Good morning, everyone, and welcome Artea Bank second quarter 2026 earnings call. Thank you all for joining us today. My name is Tautvydas Mėdžius, and I'll be presenting today alongside our newly appointed Chief Executive Officer, Tomas Varenbergas, and our Chief Financial Officer, Paulius Daukša. We are pleased to report a strong quarter in our core lending franchise. The good results were partially offset by a non-cash, non-recurring goodwill impairment charge, which we'll discuss in a greater detail later in the presentation. With that, let me hand it over to Tomas to walk us through.
Good morning, everyone. Pleased, excited, and happy to lead today's webinar. Let's start from financial highlights. Two second quarter financial highlights. After weak first quarter, during this second quarter, we have noticed a good caught up to our plan. Lending portfolio grew by 6%, that's more than we have expected. As I said, the first half plan is achieved, and we are in good position to meet our growth target for this year, which is 12%. While growing, mainly in corporate and mortgage segments, we protected our margins and Net Interest Margin has bottomed out. It also is supported by EURIBOR dynamics and good developments of our cost of funding. Going forward, we do expect a flat or gradual recovery of our Net Interest Margin. While growing business, we keep our operating resilience in place. Asset quality is good.
Capital and liquidity position is also very robust. At the end of the day, our first half results and especially second quarter results was negatively impacted by impairment that we had to do by taking all the assumptions of second pillar reform. I will give more comments and arguments, and how do we see situation going forward in the next slide. Before going into that, we had a big strategic shift in the management during the last month. I assume a chief executive role and naturally, it should be expected that some changes in how to operate and how do we approach into the business will change. In strategic business line, I wouldn't say that a revolution will take place. It's more about evolution. We need to reassess and to review our strategic initiatives, including our core banking platform project.
There will be, and we are already, changes in senior management in our organization. We need to bring a risk and compliance profile into a new level, I will spend a lot of time in building organization in this field. Well, the growth in the future depends on how much we do invest today. This also should be reassessed and reviewed. By saying that all, well, finance team is already working on reviewing our guidance for this year, and it expected that with the Q3 results, we will come with updated figures and what could be expected during this year. Moving to the second pillar reform update. A big shift in assumptions. In first half of this year, the first quarter of the whole duration of the reform, already 47% of our assets was withdraw.
We have updated what could be expected during the whole two-year period, and our model shows that up to 70%, additionally, 20% of assets under management will leave us. Based on these assumptions, we had to write down EUR 10 million gross of fund management rights and goodwill. On the net result, by adjusting for the tax benefit, negative impact stands at EUR 8.2 million. We believe that we took right assumptions and we take a pain once, and we do expect that we will not need to come back to that topic again in 1 .5 year, while the pension reform still be in place. Let's go to the financial results, and let's do a little more deep dive into key performance indicators. First of all, some extended highlights on our performance. Net Interest Income started to increase.
Our loan book growth and positive dynamics in Net Interest Margin supported that dynamics. With the growth in place and with the pipeline that we do have on lending business, we do believe that gradual recovery of Net Interest Income will be in place in Q3 and Q4. Our core lending business is well supported by net fee and commission income development. It increased substantially quarter-on-quarter and year-on-year. It's mainly driven by our capital market activities. We are volatile, but, well, we contribute significantly into our revenues lines. We do have a good development on daily banking, but it's more related to the pension reform and more activity on private clients base. It shouldn't be as high activity itself going forward as the highest activity in the second pillar of funds already took place.
Cost discipline is in place for three quarters in a row. We put emphasis here. Our recurring costs are well controlled, but by saying that, going forward, it's going to be, I would say, more difficult situation to keep that under such dynamics and pick up in operating expenses should be expected. Macro in Lithuania is doing well. Our underwriting standards are good, that helps us to keep asset quality at a good level and impairments are low. Only the second pillar reforms contributed mostly to the impairment losses in Q2 and the first half of this year. At the end, we have achieved a net profit figure of almost EUR 8 million. ROE is 5%, that's below our expectations, but it's mainly driven, again, by non-cash, non-recurring impairment on second pillar funds.
Our core business, our lending business is picking up and it's started to grow nicely.
Yes, I will re-emphasize. Tomas just said how core underlying lending business remains remarkably strong and resilient. This is the real engine Artea Bank franchise, the key generator of profits. If we look into our total loan book, it increased by 6% quarter-over-quarter, 8% year-over-year. That was predominantly driven by corporate banking activity, which added roughly EUR 180 million in the quarter. This was driven by a couple of factors. One is a pent-up demand. We are catching up after a seasonally slow Q1 and after harsh winter in Lithuania that pushed some of the activity into Q2, especially to certain sectors like construction. But also the other factor is the generally strong underlying fundamentals. Macro in Lithuania is strong, and we see our business and entrepreneurs continuing investing into the future.
If you look into our mortgage book, it also saw a nice uptick supported by a healthy and well-functioning real estate market in the country. We also saw a portion of young families leaving Pillar 2 system and deploying those proceeds as a down payment on the first property. If we look ahead, we feel very good about this book of business. In the short term, in August, the new legislation comes into effect, which reduces the down payment for the first-time buyers from 15% to 10%, and we think that will act as a nice additional catalyst for increased demand in the short run. But even more structurally, if we look into the long run, we think that mortgage will be one of our key growth drivers.
The product penetration in Lithuania is one of the lowest in Lithuania, but that's changing rapidly, and we sit right at the center of this convergence. If you look into the consumer credit book, it stayed effectively flat, but it's a combination, again, of two factors. The underlying demand for the product is healthy, but again, some of the customers used the Pillar 2 withdrawal proceeds to pay down the outstanding balances, which canceled out a nice growth. It's a temporary effect and the loan book resumed growing in July. If we switch to Net Interest Income and Net Interest Margin, I'll highlight a couple of things. One of them is asset yields stayed effectively flat at 4.6%. However, our cost of funds went down from 2.2% to 2.1%, and as a result, our Net Interest Margin expanded by 5 basis points.
Yes, it's a very modest increase, but one we're generally proud about because it marks an inflection point after several years of contraction. Looking ahead, we feel cautiously optimistic about the future. As Tomas was saying, we expect the NIM will be between flat and minor increase. On the asset side, we could start seeing some repricing flowing through the corporate book and mortgage book. However, on the funding side, we recently launched a deliberately aggressive retail term deposit marketing campaign, which gives a limited offer for Lithuanian customers to earn 4%. It will help us attract new customers, but also will put some additional pressure on cost of funds in the near term. Switching to net fee and commission income. It grew nicely, 16% quarter-over-quarter and 14% year-over-year, and reached EUR 8.6 million in total.
What's good and what we like about that Net Fees and Commissions is growing as a portion of total revenue. It reached 18% this quarter, but just a year ago, it was 15%, as you can see from the chart on the bottom left-hand side. This is exactly what we're building towards, the revenue mix, which has an element of capital-light recurring cash flows. We like it, and we'll continue doing so in the future. If you look into this particular quarter, the increase was driven by two things. One is capital markets and the other is daily banking activity. In debt capital markets, we saw a healthy activity because issuers typically come to the market once they have full-year audited financial results in hand. We, as a market leader, stand ready to facilitate those issuances.
Secondly, on daily banking, we saw a couple of things. One, our daily banking customer activity is growing. Secondly, more specifically for this quarter, we had an elevated transaction and prepayment and card volumes, which again, was driven by temporary effect of Pillar 2 and pension reform, where we had an influx of excess liquidity into the system. I'll hand it over to Paulius to walk us through the remaining slides.
Thank you, Tautvydas, and good morning, everyone. This is my first presentation as acting CFO, and I am happy to join Artea Management Team in contributing to the future growth of this bank. Let's move to the operating expense. As you can see from year-to-year, our expenses are mainly flat, just with a slight increase into two items, salaries, which was due to inflation, and buildings. This was because we are moved to a new headquarter here in Vilnius. If you are looking to the two main metrics, Cost-to-Income Ratio and adjusted Cost-to-Income Ratio, both improved more than 1%. Our operating structure, in general, are stable, and it's the same quarter-to-quarter and mostly year-to-year. As mentioned before by Tomas, we expecting slightly increase in the future of operating expense. We can move to the next slide.
Our asset quality remains strong. Even our loan book increased. Loan impairment losses for this quarter have positive impact of EUR 0.2 million. If you're looking to the trailing 12-month cost of risk, we have just 2 basis points, which is pretty significant increase comparing to the quarter one, which was 9 basis points. General three main metrics, Stage 2 Ratio, Stage 3 Ratio, and late stage NPL, all improving. If you're looking to the late stage NPL, we are accounted only for 15 basis points, and we believe that it's not going to increase in the near future. We can move to the next slide. Our funding. Basically, our funding have three main items and well-diversified items. We have term deposits, demand deposit, and debt securities.
Our total cost of funding, as Tautvydas mentioned before, decreasing this quarter, decreasing in more detail from 2.17% to 2.12%, which was mainly impacted by the increasing in demand deposits. We expect to continue optimize our funding structure going forward, and we want that our funding structure will be primarily driven by deposit funding. We can move to the next. Looking to the capital ratio, we see that we have pretty solid surplus above management buffers. Of course, if you're looking to generally comparing to the previous quarter, all CET1, Tier 1, and total capital decreased, which is because our loan book increased significantly. When we're looking to the risky asset, we can see that from the year back, our risky asset increased 10%. Our risk asset density, comparing the same period, decreased almost 4%.
We remain comfortable with our capital portfolio, reflecting balanced risk profile, and we believe that our overall loan portfolio grow solid liquidity ratios, solid operating expenses control. We have a good foundation for future growth. With that, I want to give back to Tomas.
Good. Before going to the Q&A session, let's wrap up our webinar. To repeat that our core business picked up. We do see a good pipeline to meet the growth targets for this year. We operate with resilient fundamentals. Asset quality is doing well, capital and liquidity positions are robust. Unfortunately, results are negatively impacted by one-off non-cash, non-recurring impairment.
We took a pain once, and we do not expect that we'll need to come back to the second pillar impairment topic again in a one and a half year. And again, with new CEO, with the new management, we are reassessing our strategic initiatives and the strategic priorities. That's going to be finished during Q3, and we do expect to come back to you with new financial guidance for this year and with a view what are the most critical and the most important things for our organization to focus in the near future.
Thank you, and let's switch to the Q&A session.
Thank you, Tomas. We will now switch to the Q&A session. I will ask everyone to limit themselves to two questions per person. If any of your questions remain unanswered during today's presentation, feel free to email investor relation team and we'll get back to you very shortly. The first three questions come from Enlight Research. Good morning, Mattias. I'll ask Tomas to answer those. The first question is about what's the probability that more pension impairment charges will be expensed? Is it highly dependent on withdrawals in coming quarters, or have you taken an elevated figure for further withdrawals in your assumptions?
Yeah, so couple of times said that, but let me give another explanation that we believe that the assumptions that we have plugged into our models puts us in a comfortable position not to come to the impairments discussion in one and a half year. That's while the pension reform window is open.
Okay. I think we already answered the second question, but I'll let Tomas to repeat and reiterate. The question is, will you revise the post-impairment targets, net profit return on equity following the pension reform impairment?
Pension reform impairment is one of the trigger that puts our guidance for this year under review. There are more moving pieces that we want to reevaluate, to reassess, and that relates to our strategic initiatives and strategic priorities.
Great. Thank you. The next question comes from Swedbank. Good morning, Andrej. The question is about the Luminor transaction. Can you please share your thoughts about how OTP's upcoming acquisition of Luminor might change the competitive landscape in Lithuania? Happy to take this question, Andrej. First of all, I think that a healthy competition is good, and we welcome it. It's good for the market. It's good for the customer. Secondly, I will say that I don't think it changes how we operate. We always put the customer first, and we always try to be the best bank in segments we operate, and that will stay in place going forward, regardless of change of ownership at our competitors. On OTP specifically, we know the bank reasonably well. It's a publicly traded company, which we follow closely.
We have mixed feelings about them and their operations in certain countries. I'm not going to comment on it. Maybe I'll just repeat our own strategic position. Artea Bank is the most Lithuanian bank in the market. We're deeply embedded in the local economy. We think we've done for the local economy and community more than any other financial services institution in the country, and this will remain our strategy going forward. Hopefully, that answers this question. The next question from Swedbank is about, would it be possible to get a rough breakdown of where the money withdrawn from the pension system have gone? Happy to start, and my colleagues will chime in. We have a visibility of the money that flown back into Artea Bank system. Most of the money went into the current accounts.
That's why you saw a nice uptick in our current deposits versus term deposits. I think that's bucket number one. I think bucket number two, down payments for mortgages. On a similar level, we saw consumer credit returns. We also saw a nice uptick in Pillar 3 pension product demand, it was a little bit smaller than the first three factors. I don't know if, Tomas or Paulius, you want to add something on this? No.
One just maybe small topic that when we are looking to the Net Interest Margin of consumer loans, this is also impacted by the same repayment because we taking administrative fee from the clients, and this administrative fee is linear. When we calculate according to IFRS effective interest rate, it is mostly all the fee recognized in the beginning. When we get repayment, we should recognize part of the fee. This is why when we look into the Net Interest Margin of consumer loans this quarter, it was slight decrease. When we touch this point, of course, we expect it in its pretty increase in the future.
Great. Thank you, Paulius. The next question comes from Silver. Could you please remind us the underlying EURIBOR feed assumptions used as the basis for the current financial guidance? Tomas, do you want to answer this question?
Sure. Good morning, Silver. 2.2 six months EURIBOR is plugged in into our current budget model for this year, 2.2. It is kind of a little bit conservative by taking into account the current EURIBOR rate, which stands at 2.7%.
Great. Thank you. I don't see any additional questions at this given moment. This will conclude our webinar. Thank you for joining us today. If you have additional questions later this week, feel free to reach out to investor relations team, we will answer those promptly. Thank you again and goodbye.
Thank you. Bye.
Bye