First quarter results 2019 Investor presentation 9 May 2019 Q1 2019 - PowerPoint PPT Presentation

First quarter results 2019 Investor presentation 9 May 2019

Q1 2019 Highlights during the quarter Core earnings improved compared with Q1 2018 Irregular items such as WOW air bankruptcy and the Valitor legal case verdict affect net earnings negatively. Sale of the Banks share in Farice has a positive effect Digital journey continues with the launch of the biggest update of the Arion app to date. The app is now open also to non-customers Valitor sales process is on track CEO Höskuldur H. Ólafsson stepped down 30 April. CFO Stefán Pétursson was appointed acting CEO as of 1 May until a new CEO has been appointed 2

Digital services and the change in customer behavior Number of Arion app users increasing at steady pace and new digital branches are very popular • The growth in active Arion Bank Active Arion App users 1 Active online bank users 1 app users continues to grow at a 000s 000s steady pace (6% in Q1) • New digital branches drive +4% (3)% 0% +5% +6% +6% increased customer usage in Q1 +26% +4% +31% • Our digital journey focuses on +44% reshaping end-to-end customer 78 79 72 76 76 74 +29% 68 69 journeys into fully digital flows, 67 +64% 54 41 accessible online 24/7 29 22 13 • In 2019 the journey continues with 2013 2014 2015 2016 2017 2018 Q1 2019 2013 2014 2015 2016 2017 2018 Q1 2019 three new digital solutions launching before end of H1. Number of visits to branches 2 Number of calls to the call centre 000s 000s (8)% (14)% (18)% (3)% (9)% +17% +4% (9)% (7)% 185 804 742 381 328 611 319 323 593 298 541 447 121 74 81 2014 2015 2016 2017 2018 Q1 2019 2013 2014 2015 2016 2017 2018 Q1 2019 Traditional branch Digital branch 3 Source: Company information 1. 30 day active online users/individuals and 30 day active app users, counted on June 30 th each year. Definition by Finalta 2. Data: Qmatic ticketing system for traditional branches and Mobotix camera counting system for digital branches. Two different methods.

Macroeconomic environment

Temporary contraction in GDP expected After strong 4.6% GDP growth in 2018, economic activity looks set to slow down in the short term • Falling exports are GDP per capita in 2018 expected to bring an end to GDP growth - USD thousands one of the longest growth 6.6% periods the Icelandic 74 4.7% economy has experienced 4.6% 4.6% 62 Despite a possible • 2.3% 2.3% 2.2% 2.2% 2.1% 1.8% 1.7% 1.7% 1.4% 1.4% contraction, GDP per capita will remain high 40 2.4% 2.1% 2.0% 1.8% 1.4% 1.3% • The tourism industry has boomed since 2011. (1.9%) Growth is however slowing down temporarily but is 2014 2015 2016 2017 2018 2019E 2020E 2021E expected to pick up again Iceland (IMF forecast) Arion Research forecast from 2020 Iceland Other Nordics Euro area Other Nordics Euro area The economy is well • equipped to handle a short Net international investment position Tourist arrivals via KEF Airport recession, with a positive - % of GDP - millions and YoY growth net external position and 14% historically low debt levels, 5% 12% 2.5 both in the private and 24% 4% 5% 10% (16%) public sector 2 40% 8% 6% 1.5 30% 4% 24% 2% 1 0% 0.5 -2% -4% 0 -6% 2014 2015 2016 2017 2018 2019E 2020E 2021E 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sources: Icelandic Tourist Board, CBI, Statistics Iceland, Arion Research, IMF 5

New wage agreements reduce uncertainty Inflation is expected to pick up again and household consumption is wavering • Wage agreement partly The ISK against major trade The labor market concluded in March at 150 currencies 10% 85% reasonable levels 84% 140 8% WOW air’s bankruptcy • 83% and the signing of the 130 6% 82% wage agreements have 120 81% 4% reduced uncertainty in the 80% FX market 110 2% 79% • Foreign investment of 100 0% 78% pension funds has put Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18 Feb-19 90 pressure on the ISK Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 • Inflation slowed down in Unemployment, 12M MA (l.axis) Q1, but is trending Labor force participation rate, 12M MA (r.axis) USD EUR upwards due to higher import prices in relation to the weakening of ISK and Total payment card turnover Inflation wage increases (YoY growth) • Unemployment remains 4,0% 18% very low, but expectations 3,5% 16% of an increase are 3,0% 14% emerging, especially in 12% 2,5% tourist related sectors 10% 2,0% 8% Consumer confidence has • 1,5% 6% been sliding, which has 4% 1,0% been reflected in slower 2% 0,5% payment card turnover 0% 0,0% growth -2% Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Sources: CBI, Statistics Iceland, Arion Research 6

Q1 2019 Positive core earnings, but impact from weaker macro Growing NII compared with Q1 2018, but NIM stable as inflation temporarily slowed down and positive effects of liability management have not materialized yet Slowing economy puts pressure on revenue growth and impairments Stable commission income and insurance performance Net financial income improved significantly compared with Q4 2018 Operating expenses relatively stable compared with Q1 2018. Ongoing focus on cost efficiencies supported by digital solutions 7

Income statement

Income statement Q1 2019 Core earnings improve, but increased impairments and Valitor legal case have negative effects • Top line development strong compared with both Q1 and Q4 2018 Q1 2019 Q1 2018 Diff% Q4 2018 Diff% − Operating income up 8% vs Q1 Net interest income 7,434 6,827 9% 7,969 (7%) 2018 Net commission income 2,218 2,205 1% 2,746 (19%) • Cost development stable Net financial income 766 1,387 (45%) (774) - − Salaries flat vs Q1 2018 Net insurance income 253 143 77% 704 (64%) • Net impairments increase both Share of profit of associates 727 (20) - 11 - single name and stage 1 and 2 according to IFRS 9, partly due Other operating income 310 268 16% 294 5% to more cautious macro expectations Operating income 11,708 10,810 8% 10,950 7% Salaries and related expenses (3,630) (3,616) 0% (3,584) 1% WOW air bankruptcy affects • financial income by ISK 0.2 Other operating expenses (3,232) (3,143) 3% (3,015) 7% billion and net impairments by Operating expenses (6,862) (6,759) 2% (6,599) 4% ISK 1.1 billion, in total ISK 1.3 billion (ISK 1.0 billion net of tax) Bank levy (906) (804) 13% (765) 18% Net impairment (1,081) (135) - (573) 89% • Sale of the associate Farice resulted in a profit of ISK 732 Net earnings before income tax 2,859 3,112 (8%) 3,013 (5%) million Income tax expense (622) (890) (30%) (881) (29%) • The Valitor legal case affects Discontinued operations, net of tax (1,219) (273) 347% (516) 136% discontinued operations negatively by ISK 600 million, Net earnings 1,018 1,949 (48%) 1,616 (37%) net of tax All amounts in ISK million 9

Net interest income Net interest income increased compared with Q1 last year in line with strategy Effective inflation • Net interest income increased Net interest income from Q1 2018 due to loan growth (6% Y0Y), increased focus on return and 8.0 management of liabilities. 7.4 4.2% 7.3 7.2 Decrease from Q4 2018 mainly 6.8 due to lower inflation 3.5% 3.1% 2.9% 2.8% NIM stabilized as inflation • 2.7% 2.7% 2.7% tailwind is temporarily reduced 2.1% 2.0% • NIM was also negatively affected by increase in interest bearing assets in connection with funding activities during the period, mostly in low yielding FX Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 − High LCR at the end of Q1, 213% compared with 164% at Net interest margin YE 2018, due to upcoming payments of borrowings in Q2 Net interest income Q1 2018 - Q1 2019 2019 (ISK million) • Improved liquidity management 1,304 − Liability management is yielding 4 positive results (252) (170) (42) (44) (193) 7,434 6,827 NII Q1 2018 Loans to Loans to Securities Deposits Borrowings Other Net inflation NII Q1 2019 credit customers effect institutions All amounts in ISK billion 10 and CB