Jón Ómarsson: In the Q3, the main driver was high net interest income, partly driven by strong inflation ticks in the quarter, which will be much less in the Q4, as Ellert will take you more through later in the presentation. Costs are relatively low seasonally in the Q3, but we are seeing quite a big growth there year-on-year due to various factors, partly due to that we are expensing quite a big part of the bonus system, the underlying bonus system in the quarter and along the year, basically. So we have expensed quite a big part of it already, having gone through just nine months of the year. Some other underlying factors, we are seeing a bit of an uptick in impairments due to a bit of a slowdown in the economy, and especially in the construction sector.
Jón Ómarsson: Overall, very good ROE for the quarter of 13.6%. The cost income is below, obviously, our targets and at a very low number in the Q3. Again, that is due to the seasonality where we are seeing less costs in the Q3 due to summer holidays. The capital remains well above both our targets and actually our expectations. We have seen a bit slower growth in international lending than we had planned for this year, and therefore we expect that at the end of the year, we will have a considerable excess equity and an opportunity into next year for either stronger growth or more distributions. In terms of our targets and guidance, we confirm our guidance of 12.5%.
Jón Ómarsson: Even though for the first 9 months, we are well over 13%, we are still guiding, saying about 12.5%, and that is mainly due to the low inflation tick that we are expecting in Q4, and therefore weaker results in that quarter due to that. The cost income ratio, still expecting around 41% to 43% due to the same reason. Like I mentioned, we expect to see excess capital in around 300 basis points at the end of the quarter, and then we are not taking in the ISK 10 billion that we have already subtracted from capital due to planned buybacks. In terms of the economy, we are seeing slow growth in Iceland this year, but it is quite different between different sectors. The seafood industry is doing very well, enjoying very high prices for their products.
Jón Ómarsson: Tourism was good this summer, but relatively flat year-on-year. The construction sector, however, is slowing down quite markedly, and we are seeing a pickup of unemployment, somewhere between 5% and 6% based on different measures, but up to about 10% for immigrants. Immigrants in Iceland mostly work in tourism, where we have seen quite stable employment, but more unemployment, especially in the construction sector. The sale of new apartments have slowed down markedly, and we are seeing some signs of that in our loan book. Most of our borrowers there, however, are extremely well capitalized and can get through a slow period where you have slow sales over a couple of years. Overall, our LTVs in the sector are quite low, so our risk of losses, we would say, is limited. We obviously hope this sector will pick up in the next few quarters.
Jón Ómarsson: I would like to mention there, the Central Bank of Iceland is obviously keeping rates in Iceland quite high, at around 8%. This is obviously much higher than the neighboring countries, and this is obviously to try to push down both expenditures and the capital or investment levels here. At the same time, we are seeing extremely strong investments, both in land-based salmon farming and data centers. Those investments are mostly financed from abroad with foreign currencies or in different currencies than the Icelandic krona. The interest rate level here in Iceland has very limited impact on these investments. That means that we are seeing strong investment and strong investment levels from those sectors, and that means the Central Bank of Iceland has to keep rates quite high to push down then even further investments in other sectors in the country.
Jón Ómarsson: That obviously has an impact, for example, on SMEs, where some of them might see interest rates of around 12% when looking at new investments. That definitely has an impact there. In terms of the exports, we are expecting exports to pick up volume-wise next year. As I said, in general, we are experiencing very favorable pricing, especially the seafood sector. Inflation is expecting now to start coming down. The underlying factors that have been pushing up inflation are now hopefully coming down. In terms of the general wage agreements now in Iceland that have been extended, many companies in Iceland have promised to keep price increases at around 2.5% to help fight against inflation. As a result of this, we are expecting to start seeing rate cuts next year, hopefully in the spring, or Q2 at the latest.
Jón Ómarsson: Moving ahead, we continue to invest on the digital front and making very good progress there. Mentioning a couple of points here, on the bottom left, we have now introduced the Vanguard funds into our app, so our customers can now very easily distribute their investments and buy into the Vanguard funds, which are obviously extremely good in terms of diversification and low cost as well. We have our loyalty services that is being expanded to senior citizens, and we are now coming with the AI into our app, giving much more flexibility for our customers to ask questions about their own finances. Moving to personal banking, strong momentum there. We are seeing good growth in mortgages and the overall market share at 31.5%.
Jón Ómarsson: We are also seeing a good pickup in customer satisfaction and the NPS, and we are seeing really the benefit there of our new loyalty scheme, where we have already about 68,000 customers. Through that, a lot of new products. This scheme really encourages our customers to have as many products as possible with the bank, so we are really seeing that working. In terms of business banking, we continue to have a very strong and good market share there. We measure that quite regularly throughout the year and based on basically surveys, and we see that we are still at around 37% in terms of the country as a whole, but around 40% here in the capital area. We continue to enjoy the highest NPS amongst the domestic banks.
Jón Ómarsson: As you can see in the middle here, we have been adding clients across the country, and at the same time, pushing out our acquiring services in cooperation with Nets, and seeing a very good pickup there, and a nice pickup in our market share in that market. Ergo has had a very strong year with a 12% growth in their loan book, and that is partly due to a new product financing older cars, but overall also good market share in car rentals. In terms of corporate investment banking, the capital markets obviously have been extremely slow here in Iceland and heavy, you could say, with the overall turnover in the market down by around 33%.
Jón Ómarsson: At the same time, however, we have enjoyed the highest market share, both in equities and bonds. Also we have been extremely active in terms of issuing bonds in the primary market, both for the bank and also for our customers, and that equates to about ISK 75 billion the first nine months of the year. We have also seen good growth in asset management, about 10% this year, and that is obviously on the back of that, well, partly due to the high interest rates, so some of our customers enjoying rates ticking into the deposits. Also, we are seeing wealth in Iceland in general coming up, generation shifts, where families are selling corporates and investing, so we expect to see that trend continuing over the next two years. International lending amounted to ISK 18 billion in the first nine months of the year.
Jón Ómarsson: A bit slower growth than we had expected, so we are seeing basically due to the environment internationally higher rates, that there is a bit slower pickup in terms of syndicated loans. Like I said, we expect to have, therefore, be overcapitalized at the end of the year, and we will use some of that capitalization to continue our growth into next year internationally.
Jón Ómarsson: In terms of the society, just to mention a couple of things here, Reykjavíkurmaraþon Íslandsbanka was a very strong success, with 170 charities receiving ISK 307 million. We had an event here to celebrate that two weeks ago, handing over these funds to the charities. We support the run by basically having all the framework around it, so all the donations go directly to the charities, and that is obviously one of the best days of the year, I could say, when the charities actually receive the funds.
Jón Ómarsson: In terms of our entrepreneurs fund, that is a fund that we awarded about ISK 70 million now this year, and it was quite interesting to see that we had a 54% increase in applicants. We actually widened a bit the rules in terms of applications, but nonetheless, we are seeing a strong pickup of interest there, and more people obviously coming up with hopefully great ideas for further buildup in the economy. Also, just to mention that we are quite active in financial education, and for example, our most popular events are around financial planning for retirement, and we always have basically extremely good participation in those events. A bit on, in terms of our shareholders, over the past 12 months, we have seen a good increase in our share price, but relatively flat throughout this year, due to obviously relatively soft markets here domestically.
Jón Ómarsson: Our shareholder groups remains quite stable, with pension funds around 43% and the private individuals 27%. So you could say that about 70% of the bank is owned by the Icelandic public. Foreign owners a bit down to 9%, but otherwise a very, very stable shareholder group. Now I turn over to you, Ellis, in terms of the financials.
Ellert Hlöðversson: Thank you, Jón Guðni. As Jón Guðni said, we turned a profit of 13.6% or a return on equity of 13.6% over the quarter, bringing the return on equity for the first nine months up to 13.4%. The profit in total was close to ISK 7.3 billion, and it is similar story as in historical quarters or the last few quarters, where we have seen growth in net interest income. But at the same time, all the revenue lines have been subdued due to market conditions. Moving into the interest, we turned a net interest margin of 3.5% on the back of inflationary ticks of 1.5% compared to 3.1% in 3Q25, with less inflation coming through the book as well last year.
Ellert Hlöðversson: As we have stated before, we expect net interest margin and net interest income to be seasonal, related to the seasonality of the inflation. We expect inflation to come down in Q4 or ticks to come down to a level of 45 bps compared to the level of 150 bps over this quarter. Overall, we saw ISK 15.8 billion in net interest income throughout the quarter itself. Looking at fees, net fee and commission income continues to be subdued. Net fee and commission income was in total ISK 3.3 billion, comparable to the previous quarter and also comparable to the previous year. The composition of fees remains similar as it has been, driven by the fact that capital markets have been declining. We have seen both decline year on year as well as quarter on quarter. The bank notes that we have a very strong market position.
Ellert Hlöðversson: We are number 1 in turnover in both equities and bonds. Pipeline in corporate finance and other parts of the investment banking services are strong. We have seen growth in number of customers in the asset management side of things, and made some structural changes as well within Íslandsbanki, which are going to benefit us when capital markets regain their momentum. We expect momentum, of course, to regain once we see more decline in inflation, on back of which we expect the interest rate levels to come down. Looking at other parts of the income statement or the revenue line, the bank turned a loss of ISK 223 million on the net financial income, mostly related to adverse market conditions.
Ellert Hlöðversson: As before, market risk is a very small part of the bank's balance sheet, in total of around ISK 5.9 billion, of which the unlisted equity holdings to a large degree include strategic assets related to the bank's own operations. When it comes to costs, the cost-to-income ratio was 38.4% in the quarter, bringing the first 9 months to a level of 39.9%. We saw growth in salaries year on year for Q3 amounting to 9.5%, which is solely explained by the introduction of the variable incentive scheme coming into or being expensed over the course of this year, while not over the course of last year.
Ellert Hlöðversson: In our Q1 earnings call, we stated that we were, I would say, on the back of structural changes, reducing the FTE base by around 7%, bringing the total number of FTEs down to around 675 for the parent company towards the end of 2026. The bank reconfirms its ambitions to those plans. We expect cost to income to come up in the fourth quarter on the back of lower revenue lines. We also note that the third quarter is seasonally lower given the fact that much of our employees are taking their summer holidays, and that impacts salaries as well as overall corporate activity. Shifting to the balance sheet, the composition remains similar, liquid assets around 18% and the loan book around 79%, meaning that the balance sheet is very simple, containing very little market risks.
Ellert Hlöðversson: Moving on to the loan portfolio itself, it closed off at 1,431 billion, growing 1.1% over the quarter or 4.7% over the first nine months. The composition, as seen on the top right-hand side, remains similar as in previous quarters, around 44% in residential mortgages, additional 5 percentage points to other individual lending, and the rest reflecting the Iceland economy quite nicely. By large, the book is covered by collateral, around 93%, where LTVs remain low, as you can see on the bottom left-hand side, around 52% across all types of securities. In our previous earnings call in Q2, we stated that around 5% of the loan book was from customers or international parties, basically, I would say, reporting on our efforts to grow the international loan book, and we remain about the same percentage point.
Ellert Hlöðversson: We have seen slowdown in the international markets based on capital markets conditions internationally, so we are now, as Jón Guðni stated in his opening comments, retaining a bit of equity to support that growth and other growth into next year. But we will get to that in more details on the capital slide later on. Asset quality is high. NPLs closed off at 2.4%, coming down a bit from the previous quarter. During the quarter, impairment charges were around ISK 1 billion, around half of that related to borrower-specific circumstances, and the remaining part to various other factors. Cost of risk in the quarter on an annualized basis is 29 bps, bringing the first nine months up to 25 bps, towards the higher end of our through-the-cycle guidance.
Ellert Hlöðversson: Of course, we are seeing high interest rate, we are seeing high inflation, so we expect impairments to be towards the higher end of it, or even potentially above it, compared to what we have seen in the previous years themselves. When looking at the mortgage book, the picture remains the same. NPLs remain super low at 1%, comparable to previous quarters, and we have seen growth in the book where it closed off at ISK 633 billion. Composition between CPI-linked instruments and nominal instruments remain similar as in previous quarter. LTVs are modest, around 57%. But on the top right-hand side, you will note that for the last few earnings calls, we have shifted or we have placed the focus on the nominal fixed rate imbalance, but are shifting our focus to the CPI fixed rate imbalance.
Ellert Hlöðversson: Over the course of 2027, we expect around ISK 60 billion to be refinanced of currently fixed rate CPI instruments, an additional ISK 30 billion over the course of 2028, which are considerably below market rates. On average, you can assume that the loans being refinanced throughout 2027, or I'll say from the current date throughout 2027, are around 250 bps below the current rates. And the same goes for 2028, where the difference is maybe around 100 bps. So the refinance of the CPI fixed rate imbalance is going to provide the bank going forward with an upside. CRE is a constant topic domestically as internationally, and we have seen slowdown, especially in the residential construction sector. However, the sector remains healthy on our books, and we expect risk of losses to be low.
Ellert Hlöðversson: Towards the bottom right-hand side, you will see the LTVs of the residential real estate construction loan portfolio by a loan splitting amount or by loan splitting approach. As you can see, LTVs are very modest, where by and large, the corporate portfolio is below 70% or even below 60%, to that matter. Over half the exposure in the construction exposure is around half towards residential real estate. So, although we note that the sector has been experiencing slowdown, the portfolio is strong, and we do not foresee any losses as of now. Shifting to the liability side of things. Deposits outpaced loan growth and closed off at around 1,100 million ISK. Position is similar as before. This, of course, means that liquidity is super high, closing off at 179% for all currencies and 133% for ISK.
Ellert Hlöðversson: As I stated before, around 18% of the balance sheet is in liquid assets, which is mark-to-market as in historical quarters. In terms of wholesale funding, the bank is fully MREL funded well into 2027. On the top right-hand side, you can see that there are very little maturities left for the Q4, around 8 billion ISK. Thereof, we see, yeah, into next year, around 90 billion are facing the maturities, but the largest part of that is a euro covered bond of around 300 million EUR outstanding currently, which has its maturity in September, but we assume that we will start refinancing that towards the H1 of next year. As before, we are seeing the emphasis on diversifying maturities across dates, across geographies, across in types of instruments, to make sure that the bank is well-funded and well-diversified when it comes to the wholesale funding.
Ellert Hlöðversson: Capital optimization has remained and still remains a focal point for the operations. We closed the bank off at 18.4% CET1, a bit ahead of our capital target of 17.2%, which includes the midpoint of the management buffer. The total capital ratio was at 21.8%, but we note that both the Tier 2 as well as the AT1 bucket remains not completely filled. Leverage remains super low at 10.9%. We have seen reduction in REA ratio, which is currently at 57.8%, has come down quite a lot since last year, both on the back of CRR III, further adaptation of loan splitting approaches approved by the Central Bank of Iceland to the IPRE exposure, as well as our own product changes aimed to optimize capital usage. Over the first nine months, the bank has distributed 31.5 billion ISK, both through dividends as well as buybacks to its shareholders.
Ellert Hlöðversson: Distribution and/or growth capacity closed off at 22.3%, which includes the 10 billion which we have already deducted from the capital base and put towards buybacks. As of now, the buybacks are underway, but we note that the turnover on the market has remained relatively low, and the buyback program will take, I will say, wait, will be subject to the volumes going through the market itself. To sum up, over the quarter, the bank has emphasized on service enhancement. As Jón Guðni stated, we have introduced various new products in the digital space. We have introduced or expanded our loyalty schemes. The bank remains in a very good position when it comes to market position in SMEs and has introduced new products to that extent.
Ellert Hlöðversson: The same goes for investment banking services, where the market position is leading domestically, paving the way for future growth when capital markets regain their strengths. Overall, we are quite happy with our results of 13.4% for the first 9 months and 13.6% over the course of Q3. We restate that capital optimization remains a focal point through a mixture of distribution as well as growth. With that, we turn the floor to questions.
[Company Representative] (Íslandsbanki): We have received a few written questions. Here are 3 questions from Alexander at Akkur. The first one, "The NPL ratio rose from 1.5% at year-end to 2.4%, attributed to borrower-specific circumstances. How many exposures and which sectors drive this? What coverage and collateral sit behind them, and what cost of risk do you see as normal for 2027?" The second question, "You estimate ISK 22 billion of distribution and growth capacity, partly for international loan growth. How much will go to growth versus distributions? Is there a special dividend or a larger buyback program on the table for 2027?" The third question, "Operating expenses, excluding salaries, rose 18% year on year in Q3 and 11% in the first 9 months. Is any of this one-off or project-related, or should we assume this is the run rate OPEX going forward?
Jón Ómarsson: Very good. I will start with the first one and then hand over to Ellert. In terms of the pickup in Stage 2 loans, this is, basically, it is a few items, so a few different borrowers. You can probably measure it on your single hand. It is, I think, 3 to 5 borrowers that account for most of it. Those are, in general, well collateralized, both obviously with assets, especially real estate. We are not expecting further losses on those borrowings. In general, the industries are doing quite well, so this is not industry-specific, but rather borrower-specific. Part of the reason, obviously, is the higher interest rates here in Iceland. Many of our borrowers can move that into prices towards their customers, but in some cases, it is more difficult. The higher interest rate environment is definitely having an impact there.
Ellert Hlöðversson: Well, when it comes to the capital allocation, as we stated, there are around ISK 22 billion which are available for distributions and/or growth, of which we have placed half towards buybacks and are currently underway with the first ISK 3 billion in the current buyback program. I think we are probably likely to stick to buybacks rather than special dividends for the year 2027. The remaining part of, I will say, of the ISK 22 billion, the ISK 12 billion remaining, that accounts for maybe close to ISK 70 billion of corporate loan growth, something like that, which is around 5% of the additional book. Of course, we are also seeing profitability, I will say, in Q4 into next year as well, which is also providing us with growth opportunities.
Ellert Hlöðversson: There is no decision or fixed line on how we will allocate it or how we will split it, other than we will at least conclude the 10 billion buybacks. But over time, we are also going to use buybacks to right-size the capital going forward. When it comes to OPEX, there is a one-off taking place in Q1 related to depreciation of an intangible asset related to, I will say, a purchase, around 115 million ISK or so, which can be viewed as a one-off. Other than that, we are seeing quite a lot of price increases, especially in the software sector. We are meeting that with, I will say, enhanced scalability and seeing what we can to exchange software or even develop itself where that is profitable. The bank is meeting that with adequate measures.
Jón Ómarsson: Any further written questions?
[Company Representative] (Íslandsbanki): Yes. The next one is from Helgi Frímannsson at Landsbankinn, and he asks, "With aggregated inflationary ticks for 4Q26 expected to be 0.45%, how should we think about the impact on ROE in Q4, and can you maybe give early color on ROE for Q1 2027?
Jón Ómarsson: Well, obviously, we are not providing any guidance into 2027 as of yet in terms of the inflation tick, and that is obviously quite easily measurable, that the lower tick feeds directly into our income. So based on if we look at the results for this quarter and then just change the inflation tick, then the ROE would probably be around 10%, around that level, and therefore we confirm our guidance of 12.5% for the year as a whole, or above 12.5%.
Ellert Hlöðversson: Yeah. If I may add, the current CPI imbalance is close to ISK 230 billion, so adjusting for around 1 percentage point, which is the difference between the ticks in Q3 and the expected one in Q4, that amounts to maybe ISK 2.3 billion or so of net interest income, which is less in Q4 compared to an equity level of ISK 215 billion.
[Company Representative] (Íslandsbanki): The last written question we have received is from Oddur Stefánsson, and he asks, "The year-on-year rise in other operating expenses, is that something you expect to continue into the fourth quarter, or is some of that one-off cost?
Ellert Hlöðversson: Yeah, I think we just reiterate what we said before. Within the first quarter, we saw a one-off expense, but we have seen some increase in especially IT-related expenses.
[Company Representative] (Íslandsbanki): We have no further written questions.
Jón Ómarsson: Okay. Are there any questions on the line?
Operator: As a reminder, if you wish to ask a question, please press pound key 5 on your telephone keypad. Going to have a brief pause if questions are being registered, but it doesn't seem that way. I hand the word back to you, Jón, for closing comments.
Jón Ómarsson: Okay. Thank you so much, and thank you all for joining this call. We are quite happy with the results for Q3 and the first 9 months as a whole. The economy here in Iceland is obviously slowing down, partly due to high interest rates, but at the same time, it remains quite robust, and we are seeing strong investment in specific sectors, and especially in salmon farming and data centers, as I mentioned earlier. The overall outlook is quite favorable, and we are quite happy with the first 9 months of the year. Thank you very much for joining this call, and I hope you have a good day. Thank you.
