Post-results note
Let the yield lead the way - Q3 review
Emil Jonsson
Nicolas McBeath
2026-10-29
16:00 CET
Q3 strengthened the capital distribution story in Arion, with surprisingly strong capital ratios and a tightened capital buffer target. This supports our 10–11% annual total yield outlook for the next three years. We reiterate our SEK14–18 per share fair value range.
Core profit (our definition) grew 16% Y/Y and was 2% higher than we expected. Much of that growth came from a 14% uptick in net interest income, boosted for the third time in a row by high quarterly inflation prints (benefitting Arion’s inflation-linked loans). Adjusted for non-recurring items, the 16.8% return on equity was the second highest in three years.
Capital stood out as a strong suit, with a surprisingly strong 18.1% CET1 ratio (we expected 17.2%) as the average risk weight came down to 68% (we expected 70%). Furthermore, Arion’s lowered CET1 buffer target (100–250bps vs the previous 150–250bps) and near-term guidance around 175bps suggest a tighter buffer and notably higher capital distributions than we had anticipated. We consider this a particularly positive development as we see capital distributions as the main draw of the equity story.
We tweak our core profit by +2% for 2026e and -1% for 2027–28e, reflecting 3% lower commission revenues, slightly lower 2026 bank levies and rolling the 12-month loan-loss ratio guidance of 32bps forward by one quarter. However, we raise our 2026–28e total capital distributions by 10% on lower risk weights, 1% lower lending volumes and a smaller capital buffer. We now anticipate Arion paying out 100% of profits for 2026 and 80–85% for 2027–28.
We now forecast 10–11% annual total yield for 2026–28. We see core profit dipping 9% in 2027e (on elevated credit losses and dissipating NII benefit from the relatively high 2026e inflation) before recovering in 2028e. Still, the capital generation in Arion means the company should be able to execute dividends and buybacks equal to just over 10% of mcap annually.
The stock is trading at c8x 2027e P/E and 1.1x 2025 P/BV – 3% below Islandsbanki.