Arion Bank will report Q3 22 results on 26 October, with an investor call the following day. We project the firm to deliver ISK6,082mn net profit, a creditable performance (13% ROE) given likely headwinds from weak net financial income – see the table below for more details. Key positive drivers include strong balance sheet volume growth (particularly from corporate clients), better net interest margins and healthy fee generation, allied to very low (negative) credit risk costs.
We think the bank will complete its ISK10bn share buy-back before year-end, and should also distribute a healthy full-year dividend. After declining 13% during the past month, the shares are trading on 1.4x 2022f tangible book value and 8.7x 2023f earnings. Major risks include the impact of an external slowdown on key sectors, such as tourism, and potential loan quality stress as interest rates rise, although last week’s modest 25bps policy rate hike lessens the risk of a sharp credit crunch.
Q3 22 results preview: Strong underlying trends offset by weak net financial income
With domestic economic activity remaining strong, loan and deposit growth are likely to have been robust, particularly for corporates. Margins should also have benefitted from the 100bps rate hike that took place towards the end of the previous quarter. Fee income will likely not reach the record levels seen in Q2 22, partly for seasonal reasons but also due to a lack of IPOs. Net financial income is likely to remain pressured, with both equity and fixed-income markets declining during the quarter. We project a modest yoy decline in insurance income, partly to account for a brief period of bad weather late in the quarter.
We don’t expect to see any significant shifts in operating or risk cost trends. Regarding the latter, the macro environment is so far benign (unemployment continues to fall), while global uncertainty likely does not warrant any model changes at this point (not least because some extra provisions were taken in Q1 due to uncertainty from Russia’s invasion of Ukraine). Due to weak net financial income, the effective tax rate is once again likely to be on the high side. We don’t think there will be any major progress regarding the major remaining discontinued operations asset (silicon smelter) until Q4.