Third quarter 2022 (3Q22) financial highlights – strong quarter with ROE above target

• Íslandsbanki reported a profit of ISK 7.5bn in the third quarter (3Q21: ISK 7.6bn), generating an annualised return on equity (ROE) of 14.4% (3Q21: 15.7%), which is above both the Bank’s financial targets and market consensus. The main drivers were strong income generation and a positive net impairment.
• Net interest income (NII) grew by 28.7% YoY and totalled ISK 11.3bn in 3Q22, compared to ISK 8.8bn in 3Q21, owing mainly to higher interest rate environment and growth in loans to customers and deposits from customers in recent quarters. The net interest margin was 3.0% in 3Q22, compared to 2.4% in 3Q21.
• Net fee and commission income (NFCI) grew 2.6% YoY and amounted to ISK 3.5bn in 3Q22, compared to ISK 3.4bn in 3Q21. Fee income from cards and payment processing is the primary driver of the increase.
• The Bank focuses on core banking operations, with NII and NFCI accounting for 102% of total operating income in 3Q22, compared to 92% in 3Q21. These two items combined grew 21.4% from 3Q21 to 3Q22.
• Net financial expense was ISK 471m in 3Q22, compared to net financial income of ISK 941m in 3Q21, due to a loss in other NFI which is largely due to movements in ISK base rate curves.
• Administrative expenses were ISK 5.3bn in 3Q22 compared to ISK 5.1bn in 3Q21, an increase of 3.6% YoY and a decrease of 5.5% in real terms.
• The cost-to-income ratio was 36.3% in 3Q22, below the Bank’s financial target, down from 39.4% in 3Q21, due to strong revenue generation.
• The positive ISK 1,165m net impairment on financial assets in 3Q22 is due to a more positive outlook for the tourism industry, updated real estate valuation and previously distressed credit case, but partly offset by the impact of expected inflation. This is compared to a positive impairment of ISK 1,757m in 3Q21. The net impairment charge as a share of loans to customers, the annualised cost of risk, was -40bp in 3Q22, compared to -64bp in 3Q21.
• Loans to customers remained the same from the end of 2Q22 at ISK 1,153bn.
• Deposits from customers increased by ISK 24.8bn, or 3.3%, during the quarter, up to ISK 782bn. The increase did primarily come from Business Banking and Personal Banking.
• The liquidity position of the Bank remains robust with all liquidity ratios well above both internal targets and regulatory requirements.
• Total equity amounted to ISK 211.6bn at the end of September 2022. The capital base was unchanged from the end of June, at ISK 213bn (ISK 228bn at year-end 2021). The Bank’s total capital ratio was 21.4%, compared to 21.5% at the end of June (25.3% at YE21). The corresponding CET1 ratio was 18.2% (300bp above requirement), same as end of June (21.3% at YE21). This is considerably above the Bank´s long-term CET1 target of ~16.5%. The ratios are determined on the basis of the unaudited net earnings in the quarter, with a deduction of 50% of net earnings as foreseeable dividends in line with the Bank’s dividend policy and foreseeable buybacks of ISK 15 billion. Lower total capital ratio is mostly the result of an increase in the risk exposure amount (REA) due to increase in loans to credit institutions during the third quarter.
• The Bank’s MREL requirement is 21.2% of the total risk exposure amount (TREA), the Bank’s ratio was 27.6% at the end of September.
• The leverage ratio was 11.9% at the end of September, including the 3Q22 profit, compared to 12.5% at the end of June (13.6% at YE21), indicating low leverage.

First nine months 2022 (9M22) financial highlights – ROE above target as revenue continues to rise

• The Bank’s net profit for the first nine months of 2022 was ISK 18.6bn (9M21: ISK 16.6bn) with annualised return on equity for 9M22 of 12.1% compared to 11.7% in 9M21.
• Net interest income totalled ISK 30.8bn in 9M22, an increase of 21.2% YoY, explained by growth in loans to customers and deposits from customers and a higher interest rate environment.
• Net fee and commission income (NFCI) grew 8.9% YoY and amounted to ISK 10.0bn in 9M22, compared to ISK 9.2bn in 9M21. Fee income from cards and payment processing, strong performance in Allianz Ísland hf. together with investment banking and brokerage are primary drivers of the increase.
• Net financial expense was ISK 358m in 9M22 compared to income of ISK 1,853m for 9M21.
• Administrative expenses were ISK 17.1bn in 9M22 compared to ISK 17.4bn in 9M21, a decline of 1.9% YoY or by 5.5% in real terms.
• Cost-to-income ratio dropped YoY from 46.6% in 9M21 to 41.9% in 9M22.
• Net impairment on financial assets was positive and amounted to ISK 2,223m in the first nine months of 2022 (9M21: ISK 2,379m), mainly due to a more positive outlook for the tourism industry along with result of a court ruling regarding a fully impaired loan and outweighing the negative impact from increased inflation and international economic volatility. The net impairment charge as a share of loans to customers, the annualised cost of risk, was -26bp in 9M22, compared to -30bp in 9M21.

Revised 2022 guidance

• Considering the good financial results during the year and prospects for the remainder of the year, the 2022 guidance for ROE is now revised upwards to 11-13% from the previous over 10%. Also, the 2022 guidance for the cost-to-income ratio is now revised to 41-44% from the previous 44-47%.