Good morning and welcome all to the presentation of the second quarter results 2026 for Arion Bank. My name is Ólafur Höskuldsson and I'm the CFO of Arion Bank.

Today's agenda is as follows: I will start by walking through the key financial highlights for the quarter, and then my colleague, Deputy CEO and Head of Retail Banking, Iða Brá Benediktsdóttir, will cover the key operational highlights and outlook going forward. Before I start the presentation, I would like to remind participants online that you can submit questions throughout the presentation through a message board located below the video feed.

We will then provide answers to the Q&A after the presentation. Starting as usual with the key highlights for the quarter and the first half of the year.

First, another solid quarter with an annualized ROE of 15.5%, which then takes the return on equity for the first half of the year to 14.6%. A key milestone for the group is that this quarter with these results, we are for the first time exceeding all our financial medium-term targets.

Again, these results are broad-based and with most key business units delivering a solid profitability and supporting diversified and robust results through the cycle. In terms of growth, the positive is that we continue to find solid loan growth opportunities, both in corporates and mortgages.

This growth again continues to be supported by very strong growth in stable deposits. We do, however, continue to see increasing signs of the economy being impacted by the prolonged period of high interest rates in Iceland.

This is likely to become a headwind for growth should this remain the case, should rates remain elevated going forward. Finally, and of course always very importantly, our balance sheet continues to be very strong.

We maintain a very robust capital and liquidity position, as well as having proactively and conservatively increased provisioning early in this cycle. With most of the upcoming bond maturities pre-financed early, we have a very strong and light maturity profile.

Now looking more closely at the income statement: Net profit for the quarter was 8.1 billion compared to 7.3 billion in the first quarter. Core income, namely net interest, fees, and insurance income, were 21 billion, which is around 1% increase from this quarter last year.

Financial income was again negatively impacted by the equity markets in Iceland, which impacts, of course, the investment portfolio of Vörður, the insurance business, and our market making business. We also had a close to 300 million loss from a conservative revaluation of our unlisted equity holdings in this quarter.

Because of these losses again in equity holdings, the effective tax rate is again somewhat high in this quarter at 28%. Cost of risk is 19 basis points with an impairment of just under 700 million.

Now looking at some of the key line items: Starting with net interest income, net interest income in the quarter was 15.2 billion compared to 14.2 billion for this quarter last year. The annualized net interest margin as a percentage of interest-bearing assets was a solid 3.5%, which is similar to the margin for this quarter last year, but somewhat down from, of course, an unusually high margin for the first quarter.

I have, of course, covered this in some detail in previous calls, but again we do expect some continued fluctuations in the margin near term as our inflation-linked loan portfolio is impacted by monthly real policy rates and monthly inflation prints. Again, of course, these products are not priced based on three-month real interest rates, and we tend to look through these short-term movements when managing these products, and are very confident in the resilience of the margin going forward.

We continue to guide investors for a margin over the medium term of over 3%. Looking at fees and commissions, a decent quarter in terms of fee generations, with total fees of just under 4 billion.

In general, our fee-generating businesses are doing well and demonstrating strong stability through the cycle. As discussed, this prolonged period of elevated policy rates are of course a headwind for some of our transaction-related fee-generating businesses, namely in the CIB and markets areas.

It's good to see that despite this, we are seeing very strong stability in fee generation for the business. Of course, clearly, when there is upside in this area when we do see policy rates coming down, we are in a very strong position in these areas on the transaction-related fee side going forward, which will increase economic and market activity, of course, when policy rates come down.

Moving on to the insurance business: Growth momentum continued with insurance revenues growing by just under 7% for the first half of the year, and growth continuing to be exceeding the market growth, which is of course one of our key financial medium-term targets. The combined ratio for the quarter was a solid 87.9%, while somewhat higher than what was unusually strong this quarter last year.

This then takes the combined ratio for the first half of the year to 94.3%. While we are pleased with the good growth momentum and profitability of the insurance business, the overall earnings from Vörður, of course, continue to be impacted by the challenging market conditions on the investment side.

We continue to anticipate that this business will become a very strong contributor to the overall earnings of the group and profitability when we see normalized earnings on the investment side. Now looking at total operating expenses, including those from the insurance business: Total operating expenses in the quarter were 8.4 billion, which is up by around 860 million between years.

Roughly half of this relates to salaries, and out of that half related to salaries, around 200 million relates to a change in accounting for incentive scheme between years, which I effectively see as a one-off impact. Excluding these items, salaries increased by around 240 million or around 5% between years.

For comparison, the number of employees increased by just under 4% between years. At the start of the year, we had a 3.5% general wage increase related to the union collective wage agreement coming into effect.

In terms of other expenses, these were similar to what we saw in the first quarter, but they do increase by 440 million between years, and this mainly relates to IT expenses and investments. Moving on to the balance sheet, and starting with the loan book, which grew by around 66 billion in the quarter to 1,418 billion.

Growth in the retail book was just under 2%, while on the corporate side, we continue to see good growth opportunities, and the corporate loan book grew by just under 8% in the quarter. While we continue to be generally opportunistic in the way we grow the loan book, we do anticipate that growth will slow in the second half of the year and the coming quarters, as both the pipeline on the corporate side was rather sort of seasonally top-heavy for the year, and we of course also see some slowdown in the economy, which we expect to impact loan growth going forward.

The loan book continues to be very well-balanced with 42% mortgages, 5% other loans to individuals, and 53% to corporates. Looking at our provisioning position: As discussed, we have a 679 million impairment in the quarter, or 19 basis points.

This takes the total loss allowance at the end of the quarter to 12.4 billion, or 0.9% of the loan book. The increase in provisioning in this quarter was mainly related to increase in Stage 1 provisions, where we have conservatively worsened some of our macroeconomic assumptions in our modeling.

The general story is, however, similar to what I have described in recent quarters: Non-performing loan ratio was relatively stable this quarter, but has been increasing over recent quarters, which is to be expected in the current rate environment. Credit quality indicators remain, however, very robust.

As discussed, we retain a very conservative provisioning position, and we increased provisions early in the cycle, which we are benefiting from currently. The sector perhaps that we are monitoring most closely these days in the current environment is obviously the construction sector, which is probably seeing the biggest impact of the current rate environment and the slowdown in the housing market.

As discussed, I think we test this portfolio, which is around 120 billion, regularly against very punitive stress tests and macro outlook scenarios, and are very confident in our provisioning, which is appropriate and conservative. Deposits continued to grow in the quarter, increasing by 44 billion to 981 billion.

As I always say, our strategy in this area has been to compete especially in the more stable categories of deposits. As highlighted in the top right chart of this page, the growth has continued to be in those categories.

As we have discussed previously, the deposit beta in Iceland, the relationship between deposit cost and policy rates, is very high compared to other countries. This is a headwind for the interest margin currently for the Icelandic banks.

I think it's important to note that when policy rates come down, this also means that there's a lot of room for deposit costs to come down along with it, which will protect the margin in that scenario. Finally looking at capital: Our position continues to be very strong.

Common equity ratio at 17.7%, 242 basis points above regulatory requirements. Of course, as discussed, following a very focused effort over the past years to manage our capital towards our optimized capital level, it is a strong milestone for the group to have now reached this level within the target range.

The leverage ratio continues to be very strong at 11%, of course well above most European peers. In terms of MREL, we also have a very robust position with substantial buffers above requirements.

On that point, I would now like to welcome our Deputy CEO and Head of Retail Banking, Iða Brá Benediktsdóttir, to go through some of the key operational highlights and the outlook going forward.

Thank you, Ólafur, and good morning, everyone. As Ólafur mentioned, solid first half of the year; all medium-term targets achieved for the first time.

Return on equity was 15.5% in the second quarter and 14.6% for the first half of the year, ahead of our medium-term targets of exceeding 13%. Results are driven by strong development in core earnings and continuing cost discipline across business.

Core operating income over REA was 7.9% in the second quarter, ahead of our 7.2% target, while the cost-to-core income ratio was just over 40%, well below our 45% target. Thus demonstrating a sustained cost discipline even as the business continues to grow.

The combined ratio for Vörður was within our 95% target for the first half, or 94.3%. As Ólafur mentioned, this was particularly strong in the second quarter.

We see further growth opportunities for Vörður through our bancassurance strategy leveraging on Arion's customer base, both in the app as well as with physical presence within our branches, to deepen the relationship and increase cross-selling. We continue to make strong progress in our capital optimization with CET1 ratio standing at 242 basis points above regulatory requirements, although within our management buffer.

This supported a capital distribution of 23 billion in the first half of the year through dividend and buybacks, and at the same time supported a healthy loan growth. Going forward, we will continue to manage profitable balance sheet growth alongside with capital distribution through buybacks and dividends.

Now looking at the few of the key operating highlights in the quarter: Arion Bank was recognized as having the best banking app in Iceland for the tenth consecutive year, reinforcing our strong customer proposition and digital leadership. On the funding side, we successfully issued €300 million of preferred senior debt in May.

The issuance was eight times oversubscribed with a very diverse investor participation. Maturities for 2026 are now fully funded, and the funding profile remains well-diversified with limited near-term refinancing need.

We launched the sale process of Blikastaðir earlier this month, one of the largest development areas in the capital region. The objective of the sale is to attract experienced and well-capitalized investors with knowledge in this field who can lead this development going forward.

Across the group, AI adoption progressed in line with our plans. AI implementation is an important strategic priority for the group.

During the quarter, we broadened adoption of enterprise AI tools and continued to strengthen our technology foundations needed to capture efficiency gains, improve customer service, and support long-term innovation. At the same time, we delivered a record number of IT projects during the quarter.

In asset management, Stefna further strengthened its product offering and growth potential with the launch of Katla Government Bond Icelandic UCITS Fund. The launch of this fund represents another step in Stefna's international strategy to attract international capital into the Icelandic financial market by offering a local currency Icelandic sovereign fixed income through Luxembourg fund structure.

As Óli mentioned before, activity in the corporate and investment banking remains strong, supported by continuing strong loan growth and solid advisory projects including Laxey, Controlant, Niceair, and GPG [Garri?] .

This shows the diversity of the opportunities across the business that we have and are operating, and a strong foothold of our corporate and investment banking. The earning impacts of those activities are not fully reflected in this current quarter.

Finally, insurance operations delivered accelerating premium growth and a growing customer base, and we are enjoying high customer satisfaction. Building deeper and longer-lasting customer relationships remains a key strategic priority for the group, I would like to provide you some additional color on what we are doing in this area.

During the quarter, we continued to strengthen our ecosystem and our loyalty proposition through Arion Rewards. The program has now more than 60,000 customers, and the rewards account, deposit account, has achieved strong deposit growth since launched late last year.

We also expanded our physical presence by opening a new full-service branch in Keflavík, enhancing accessibility and supporting customers in Iceland, in one of the fastest-growing regions. It is worth noting that Vörður had a very strong foothold in this region, and we are leveraging on that by opening this joint branch.

Our digital proposition remains a key differentiator. As mentioned earlier, once again, Arion was recognized as having the best banking app in Iceland.

During the quarter, we further enhanced the customer experience through personalized digital services using activity feed in the app to deeper integration and offer personalized loyalty offerings through our app. We launched Arion Future, which we are very proud of.

It is an initiative designed to build loyalty among the younger generations by combining financial education, relevant products, and tailored benefits across the group. There we are building on the infrastructure of our loyalty program and the success of Women Invest.

This is a group initiative where we, for example, offer new insurance product and a mutual fund tailored directly to this group and which are only sold in the Arion app. We are also seeing strong results from our premium customer proposition.

Arion Premier continues to attract affluent clients through specialized service. Overall, bancassurance momentum remains strong; penetration has increased steadily and is now 43.5% in our retail business, and in Premier, we are having 48% bancassurance ratio.

Finally, NPS and overall customer satisfaction among both retail and corporate customers are at all-time high. Before we go into Q&A, I want to highlight some of the key themes going forward: A solid first half of the year where again the diversity of our business provides support for the overall earnings momentum through the cycle.

Furthermore, we see that customer engagement is increasing across all segments, supported by improvements in our services and also the success of our loyalty program. We will continue to be flexible and opportunistic, both in pricing and balance sheet management.

Now, as Óli mentioned, for the first time, we have reached our optimal capital ratios. With capital ratios within optimal range, future loan growth will be supported by organic capital generation.

We continue to cautiously anticipate a continuing complicated external environment near term, both in terms of domestic high inflation and rates development, and also in terms of the international geopolitical landscape. Regarding the referendum at the end of August of reopening EU accession negotiations, it is still too early to tell the effect or the impact of the economy if yes will be the answer of this referendum.

Clearly, this is a first referendum in what will likely be a multi-year process. With regards to impact on our business, there are several uncertainties which we are always evaluating and planning for.

As always, the main focus for us is to run an efficient bank and serve our clients well, and to maintain a flexible strategy allowing for us to react to any changes quickly in the external environment. Unfortunately, inflation continues to remain persistent with latest figures of 5.3%, thus contributing to a higher for longer policy rate outlook.

Importantly, our balance sheet remains very strong. Capital, funding, and liquidity ratios are all solid, and we are taking proactively conservative approach to provisioning.

We are not making any change to our strategy, targets, or capital priorities for the time being, consistency is the message here. We will continue targeted IT investment, particularly in AI and cybersecurity, and our AI implementation strategy is becoming clearer with measurable opportunities now taking shape.

We remain selective on value-accretive opportunities, ones that benefits our clients, shareholders, and the broader economy. With that, we will now turn into Q&A.

For those joining online, you can submit your questions through the webcast platform. I would now like to welcome our Head of Investor Relations, Theódór Friðbertsson, on the stage, who will moderate the discussion.

Welcome, Theódór.

Thank you, Iða, and good morning, everyone. I think as usual, we'll start with questions from the online participants, and then move into the auditorium.

Starting with questions from Alexander from Akur, four questions from him: OpEx grew 10.9% year on year in Q2, and cost-to-core is 40.4% against your 36% to 40% range. How much of the 9% salary growth in the wage review clause versus headcount?

What is the IT run rate from here, and when specifically does the growth rate decelerate back inside the range? Maybe,

yeah. I'll take that one.

Thank you for good questions. I think I probably answered it partially in the presentation.

The salary increase year on year, around 50% of that 9% increase is related to sort of what I would say is one-off, is related to the change in accounting of the incentive scheme. If you take that out, there's roughly a 4.5% increase in salary then between years, which is around 50-50 sort of split between headcount and wages.

Of course, in that period, we've had around 5% inflation, I think that's a reasonable result. Thinking about, okay, he asked about when we return to the 36% to 40% range, which I think we have a target cost-to-core income ratio in our medium-term targets of 45%.

We are well within the medium-term target. Of course, we want to be always lower.

I think we've been sort of exceeding this target now for a while, of course these targets are evaluated annually, we will be looking at those targets along with others again at the end of the year. In terms of IT costs, I think it is an area which has been the key driver of increased cost for the banking system and probably most companies for the recent past years.

We're all investing in required infrastructure to be able to service our clients. I think we always try to manage that as best we can.

I think interestingly, as probably Iða talked about the AI investments, which everyone is now of course focused on, and is a very interesting area for the future. I think in the short term, for most companies and ourselves included, it's a net cost.

We're investing currently in what we see as something that will drive efficiencies in the future. For the short term, it's going to be increasing costs and we have to invest.

It's then how we time the outcome of those investments is something that we probably will be presenting at later date. I hope that covers the full question.

Yep. Thanks.

Next one is on our development asset, Blikastaðir, which we launched the sales process recently. The question is: What is the expected disposal timing and rough magnitude through other income?

The sales process was announced earlier this month. We have a deadline in September, but of course the main focus for us is to find strong investors with capabilities to finalize this project.

The book value of Blikastaðir is now 7.2 billion, but I think it is too early for us to tell what the impact will be. The objective has not been simply to sell it as quickly as possible, and therefore we have been working a lot to make it more attractive, marketable, and also de-risk the project for those that are going to buy it.

I think it is just too early to tell both on the timing and also on the expected sales price.

The net financial income was negative by 68 million on unlisted equity revaluations. The question is: Which positions, and is the write-downs complete?

Ólafur?

Are they complete is difficult to say. It's around 3.8 billion portfolio now that we have of unlisted equities.

We always just try to value these stakes very conservatively, the bottom of any range of transactions or valuations that we see in the market. That doesn't say anything about the future, of course, but unfortunately, we did another valuation markdown of our positions in Annata, which is the largest unlisted holding that we have, which is around 1.5 billion currently.

As I said last time, it's a very interesting company with a bright future, but we want to be just very conservative in the way, again, we value it. That's why we took it down again by 300 million this quarter, just under 300 million.

If I may add on Blikastaðir, of course, we will do what is best for our shareholders in this case as well.

Then the final question from Akur is that fees fell 13.5% in the first half despite strong corporate lending volumes, and why is lending-related fee generation decoupling from volume, and is the first half run rate the right base?

I probably covered some of this also in the presentation. I think if you look at last year, we had a very large transaction closing at the beginning of the year, the Marel-JBT, one of the biggest M&A transactions in Iceland historically, which we were involved in, it's difficult to compare to that period.

I think, like I said, the composition of the loan growth is just different than it was last year. There are less transaction-related loans, it's more sort of traditional lending business, which has a lower fee generation associated with it.

I think, despite that, we are generating relatively good fees out of this business, but again with huge upside, when transactions in the market recovers again and we see more transactions, we are in a very good position for that increasing again.

We have two more questions here coming in. Iða, as sort of Óli touched upon this earlier, you spoke about the AI development and improving the customer experience for different customer segments.

How do you see the AI impact on costs today?

It is difficult to tell exactly the impact of the cost today, but I can tell you, for example, in sort of our core IT teams, we are seeing increased productivity of around 25% to 30%. People around the bank are starting to use this also quite frequently to augment their work.

We have been working a lot of this. We have the AI corporate governance in place, we have the risk framework in place, we are working on the delivery models.

Hopefully we can tell you in more detail perhaps later this year or in the Capital Markets Day how it will affect the cost. For the time being, we are augmenting and helping our employees to get used to it, to learn how to use it, and make their work easier, stop to do more manual work and focus more on projects that are more valuable, to say.

Here is the last question, probably to both of you: With the solid loan growth in the quarter, mainly in the corporate loan book, and capital levels now within your CET1 buffer range, how should we think about the balance between growth and future capital distribution?

Good question. I think we, of course, as a bank have been very active in the buyback space, probably setting some sort of Icelandic record.

We I think bought back around one-fourth of our outstanding shares in the past two years. Buybacks are always a key part of how we optimize shareholder returns, it's always something that we consider.

Of course, this business is now generating sort of 13% to 15% returns for a number of years now, very steadily. I think, of course then when you're in that position, growing that sort of business is also driving shareholder returns.

I think we are in a business of lending, we're a bank, of course our core business is serving our clients. It's very good if we can find growth opportunities as those returns.

It's something that we just look at opportunistically at every time, whether we find opportunities and if we don't, we return it to shareholders. We've shown consistently that we've done that.

Iða, anything to add there?

No, I think second that.

That concludes the questions from the online participants. Any questions from the auditorium?

Yep, Helgi.

Hi, Helgi from Landsbankinn. My question is on the ROE.

Obviously in the first half you delivered over 14.5%, but [at least that's what keeps business?] is guiding the second half down considerably compared to the first half.

How do you see your ROE develop in the second half of the year?

Maybe just to repeat the question: How are we seeing the ROE developing for the second half of the year?

It's difficult to sort of give a very precise answer. I think if you look at, of course, our net interest margin, if you sort of break down the components of our income statement, net interest is now impacted, of course, by inflation.

I think most analysts are seeing inflation ticks coming down for the second half of the year, which should have impact. We've been having consistently surprises on the upside on the inflation side recently.

Of course, if inflation comes down as well, hopefully we have rates expectations also coming down, which should help the markets and our financial income, fee business. We have a 13% ROE target and we are confident in exceeding that

on

the medium term. Now we have an optimized capital position, which is also a key component, of course, to deliver those returns.

I think I wouldn't add anything to that.

That's fine.

Maybe just one more. On the loan book, the loans in foreign currency are increasing some, 30 billion.

Is that an area where you're focused on keep growing or how do you see that to play out?

We have of course said that we are looking at the Arctic, and the loan growth there has been preliminary in that field, but also in some projects that we know very well, such as something related to fisheries and aquaculture. We have a favorable terms now when we go to the market abroad, for example with this €300 million preferred issue that we did.

That is a part of our strategy to be growing as well in the Arctic region.

Just to echo on the point on the funding costs, I think for Iceland and the Icelandic banks, of course, it's a key positive, and I think the result of a lot of effort over the past years to broaden the investor base and get our funding costs in FX down. We've seen it's a very positive position that we are in now, I think.

If you look at where these investors are coming from, it's become much broader and diversified than we saw a few years ago, which is a very strong for the future for the system. We're using that, like Iða said, because our funding cost is now down, we can bid for transactions that we weren't able to do before.

That's allowing us to grow.

What's the business that we know quite well.

Yes.

Any final questions? No.

I think that concludes it for today. Thank you very much for attending, and we wish you a good rest of the summer.