Good day, everyone. Good day, investors. Welcome to the webinar of Artea Bank for the first half of the year. We'll present financial information for you about the results of our bank. My name is Vytautas Sinius, I'm CEO of Artea Bank, and with me, Tomas Varenbergas is Head of the Investment Management Division. We will lead you through the presentation. We started with a nicely made video of Artea brand. I hope you enjoy that. This is the first quarter that we are operating under the name of Artea. This is an important milestone in the bank's history when we evolved from the historically regional bank to much more covering all the country with all the services as a national bank. We have a bank for the whole of Lithuania.
I think we are progressing very well with this project, with this transformation to the new name, expressing our historic expertise and evolving to be a much more modern bank. We made all the necessary work to prepare well, and the process moved, I would say, very smoothly. We rebranded all our branches, also our website, mobile application, internet bank was also upgraded. The clients, all of them, felt this change, and I think it was very positive. Important to mention that the project is delivered on time and within the budget. We are now operating all our subsidiaries under the same Artea brand. If we move forward to talk about key financial and strategic highlights, the first strategic change has happened on the rebranding process, as I mentioned. Now we are working hard on a core banking system upgrade.
I will give a bit more details on the next slide. On other key highlights, I would mention that the loan book growth rebounded in the second quarter, following a bit slower first quarter. Important milestone we reached with our mortgage portfolio, which went through the EUR 1 billion milestone. Our portfolio becomes even much more diversified. Net fee and commission income grew by 10% year on year, which is also showing strong development in this field, supported by renovation financing, asset management, and capital market businesses. Asset management is also an important part of our income generation. We are well delivering according to our index plus strategy, which reduces volatility during more volatile times. It helps to swiftly recover through allocating some of our investments to the private assets. Asset quality remains stable, low NPLs. As we see, our cost of risk stands at 0.24%.
So far, so good with the loan portfolio quality. No major issues there. We completed in the second quarter our buyback program. Now we're expecting information from the European Central Bank on the next phase of our share buybacks. Delivering each quarter profit generation, it positively affects our book value per share, despite that we are doing significant investments. Overall, for the first half, we have delivered close to €37 million, looking to the adjusted profit with approximately EUR 17 million from the second quarter coming to this figure. Return on equity at 11.1% if not adjusted, and close to 13% when we include the fact of one offs. If we can move forward to highlight some keynotes on our project on a core banking system. Symbolically, I would say we are in the midst of the project. We started that in the last quarter of 2023.
Now we are in the implementation phase after the discovery phase that has been finalized in the beginning of this year. Now we are in the first stage of the implementation phase, where we have actually three releases of the programming and testing of the new system. Before the launch in the midst of 2026, we are expecting also to run so-called friends and family testing on a production environment that would allow us to be well prepared for the full launch for all clients. The program is developing on track and with a budget. It's a big project for the bank, but we are running, I would say, pretty successfully, taking into account the scope of the program. As I mentioned, we are preparing a lot with the data migration that all data should be properly migrated to the new system and all the functionalities programmed and tested there.
I would like to give some insights about the changes in the environment in Lithuania on the regulatory angle. During those two years, in 2025 and 2026, we have some developments in our legislation. Some of them already have been approved and passed in parliament and signed by the president. Some of them are still in the discussions. One part is related to the investment environment. We see them as providing some new opportunities for developing investment services in the country. The first one is so-called individual investment accounts, which is internationally known as ISA, which effective is from the 1st of January 2025. It fully will be operational in 2026 when the declaration of the taxes will be made. It will allow for the clients to invest via the tax-deferred account. It could be used for the different types of instruments, stocks, bonds, ETFs.
It would allow clients to participate in the capital markets. We think that it will positively affect the investment culture in a country which is still developing. Such an instrument will allow for the clients to be more active. That would also be reflected on the liquidity of the instruments in the country, including, I believe, Artea stock too. The second initiative is a Pillar 2 pension reform, which is taking place at the beginning of next year. This change will allow participants to opt out from the second pillar of the pension system. The participants could withdraw the accumulated funds during the two-year period and transfer them to the private investment accounts. We are expecting that a part of people will cash out these funds, but another part will use further for the investments. Therefore, there's an opportunity to provide all the services that we have.
We have historically known, after the merger with Inwell Retail Business, that this part will be applicable for the clients that are willing to continue investment and to use investing in the third pillar, investment funds, and et cetera. We are getting prepared for this change in the pension system, working hard with our clients to explain and to provide all the needed information for the future long-term investments. The second part of the change is related to the mortgage market. At February of 2025, there is a new regulation of how the mortgages could be refinanced. It becomes more easy and smooth for the clients to change the banks. That has been tested. It's working, and clients could migrate. Most clients seem to remain with their banks, renegotiating the conditions.
It's working, but most of the clients, as we see from the trends with our bank, are still willing to stay with the bank. This opportunity is working, and the clients now can much easier make changes within their mortgage engagements with the banks. The last change, which also could impact mortgage market development, is related with a revision of some parameters in the granting of mortgage loans, whether it's a first mortgage or secondary mortgage. The current minimum of down payment is 15%. The discussions are for first-time buyers to go down to the 10%. The down payment could be smaller for them. There are also adjustments on the debt service to income ratio, but I would say that would not be that significant. The down payment probably is one of the most interesting changes that will happen potentially shortly if those decisions will be made.
With that, I will pass the word to Tomas to continue with the financial results. See you later.
Good day, everyone. Happy to date and continue our today's webinar. Let me walk you through our financial performance in the second quarter and the first half of this year. To begin, we still have a pressure on our net interest income from the declining rate environment. What is good is that with proactive funding cost management, we enabled to maintain our net interest income flat during the second quarter compared to the first quarter of this year. That was what we expected and communicated in the first quarter webinar. We believe that this stabilization will continue in the upcoming quarters of this year. Our net fee and commission income grows nicely. We have achieved a 10% growth rate compared to this year's first half to the last year's first half. The large contribution comes from our asset management and business renovation segment and capital markets.
On operating expenses, it still increases, primarily due to salary costs, together with our investments that we treat as a one-off. It's rebranding and IT replatforming. Cost discipline is our top priority. Currently, we are undertaking a comprehensive review of our cost base. Some important cost initiatives will take place. In the upcoming quarters, we will communicate with you on these developments. On the bottom line, we have achieved EUR 14.2 million of net profit, excluding the one-off. The second quarter profit was €17.5 million. Looking to our balance sheet metrics, the key point to mention is that our loan book growth rebounded, 5% growth rate quarter on quarter. We have achieved a 15% growth rate looking year on year. To summarize, there are still some headwinds on our top line, but we are undertaking cost cutting measures as we commit to delivering our bottom line guidance for this year.
We are still focusing on ensuring the profitability targets that we have communicated for this year. Going forward, to give you some insight on net interest income. As I said, on the top line, there's still pressure, but we've actively managed the funding costs. We are on a path for stabilization. Currently, our net interest margin stands at 2.9%. We do expect that 2.9%, 2.8% area is what could be expected at the end of this year. On our loan portfolio, Q2 was a rebound and a growth in all the segments. Looking on year-on-year development, the situation is the same, that all the key segments contribute to the growth. We have achieved a 15% growth rate. On the loan or asset yields, different segments face a different situation. On the corporate side, we see in the recent quarters intensified competition.
Together with decreasing base rates, additional pressure on the yields is coming from the competition. On the mortgages, with the reforms that the mortgage market had, there is higher competition on the margins. Strong demand from the clients helps to mitigate that effect. We do see a stabilization or even some pickup in the margins on the mortgage market recently. On the consumer segment, our fixed-rate products, we introduced dynamic pricing. That helps us more effectively manage our yields. We see some pickup in the asset yield on these products. Net fee and commission income, as I said, nicely growing, 10% a year. Quarter on quarter flat, but we are focused more on long-term development. On the bottom left-hand side, we see that fees are growing nicely. They contribute as a higher proportion into our total revenues looking for the last several years.
To comment on what segments contribute most, asset management is one of them. Client inflows are growing nicely. Our asset management performance results are best in class. Looking into short-term or long-term, the performance compared to the competitors is very good. Inflows plus good performance helps us to grow assets under management and revenues respectively. On the renovation, we have fully disbursed our second modernization or retrofit fund. Revenues increased by adding higher also assets that we are managing on renovation. We are working on new solutions and new funds that will continue to grow our renovation segment going forward. I would also mention capital market activities. We are keeping our leading position in the Lithuanian market by originating corporate bonds in our country. The capital market is still growing. We do see a good potential to grow that business going forward as well. Let's turn to our operating expenses.
Some insights were delivered in the highlights section. Costs still increased during the second quarter of this year. It mainly was driven by the salaries that increased by EUR 1.6 million, looking year on year. The other expenses lines, IT, marketing, buildings, they are flattish, which is good. We didn't pay any solidarity tax this year. That was the case last year. Last year, we paid EUR 2.2 million in the second quarter for 2023 on solidarity tax. We do not expect that. That was previously communicated that the bank won't pay any solidarity tax during this year. EUR 4.1 million of one-offs. It's rebranding and our IT replatforming costs. To mention again, we are currently undertaking our cost-based review, and cost-cutting initiatives are underway. Asset quality remains good. In Q2, the increase in non-performing loans was actually due to one reclassification from stage two to stage three. The coverage ratio remained high.
The total stage two and stage three portfolio also remains stable. There is no deterioration on our assets. Mainly one ticket contributed to the increase of stage three from reclassification of stage two loans. Our cost of risk for the first half is running at 0.25 basis points. 12-month trailing cost of risk stands a little higher at 33 basis points. As previously communicated, we do expect that for this year, 0.3% of the cost of risk, that's what could be expected. We expect that asset quality will continue to be stable and at a good level. On funding, the cost of funding is decreasing. There is a natural rotation from term deposits to demand deposits due to the lower rates and lower attractibility of term deposit as a product from the clients. Going forward, we see a need to grow our deposit portfolio, especially term deposits.
We do see that term deposits, it's a good entry product for our private clients. We are working on different marketing initiatives, and we will be visible in the market by promoting our savings products. Overall, we do see kind of a need and a will from us to decrease our loan-to-deposit ratio. Currently, it stands above 100%. We aim to decrease that at least to 100%, and probably a more sustainable level would be around 90%. Growing the deposit portfolio will be one of our focus areas going forward. On other funding lines, as planned, we redeemed EUR 20 million of our subordinated bonds. On other funding sources, there was not much development to mention. Our capital, probably not worth to spend much time here. Our position is very good.
We stand at a position to continue to grow our asset base and to be committed to a high capital distribution to our shareholders. Our risk-weighted asset density remains stable. While we are growing our balance sheet, our risk profile does not change, and we keep the balance looking from that metric perspective. On our shareholder value creation, as I said, we are committed for high capital distributions. Our capital position reflects that, that we can be committed to this. Our book value per share from two shareholders is increasing fast. Kager for the last five years stands for 14%. We do expect to receive permission from the European Central Bank for our new share buyback program. Starting from mid-August, we expect to have that in place. We plan to resume our open market buybacks or to get off with a tender offer.
It's not decided, but we are willing to start buybacks sooner than later. In general, we continue to proactively manage the capital that the shareholders provided us to run the business and to return the sustainable but high long-term return for the shareholders.
Thank you, Tomas, for presenting most of the elements of our development. I can give some concluding remarks on the current state. I would say we're focusing on a two-direction. One is a strategic initiatives according to our strategy. I think we've just, as I mentioned at the beginning, I would say closed the project of renaming the bank group. Now we will go further with that, strengthening our name and building the more practical elements that will be much more understandable and good for the clients. The branding is one thing.
Another thing is how to make it much more practical and touch and feel for the client base. Another initiative is core banking. For this year and next year, this will be the high priority for the bank to run smoothly this project. The other part of the line is the development of the bank on organic growth and dealing with all interest and non-interest income. Yes, we have some headwinds in the net interest income generation. Therefore, as Tomas mentioned, we will work close to our cost management and adapt to the current situation with the income generation. In the longer term, we think that adjustments will happen in our loan and deposit pricings. We will come back to the indicated levels of our return. Such elements as mortgages have developed really strongly during the last period. We've reached, as I mentioned, a symbolic level of EUR 1 billion.
We see still continuously good here for the mortgages in 2025 for the rest of the year. Share buybacks has been also mentioned that we tested all the possible scenarios with share buybacks. We expect to continue with that. To remind our long-term commitments of minimum dividend payouts, long-term return on equity, and total shareholder return, we committed to that despite the year's turbulence if 2025 happens. We still believe that with all measures we are planning, we need to be close to the projections that have been previously presented. With that, I'll pass the word back to Tomas to explain a bit more on the investor relations calendar.
Good. Thank you, Vito. In the next six months, we're going to travel a lot. We keep our promise on proactive investor engagement. We are ready to meet you in person in any event on our calendar. In case of any questions, we are ready to take that every day. We have covered the key information that we wanted to share today with you. We do see plenty of questions. We'll start with a Q&A. In case you still have some questions, you can put it for us. To begin, we have a question on our loan book. The last bit of this is to answer what loan book growth do you expect going forward?
Good. Thanks for the question. Yeah, the loan book is developing well, I would say. I would say it's splitting to the ranges like mortgages. We are running really fast on the mortgage growth. As I mentioned, we see the potential of growing further during this year, the next half of the year. Corporate lending, again, first quarter was slower and the second rebound. We see that development will be not too aggressive, but growing further in the second half of the year. The consumer lending as well, I would say, is progressing well. The market is active. We're generating good return on the consumer lending due to the fixed margin, the fixed interest rates that we have on this instrument. With that, I would say that we will be with a total year growth in the lower or midst of double-digit figures growth for 2025 all year.
Good. Thank you, Vito. We have a question from Vladan Pavlovic from IPANEMA . Thank you, Vladan. Deposit growth has slowed for a couple of quarters now. How do you see this development in the future? I will take that question. As mentioned in the presentation, deposit portfolio growth is one of the focus areas for us in the upcoming quarters. We do see it as a good entry product for our private clients. On the same note, we are looking at a more conservative loan-to-deposit ratio. Currently, it stands above 100%. At least we need to drive that into 100%, and even probably some 90s level is more sustainable looking into the bank's development for the story. Let's move on. We have a question from Miguel Diaz from Wood & Co. There are four questions. Thank you, Miguel. Let us cover these ones.
Where do you see your total capital surplus at the end of the year? It will be at a higher level due to a slightly lower loan growth rate from this year. We do expect to be above 17% on our CET1 ratio. What does it mean that our commitment for the high capital distributions for the shareholders is in place? You expect the net interest margin to remain at reported levels for the rest of the year. Does that assume any more rate cuts by the European Central Bank? Our expectations for the base rates is that Euribor will decrease by another 20 basis points till the end of the year. As I said, net interest margin currently stands at 2.9%. We do expect that at the end of the year, we will be in the area of 2.9% or 2.8%. The next question is on fees.
Are fee incomes at this level a good indicative run rate for the rest of the year? Yes, that's a good run rate. We do see a good potential to grow our fees at a fast pace. What we have achieved during the last year—asset management, renovation, capital markets—are the key business segments where we see a potential to grow further. The next question is on cost savings. The last call, Vytautas, is to cover that. What are the cost-saving measures you are putting into place?
Yeah, thanks for the question. As we explained, that's getting a bit lower income. That according to our expectation for the first half of the year, we've seen this trend and started to practically consider the impact on the cost side as well. I would say the largest part of operating costs in the bank is HR costs. That part will be touched probably the most. There are different types of areas like trainings, like bonuses, and other lines will be reviewed thoroughly. The other part is the marketing part. Even delivering well on the rebranding, we're still sourcing optimizations there. As I mentioned, we will be within the budget, meaning that some savings will be made in this area too, also in some campaigns. That's the largest part. Of course, all the other administrative cost lines will be reviewed. According to our budget, it will be lower, practically actually.
The other area I would say, which is not from the cost side but still has potential for some savings, is the provisions since we are expected to have a slightly higher cost of risk. Now we see that the development is more safe or better on the non-performing loans side. Most likely, if nothing happens during the third or fourth quarter, we could have some lower provisions there as well.
Good. Thank you, Vito. Another question comes from Andrei Rodanov from Svetbank. Hi, Andrei. Thank you for the question. Our term deposits accounted for 34% of total funding in Q2. Where do you see this ratio in the long term? As I said, we are more focused on the loan-to-deposit ratio rather than looking at the term deposits contribution in our total funding. Because term deposits, you know, in a low-rate environment, tend to decrease. Our loan-to-deposit is the ratio that we track. As I said, below 100 is the first aim we are focused to achieve, and 90s is the long-term level that we are targeting. The other question comes on a no-name basis. Have you evaluated possible impacts of Pillar 2 pension reform on your net commission income or assets under management within pension funds in 2026? Yes.
We do model different scenarios, and there are two things to say. The first one is we do expect some outflows, and it can be 20%, 30%, 40%. In such a scenario, our bottom line could be impacted by up to EUR 2 million. That's not what we are taking as granted. Our focus is to discuss with the clients about what is the best way on their funds as a long-term savings. What is the best solution and what should be done with these funds? Our focus is to keep the clients' assets in a bank, in an organization. In case we are not happy with Pillar 2 funds as a product or as the results that these funds have achieved, we are ready to offer different solutions. Either it will be the Pillar 3, or it will be a life insurance solution, or it will be our term deposits.
We are in place to discuss, and we are proactively approaching our clients. We already started to do the needed things in order to mitigate the worst-case scenario. The last question from Vladan Pavlović , again from IPANEMA. What is the maximum payout ratio we'll consider in 2026 given the capital surplus? I would say our dividend policy states that the minimum payout is 50% of the last year's profit. That's one thing. Another thing is there is no cap or ceiling on the maximum payout. I would answer it this way. The decision, the final decision on the payout, will be made when we finish this year or beginning next year. We covered, I hope, all the questions. In case we missed some of them, we will give answers after the webinar. Thank you for listening to us, and have a nice summer day.
Let's meet in our Q3 results meeting. Thank you, and bye-bye.