Second quarter 2022 (2Q22) financial highlights – sound operations deliver strong performance and above-target ROE

• Íslandsbanki reported a profit of ISK 5.9bn in the second quarter (2Q21: ISK 5.4bn), generating an annualised return on equity (ROE) of 11.7% (2Q21: 11.6%), which is above both the Bank’s financial targets and market consensus. The main drivers were strong income generation, good cost control and a positive net impairment.
• Net interest income (NII) grew by 21.8% YoY and totalled ISK 10.3bn in 2Q22, compared to ISK 8.4bn in 2Q21, owing mainly to higher interest rate environment and growth in loans to customers and deposits from customers. The net interest margin was 2.9% in 2Q22, compared to 2.4% in 2Q21.
• Net fee and commission income (NFCI) grew 18.1% YoY and amounted to ISK 3.4bn in 2Q22, compared to ISK 2.9bn in 2Q21. Fee income from cards and payment processing, investment banking and brokerage and from loans and guarantees are primary drivers of the increase.
• The Bank focuses on core banking operations, with NII and NFCI accounting for around 98% of total operating income in 2Q22, compared to 93% in 2Q21. These two items combined grew 20.9% from 2Q21 to 2Q22.
• Net financial income was ISK 208m in 2Q22, compared to net financial income of ISK 619m in 2Q21.
• Administrative expenses were ISK 6.0bn in 2Q22 compared to ISK 6.5bn in 2Q21, a decline of 7.6% YoY. Excluding ISK 588m one-off cost in 2Q21, administrative expenses rose by 1.6% but declined by 5.9% in real terms.
• The cost-to-income ratio was 42.7% in 2Q22, below the Bank’s target, down from 49.9% in 2Q21, due to strong revenue generation and cost reduction efforts.
• The positive ISK 575m net impairment on financial assets in 2Q22 is mainly due to a result of a court ruling regarding a fully impaired loan coupled with a brighter outlook for the tourism industry. This is compared to a positive impairment of ISK 1,140m in 2Q21. The net impairment charge as a share of loans to customers, the annualised cost of risk, was -20bp in 2Q22, compared to -42bp in 2Q21.
• Loans to customers rose by ISK 45.8bn, or by 4.1%, during the quarter, to ISK 1,154bn, where lending in all business areas contributed.
• Deposits from customers decreased by ISK 4.6bn, or 0.6%, during the quarter, down to ISK 757bn.
• 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 203.7bn at the end of June 2022. The corresponding capital base, that includes the AT1 and Tier2 issues, was reduced from ISK 228bn to ISK 213bn as a result of an authorised ISK 15bn buyback of own shares. The Bank’s total capital ratio was 21.5%, compared to 25.3% at YE21. The corresponding CET1 ratio was 18.2%, down from 21.3% at YE21. This is considerably above the long-term CET1 target of ~16.5%. Lower capital ratios are mostly the result of an increase in the risk exposure amount (REA).
• The Bank estimates that long-term excess CET1 capital equals approximately ISK 30-35bn. Reduction in excess capital is due to strong and profitable loan growth in 2Q22. The Bank assumes that CET1 capital will be optimised before year-end 2023.
• The leverage ratio was 12.5% at the end of June, compared to 13.6% at YE21, indicating low leverage.

First half 2022 (1H22) financial highlights – ROE above target driven by rise in revenue

• The Bank’s net profit for the first half of year 2022 was ISK 11.1bn (1H21: ISK 9.0bn) with annualised return on equity for 1H22 of 10.9% compared to 9.7% in 1H21.
• Net interest income totalled ISK 19.5bn in 1H22, an increase of 17.2% YoY, explained by growth in loans to customers and a higher interest rate environment.
• Net fee and commission income (NFCI) grew 12.6% YoY and amounted to ISK 6.5bn in 1H22, compared to ISK 5.8bn in 1H21. Fee income from cards and payment processing together with investment banking and brokerage are primary drivers of the increase.
• Net financial income was ISK 113m in 1H22 compared to income of ISK 912m for 1H21.
• Administrative expenses were ISK 11.8bn in 1H22 compared to ISK 12.3bn in 1H21, a decline of 4.2% YoY. Excluding ISK 588m one-off cost in 1H21, administrative expenses rose by 1.6% but declined by 5.9% in real terms.
• Cost-to-income ratio dropped YoY from 50.6% in 1H21 to 45.0% in 1H22.
• Net impairment on financial assets was a positive ISK 1,058m in the first half of 2022 (1H21: ISK 622m), due to brighter outlook for the tourism industry and a favourable court ruling regarding a fully impaired loan.

Revised 2022 Guidance

• In light of the good financial results and prospects for the remainder of the year, the 2022 financial guidance for ROE is now revised upwards to over 10% from the previous 8-10%. Also, the guidance for the cost-to-income ratio is now revised to 44-47% from the previous 45-50%.