Good morning, everyone, and welcome to Artea Bank third quarter 2026 earnings call. Thank you all for joining us today. My name is Tautvydas Medzius, and I am Chief of Staff at Artea Bank. Today, I am joined by our Chief Executive Officer, Tomas Varenbergas, our Chief Financial Officer, Paulius Daukša, and our Chief Economist, Indrė Genytė-Pikčienė. Tomas will start with key strategic and financial highlights for the quarter. Indrė will give you an update on macro situation in Lithuania. Paulius and I will take you through the financials in more detail. We will wrap up today's call with a Q&A session. With that, let me hand it over to you, Tomas.
Good day, everyone. Welcome to Artea webinar. Let me start with a central message. Our core business continues to grow. Our underlying earnings power remains solid. At the same time, we are strengthening our foundations to build a stronger bank in the future. This message will be repeated many times in the webinar because it shapes current performance results for the bank, and it will shape in the future. When it comes to the growth, our loan portfolio growth remains in this safe area, and within the original guidance, it should stay in range of 11%-12%. Deposit portfolio is growing at more or less the same pace, but it is two times faster than we have expected, and it is well supported by the campaigns. It is well-perceived by the market. That growth improves our loan-to-deposit ratio.
Our balance sheet becomes stronger, and it puts the bank in a position with a higher capacity for the future loan portfolio growth. What is important that our daily banking services gets attraction. Our clients acquisition doubled compared to the second quarter or year-on-year. That is a good achievement. The market perceives well our credit card offering or term deposit offering. We are going to continue to be active in attracting the clients because our goal is to build a more sustainable client base in terms of home client users. Moving from the growth to the second part of the key message that we are investing in the risk management. With a transition in the key leadership, in CEO, in CFO, CTO joined the management board. We set a higher priority towards to the risk management.
We see that bringing core capabilities back to the organization is essential in order to have a better control of the organization, to build a stronger organization that could achieve sustainable growth in the future. We have experienced and professional people joining the organization during the last quarter. Appointments in data, IT, risk, marketing, or HR joined our organization, and we are committed into the building a better organization is in place. Following the changes in the management and resetting the strategic priorities, we also update the guidance, and we will end our webinar with more deep information about that. Before it, let us take a look what was the key shaping factors of our results during this year. First factor is the second pillar pension reform.
We have talked about that during the first half results, but the withdrawals continued beyond the second quarter, and we have already revalued our assets downwards by the EUR 10 million after-tax impact during the nine months of the year, nine months of 2026. We are taking conservative approach. We expect that additional impairments will not be needed to take place. We can't control the pace of withdrawals. Let's see how it round up because the pension reform is taking place throughout 2027. The second pillar is that we are taking more cautious approach to the credit risk. Very important to emphasize that the underlying loan portfolio performance is good and it's in line with our expectations. By taking conservative approach into the expected credit loss by adjusting the parameters, we already formed EUR 6.3 million of the provisions in the ninth month of this year.
What is important that we already see that during the fourth quarter, additional in the area of EUR 10 million of impairments will be needed additionally to be formed this year. The third pillar is that we need to enhance the risk profile in order to build a stronger bank and investments that are needed are being assessed because it will last not in 2026, but beyond this year. The first step, what already we have started to do, is to bring the core competencies back into the organization. By saying that, it means that we need to get a strong leadership team within the organization. We're strengthening our senior leadership, and it takes place across both our control functions and the team responsible for the business and people management.
Highly experienced professionals joined Artea recently in the fields of data, risk management, supervisory relationships, marketing, people management, or capital markets. To wrap up executive summary part, let me repeat that our core business continues to grow. Underlying earnings power remains solid. At the same time, we are taking cautious approach, and we are strengthening the foundations of the bank. I'm handing over to continue presentation for Indrė, because macroeconomic developments also impacts our performance.
Thank you, Tomas. Good morning, everyone. Let's delve without any further hesitation to macroeconomic trends and outlook. It's nice to start the overview with the recent and developing success story of Lithuanian economy, because as you can see from the left-hand side diagram, Lithuanian GDP index has been outpacing the other peers within the Baltic region. Our economy in the first half of this year expanded by 3.3% real terms growth, and stood at the fifth place in the context of the EU. The growth is strong not only because it's broad-based. The growth drivers are not only external but also internal. This year, Lithuanian economy is driven by several one-off factors.
One of them is stronger EU structural fund injections, also expansive fiscal policies, and finally, last but not least, second pillar pension reform, liquidity influx into the market, which fueled consumption and also formed the anti-inflationary shield for households. Looking to the economic sentiment indicator, the expectations of Lithuanian economic agents remain relatively positive. However, we should admit that external environment remains tense and there are geopolitical tensions and energy crisis developments, which elevate uncertainty, and we need to keep that in mind. Another burning topic on the macro scene is inflationary developments. We can see that inflation curve is bending up, and at the moment, Lithuania registers 6.1% flash annual inflation estimate for October. With this reading, Lithuania ranks among the first and worst performers in the European Union, and that is not only because the external drivers energy crisis are currently narrow based in the inflation structure.
However, Lithuania has its chronic inflationary pressures within the economy. We have elevated services inflation persisting, and that will continue further. So inflation is higher. However, from the middle graph, you can see that consumption is resilient because the proxy for consumption development this year, Lithuanian real estate or real trade turnovers in real terms are expanding and goes hand in hand with the real trade turnover developments in the nominal terms. That means that the consumption in real terms is still growing and growing pretty rapidly. Moreover, the second pension pillar reform influx into the market is not only used for consumption needs, but also stays at deposits, and that also cushions households against the energy shock, increasing energy-related prices and feeding into broader inflation risks. Now let's move forward. Yes, please. Let's now move forward to the credit market dynamics.
You can see that Lithuanian banking credit portfolio has been increasing in double-digit pace, and it is one of the fastest growth recorded in the Euro area. That also measures the upturn of the business cycle in the economy this year and the housing credit portfolio developments coincides, goes hand in hand with the dynamic and tense residential real estate market. The number of residential real estate transactions is higher this year. It registers the second highest number in the recent decade, paling, I guess, only comparing to the situation seen in 2021 when we had this post-COVID residential real estate boom. The situation is tense, and that is reflected by the dynamics of residential real estate prices, which has been mounting in double digits and outpacing wage growth, the growth of earnings of households. And that already harms housing affordability in Lithuania.
The situation is not sustainable, and there could be found signs of heating in this market. However, looking to the interest rates dynamics at the moment and also to the market sentiment ahead, we see that increasing interest rates, persisting geopolitical uncertainty, and inflationary pressures might come and cool down the market tensions. Finally, let's look at the outlook. Here are the short-term macroeconomic forecasts for the next year. Lithuanian economy will sustain growth. However, it will be slightly slower. In 2027, we expect economic development to slow to 2.3% in real terms, and that will be the result of negative base effects after the year of expansion, fueled by one of earlier mentioned factors. Inflation will also cool down next year. However, the balance of risks remains still tilted to the upside given the uncertainties related to the Persian Gulf conflict and persisting energy crisis.
Labor market still remains resilient and is expected to remain so with the sound unemployment rates and still relatively high pace of earnings growth outpacing inflation and supporting households' purchasing power. That's it from me. Thanks, and giving the relay to Tautvydas.
Thank you, Indrė. We'll now switch to the Q3 2026 financial results overview. I wanted to start with a big picture overview. First of all, we had a good quarter for our core lending business and deposit collection as we continue to expand our balance sheet. Core lending increased, and our total loan book crossed the EUR 4 billion mark for the first time ever. Deposits increased by 7% quarter-over-quarter and by 16% year-over-year. Today, we're the bank with a balance sheet of EUR 6.5 billion in total assets, and this is the statistic we're particularly proud about. Second, total revenue was essentially flat at EUR 48 million. Yes, net interest income increased significantly by 12%, but that was offset by softer fees and other revenue. Thirdly, and I want to be direct and candid here, our operating expenses increased materially and predominantly this is by choice.
We are investing into the business, we investing into people, into IT, into risk management as we want to be more effective in competition today, and we want to win over long-term. We're building up here for the next chapter, and that requires investing and spending money today. Next, in terms of impairments and provisions, they remained at elevated levels this quarter as we decided to take a little bit more conservative stance at ever-changing world and increasing uncertainty around us. All in all, the net profit was EUR 4.7 million for the quarter. Adjusted for non-recurring one-off items, adjusted net profit was EUR 11 million, with ROE standing at 7.4%. So the key takeaway is that the franchise is growing, the short-term profitability is being impacted by the investments we're making, but the underlying earnings power remains very solid. Let's switch to the loan book.
Already mentioned that the loan book crossed the historic EUR 4 billion mark for the first time ever. We grew the book by healthy and sustainable rate of 2% over last quarter. Mortgages led the way, adding EUR 37 million in net new lending. We're seeing a strong demand for fixed rate mortgage product as well as for 10% down payment product from the first-time buyers and young families in Lithuania. Corporate banking had also a good quarter and added EUR 30 million in net new lending.
We're seeing a strong demand across all sectors, but particularly from manufacturing and CRE in the country. Looking ahead, we think that corporate banking will have a good quarter and will end up the year very strongly. In terms of pricing, the loan yield increased and expanded to 6%, and that was predominantly driven by rising EURIBOR rate and our proactive management of consumer financing book.
The punchline is that the book is growing and it is growing profitably. Switching to net interest income. Net interest income is the largest revenue item for our business and it had a good quarter. It increased to EUR 41 million. That is expansion of 12% quarter-over-quarter. That was mainly driven by increasing asset yields, which added EUR 5 million and expanding balance sheet, which added EUR 0.7 million. Together, those two more than offset slightly higher funding costs. NIM expanded to 2.8%, one of the highest rates in recent history. Looking ahead, we believe that it will continue rising. You should expect another slight pickup in Q4. NIM is doing fine. Now let us switch to net fees and commissions. Net fees and commissions, Q3, it had a softer quarter compared to the previous quarter.
But if we look in aggregate for the first nine months of 2026, it was a stronger period compared to the same period in 2025. Digital banking is finally gaining traction. We are investing aggressively into direct marketing and customer acquisition. We are improving our value proposition for transactional banking and savings products, and it is yielding results. We see NFCIs growing, and we see more and more people and families in Lithuania choosing Artea as the primary banking relationship. Asset management business is being impacted by ongoing Pillar II reform. AUM in Pillar II is decreasing. However, AUM in our other product, Pillar III product, is increasing and that is important because it is a higher margin business. The combination of this changing business mix effectively gives us revenues which are intact. Our DCM business is seasonally slow.
We think it is temporarily and we think with the new leadership in place, we will start winning again in this business. We feel good about the prospects. That is it on the top line. I will hand it over to my colleague, Paulius, to continue the presentation.
Good morning, everyone, and thank you personally for joining us. Let us turn to our operating expenses and look where we invest this quarter. Firstly, I will give you a few seconds to look at the operating expenses development chart on the right side, and especially look into the bridge between the previous year's quarter and this year. As you can see from the previous year, EUR 28 million to this year, EUR 34 million. It is a pretty significant increase, but let us take a look more deeply into first column, salaries.
Much of this increase comes from a deliberate management reset in capabilities needed to develop the bank. During that quarter, we recognized around EUR 1.3 million of severance payments and extra EUR 0.9 million in vacation accruals. Important to say that these EUR 2.2 million are non-recurring and they are not going to be included in our ongoing cost base.
Our stronger management team, an additional around 30 employees, added senior expertise, but also raised our recurring quarterly salary run rate, which increased around EUR 500,000 . We see this as a necessary investment in our ability to deliver, especially in a few areas, risk management, data, IT, and other control functions. Let's look to the second column about IT expenses. This quarter, it raised up around EUR 1.1 million. Spending on the core banking system changing program in the first half was lower and more catch up in this quarter, and we recognize expenses in Q3. Nevertheless, our current operating expenses without salaries budget will be on the line and our actual expenses in 2026 will be on the line which is planned in our budget. Overall, this quarter reflect both cost of a management reset and planned investment in operating foundation.
These investment are intended to support better execution, stronger risk management and more profitable future growth. Let's move to the loan portfolio quality. As you can see in the chart in the right top corner, we recognize this quarter around EUR 6 million impairment, and this brings our trailing annual cost of risk to 18 basis points. Nevertheless, it's very important to mention that credit quality across all our loan portfolio remains strong. This quarter impairment was led mainly by provision for new lending, higher specific provision based on assessment of individual non-performing exposure and more conservative loss given default model adjustments. The increase in provision in this quarter should be seen as conservative review of assumptions for specific exposures rather than sign of weakening across the whole loan portfolio. From what we know today, we see no evidence of widespread weakening in the loan portfolio.
We expect main indicators, which is late stage NPL, gross stage two ratio and gross stage three ratio will stay same in the near future. With this, let's move to our funding. As you can see, our funding position strengthened significantly in the third quarter. When we're looking to the total funding portfolio development chart in the bottom, you can see that from the previous quarter, which have EUR 6.2 billion, until this quarter, almost EUR 6.5 billion, which increased around EUR 270 million. The 4% term deposit campaign was deliberate investment in attracting clients and building funding for future loans for portfolio growth. The campaign significantly support first column term deposit increase, which increased EUR 230 million. The demand deposit also raised, as you can see, EUR 62 million. Together, term and demand deposits grew nearly EUR 300 million.
The small movement in the other categories, the overall, as mentioned before, reached around EUR 270 million increase in this quarter. Now let's look to the deposit portfolio structure chart in the left bottom corner, year-over-year this is chart. Our continued focus on cultivating strong long-term client relationship also helped the demand deposits grow year-over-year. As a result, you can see that from the same quarter previous year to this quarter, our structure changes from 51% to 55% on-demand deposits. Now let's take a closer look how our cost of funding changed in this quarter in the top right corner. Of course, as expected, the campaign also raises funding cost. The cost of the deposit raised from 1.41% to 1.45%, which is 4 basis points increase. Overall, our cost of funding increased slightly from 2.12% to 2.15%, which is 3 basis points.
Looking ahead, we are continuing this term deposit campaign after third quarter, but with the extra requirements for participant. We believe that these extra requirements give us more control over client acquisition cost and overall funding cost. The campaign has strengthened our funding base for upcoming periods and give us more capacity for planned loan growth. Let's now look into our capital ratio. Our capital position, this is important statement that our capital position remain very strong and provide a solid foundation for future growth. Let's look to the right chart more closely. As you can see, in the first quarter, we have CET1 ratio just under 17%, and our Tier 1 ratio was slightly below 18.5%. Our total capital ratio was around 21%. This ratio, comparing to the previous quarter, all three are slightly 50 basis points lower, but our capital headroom remain comfortable.
With the quarter ratio, we have a surplus over 3% in CET1 comparing to our risk appetite statement, and the next Tier 1 and total capital ratio have around 2.5% surplus comparing to the risk appetite level. Let's now take a closer look to our risk-weighted asset chart in the left bottom corner. In this quarter, our risk-weighted asset increased just around EUR 30 million. We continue to grow our portfolio growth mainly by two things, corporate loan and mortgage, while improving our asset yield, as you can see and as presented also to this before. Our RWA density fell from 50.6% to 48.7%, which show that overall financial position remain well-balanced. Also, as you can see, it's worth mentioning that we received European Central Bank approval to buy back bank-owned share over upcoming one-year period. This give us more flexibility to allocate capital and return it to our shareholders.
Also, in the Q was mentioned that the Bank of Lithuania has announced to increase our countercyclical capital buffer rate or 0.25% from 1% to 1.25%, and this will be applicable from 2027 August. Nevertheless, this additional increase have no impact to our capital position and the management no need to take any action due to that. Overall, we have enough capital to support growth, absorb coming regulatory change, and keep flexibility for shareholders' distribution. This conclude review on the overall capital position and our performance in the third quarter. I will now hand over to Tomas, who will take you through our future outlook.
Thank you, Paulius. Let me close our webinar with the updated guidance for this year. Following the transition of the management and reset of the priorities, we are moving into the two directions. In terms of growth, loan book will continue the healthy growth and in line with initial guidance in the area of 11%-12%. Deposit portfolio growth will exceed initial levels significantly and will enhance our balance sheet for the future loan book growth. The second direction is investment in risk management, so additional impairments will be formed in the fourth quarter, and the amount is in the area of EUR 10 million. That will have negative impact on our profitability for this year, so we need to revise the guidance downwards. Again, to emphasize that the underlying loan portfolio performance is good. It's in line of our expectations.
However, impairments should be formed taking a more cautious approach and to build a stronger bank for the future. Thank you, and we can turn to the Q&A session.
Thank you, Tomas. This concludes our prepared remarks, and we will switch to the Q&A session. The first question is from Silver about EUR 8.1 million impairment charge. Was it a clean charge, or does it include any pension-related impairments? I will ask Paulius to take this question.
Thank you for the question. It includes second pillar impairment as mentioned before by Tomas. We have EUR 2.1 million around the Pillar II impairment, and the other part is our impairment in the loan portfolio. This EUR 8.1 million is not just loan portfolio.
Great. Thank you. The next two questions come from Enlight Research. Good morning, Mattias. The question is about loan book growth. You raised the guidance from 11% to 12%. It has been around 8% for the first nine months of 2026. What is behind this pickup in the growth rate from 8% to 12%? I am happy to start, then maybe Tomas can chime in on that. Mattias, first of all, we are seeing a strong demand across different products in the country. Both corporate loan book is doing well. There is strong demand for mortgages. Consumer credit is doing well. We are seeing a good demand, and the pricing is good. Most of our products are on the variable rates, so rates picked up, so we can extract the high yield.
On the other hand, we have good capital and good liquidity position, which allows us to fulfill that demand. It is just a combination of strong demand in the country and us being able to serve the customers. The next question is about ECB approval of Tesonet's application to become a major shareholder in our bank. What is the latest situation there, and when can we expect to hear more?
I can take that question. That is out of the bank's control. You know what was announced publicly. The target period is the first quarter of next year. That is what the expectations are also within the bank.
Great. Thank you. The next two questions come from Artea. Good morning, Tomas. The question again is about impairments. With the sizable impairments booked Q3 and another EUR 10 million expected for Q4, should we view this as one-off provisioning reset, or is this a structurally higher cost of risk going forward for your business? Paulius, do you want to take that question?
Yeah, I can take that question. As I mentioned before when presenting loan portfolio quality slide, we are taking a more conservative approach in the loss given default model, and this led basically to our EUR 6 million impairment in this quarter. For the upcoming quarter, we see uncertainty in the macroeconomic environment, and we are likely to have impairment. This will not be ongoing for the next year, we believe, and this will be more like one-off impairment for the upcoming quarter.
Thank you. The next question is about NIM guidance. With higher interest rates providing for the tailwind, how much additional NIM expansion do you expect in Q4 in 2027? What does this imply? For Q4, Tomas already mentioned that we expect another pickup in NIM. It may not be as high as in this quarter because our cost of funding is also increasing, but it will definitely edge up. For 2027, we will give a more detailed guidance with Q4 results. The next question comes from Janis. It is about share buyback program. When do you expect to relaunch the share buyback program?
Thank you, Janis, for the question. Yes, so permission to buyback own shares is in place. Management evaluating the timing. Was the permission built for the 12th month? So we are evaluating the timing and form of the buyback. So either it will be in the open market or the tender offer will be announced. So work is in progress, and we have flexibility time-wise in order to execute it.
Thank you, Tomas. At this stage, I do not see any further questions, so thank you all for joining us today. As always, if you have additional questions, please feel free to reach out our investor relations team. We will get back to you promptly. Thank you and goodbye.