50% in ISK, which is important for the bank as it increases geographical diversification of the investor base. Additional issuances in the year relating to both AT1 and tier two will remain opportunistic as we need it for capital purposes in line with our capital optimization. Liquidity remains strong. Liquid assets are currently 90% of the overall balance sheet and fully marked to market.
LCR in all currencies closed off at 202% and 110% for the ISK. Lastly, capital. We closed off the quarter at a total capital ratio of 21.6% and CT1 ratio of 18.6%. This is compared to a regulatory minimum of overall capital requirement of 19.7% and 15.4%. On top of it, the bank aims to have 100 to 300 basis point management buffer as before. Within these capital ratios, ISK 16 billion have been allocated to share buybacks, which are not yet completed but have been deducted from the CT1 capital. As of now, we expect the adaptation of CRR3 to be mid this year and to reduce REA by the amount of 4%-5%, thus boosting capital ratios by around one percentage point.
That means the total distribution capacity, including uncompleted buybacks, amounts to ISK 37 billion, assuming a fully optimized capital structure and taking into account both the effect of CRR3 expected to be implemented this year. The bank remains committed to its efforts to continue to optimize the capital structure, which may be through external growth, organic growth, as well as distributions to shareholders. Overall, we are quite happy with the results from underlying core operations. With that, Bjarney, I hand the floor to you.
Thank you both. We now open up for a Q&A session. You can participate in the session using the dial-in details and press hash key five, 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?
Thanks. Yes, the first question comes from Sophie Peterson from JP Morgan. Please go ahead. Your line is open.
Yeah, hi. Thanks for taking my question. Just two quick questions. On net interest income, how should we think about net interest income in 2025, given that it has been quite volatile in recent quarters? Should we expect the current net interest income to be the run rate going forward, or how should we think about net interest income volatility in coming quarters? My second question would be on capital and excess capital. You mentioned that you will kind of look to, or you have around ISK 37 billion of distributable capital, and you will look at organic growth opportunities and also distribution to shareholders. Could you maybe expand a little bit on this comment? Kind of what do you think about inorganic growth opportunities?
Would you kind of be happy to increase your dividend per share, which is, or dividend payout from the current level due to a higher level? Yeah, if you could just also talk a little bit about kind of inorganic versus organic growth and then kind of dividends versus share buybacks and also increasing the top payout. Thank you.
Thank you, Sophie. I'll start with the capital. On the capital side, as we have talked about before, we remain open for potential external growth. That is obviously something that is a potential, but it depends on obviously availability and price at the same time, but something we remain open to. We have been seeing some growth outside of Iceland as well in terms of taking part in syndicated loans and both to diversify a bit our loan book and also to get more knowledge and experience, for example, in the infrastructure sector. Our loan book outside of Iceland currently is only 2%, so we see some opportunities there. At the same time, we obviously plan to continue the buybacks, and that is our preferred option in terms of returning additional capital to shareholders.
We are hoping that now with the government shutdown, we will see more liquidity in the stock and potentially more opportunities for buybacks. We continue to try to optimize the capital stack as much as we can before the end of this year, and obviously looking at these different alternatives. On the net interest income, over to you, Ellert.
Yeah, maybe one point to add to the capital. We note also that taking into account, I would say, buybacks, the payback ratio for 2024 was close to 100% of profits for 2023. So buybacks have been quite, I would say, quite sizable effort in our capital optimization story. For the net interest income and the NIMs, we have guided before that the NIMs on average through 2025 are going to be close to what we experienced in 2024. We had 2.9%, but quite fluctuating between quarters. Seasonality of inflation domestically is quite a bit. Inflation tends to be higher, I would say, first half of the year and lower in the second half. We are expecting similar behavior. Overall, we expect to be around the same levels as we did last year.
That's very clear. Thank you.
Thank you, Sophie.
There are no more questions from the telco, so I hand the word back to you, Bjarney Anna.
Thank you, Einar. We've received some questions through the webcast forum and email, so I'll read them out loud. The first one from Alexander at Akkur, starting with, "Hi guys, and congrats on the solid quarter." A couple of questions from me. First off, were there any one-offs in the NIM this quarter? If not, should we assume a similar or even stronger next quarter as inflation ticks will likely be higher than in Q1? The second one, do you expect to increase your AT1 and/or tier two funding in the near term, or will you wait until you've returned more capital to shareholders?
Oh, thank you very much for that. First, yeah, again on the capital, obviously to fully optimize our capital stack, we will issue some AT1 and tier two, and the timing of that is obviously subject to both the market, the capital markets, and also how well we progress in terms of the return of corrected tier one to our shareholders. That is something that we expect to hopefully see during the course of this year. And then on the NIM.
In terms of the NIMs, there are no one-offs on the NIM this quarter, and we usually do not have one-offs. Obviously, the strong NIM performance is, I would say, partly due to reducing imbalances, both on the CPI side, but as well as on the fixed rate imbalance side. We, however, note that during the first quarter last year, comparing to the first quarter last year, we had a EUR 300 million issuance issued at quite wide spreads, over 400 basis points, which was paid off in Q2. That's, I would say, that's a structural change between the years as such, but there are no one-offs in the NIMs. Reiterating what I said before, we expect NIMs overall to be around similar levels for the year as a whole as it was in 2024, while fluctuating a bit due to seasonality of inflation.
Just to note on the inflationary tick, like mentioned, we have just over 1% in the first quarter and expectations of close to 1.5% in the second quarter. Like I mentioned, our Chief Economist is expecting about 4% over the year as a whole, which is then similar as to annualized in the first quarter. Obviously, we'll see some fluctuations going forward, but we expect the impact on NIM to be similar to what we saw in the first quarter for the year as a whole.
David Rothner at SEB has five questions. The first one being, can you please elaborate on the increased risk appetite for lending abroad? Infrastructure is mentioned. What type? Any other sectors or type of lending regions? How large do you see this portfolio over a three to five year horizon? The next one, given the ongoing capital optimization measures, is a potential AT1 transaction this year still being considered? SAC market is quite hot given this week's trade for the Swedish online broker Avanza. The third one, what is the status for the possibility in the Icelandic Emerald framework to meet the subordination requirement with senior preferred bonds? The fourth, subject to the third, are there any plans to issue S&P bonds? The fifth, the last one.
What was the before again?
Subject to the above, are there any plans to issue S&P? The fifth, if no S&P bonds are planned to be issued, will you terminate the S&P rating as the issue rating that then will remain one notch below Landsbankinn and only focus on Moody's similar to Arion?
Okay, I'll start with the first one and then give the floor to Ellert. In terms of our risk appetite abroad, like I said, our current loan book outside of Iceland is only around 2% of the balance sheet, so extremely low. We're open to see a bit of diversification outside of Iceland. We are seeing the opportunities on both infrastructure lending and also in leverage finance, basically in syndicated loans. We are mainly looking at Europe and we are cooperating with some Nordic banks and European players in terms of participating in those loans. We have obviously done that for a long time in the seafood industry with good results where we have an exposure, especially in North America. In terms of the growth now, we are more looking at basically, you could say, Western Europe.
In terms of infrastructure, we are looking at across the board infrastructure projects, but our main interest actually is in infrastructure projects that we expect to see something similar here in Iceland in the coming years. For example, roads, bridges, electricity grids, and yeah, something on that front. I would say that is the main focus at the moment. Yeah, in terms of the potential growth, like I said, it is about 2% now. In the coming years, you could maybe see it growing to 5-10% of the loan book, giving us, like I said, a bit of a diversification, but we are not expecting any rapid growth above and beyond that.
Okay, for the AT1 question, we have touched on that before. We remain open to AT1, but that's subject to both market conditions as well as our funding needs to optimization of the capital stack. It's going to depend a bit on how we progress with the capital optimization. For the S&P questions, I'm going to tackle those, I would say, a bit as one. Obviously, the bank has a subordination requirement set by the regulator, which was set late in October 2024. We have three years to fulfill that. That comes into effect, I would say, towards the end of 2027. We are in no hurry to issue our senior non-preferreds. Our capitalization is quite strong, our liquidity is quite strong, and funding is quite strong. This is not something which we're doing, I would say, immediately.
We note, obviously, that we are on positive outlook with Standard & Poor's, although we note as well that we are one notch, I would say, one notch lower than what we see for the Moody's rating. There have been made no decisions on, I would say, either canceling S&P or doing nothing. That is something which we are constantly evaluating on all fronts. With regards to the market dynamics for senior non-preferreds domestically, we are yet to see the first senior non-preferred being issued here domestically. We have, however, seen the market reacting quite positively to senior preferreds. We are optimistic that once the senior non-preferred market is opened up, it will be accepted in a positive momentum domestically.
We have more questions. Two questions from Coron Luis. Could you explain the net interest income sensitivity for short-term and long-term market interest rate changes? Could you explain any currency risks? Which part of assets in ISK and which part of liabilities in ISK? What currency hedging do you have?
First of all, the currency rate, we remain FX neutral to a large extent, obviously between, I would say, ISK as well as the FX. Although there is some, I would say, some sensitivity between currencies in the international market, we try to eliminate those to a large degree through traditional swaps. Overall, I would say we view our balance sheet from, I would say, a two-side, an ISK balance sheet in a sense, and then an FX balance sheet in a sense. I think that covers the FX risks. For the sensitivity of net interest income, we view that mainly through lower rate environment. If the rate environment comes down, we expect returns on the liquidity portfolio to come down with it. On the flip side, we will try to, I would say, maintain and even grow margins.
Overall, we are going to see for the medium term, it's likely that net interest margin will subside as the overall rate environment comes down. However, I would say the overall target of the bank is based on return on equity. We will optimize capital to maintain and grow return on equity. For the short term, there are more elements at play. There we have the imbalances, which would be a runoff, both the CPI imbalance as well as the fixed rate imbalance. Both of them will have a positive effect on net interest income overall. On the flip side, we are seeing rates coming down in a steady pace, which is, I would say, counteracting from a liquidity portfolio standpoint.
I think that covers it. If there are no further questions, we want to thank you for attending this morning's webcast. We thank you for the questions, for committing the time joining us, and hope you have a good day. Thank you.
Thank you all.
Thank you.