Automatic translation: Originally published in Danish 10/11/2026, 11:00 GMT. Give feedback here.

In connection with the Q3 2026 financial report, we have updated our investment case for Føroya Banki. It details investment arguments, risk factors, and valuation perspectives.

Føroya Banki's first nine months delivered a profit before tax of DKK 231.3 million (-14.5%) and DKK 187.2 million after tax (-14.0%), corresponding to an annualized return on equity of ~12.4%. The contraction was primarily driven by items outside the core business. The insurance result fell by DKK 22 million due to higher claims in Trygd, the return on the investment portfolio was DKK 12 million lower, and other operating income declined by DKK 10 million because 2025 included extraordinary income. In Q3 alone, the profit after tax was DKK 61.8 million vs. DKK 63.7 million a year earlier (-3.0%), and the adj. operating profit was unchanged at DKK 58 million. Banking operations drove the progress: net interest income rose to DKK 82 million from DKK 77 million, markdowns represented a net reversal of DKK 4.9 million, lending increased by 3.5% y/y to DKK 9.9 billion, and deposits rose by 7.6% y/y to DKK 11.6 billion.

On October 15, the bank raised its guidance for full-year net profit to DKK 225–255 million from DKK 190–235 million. The upward revision was primarily driven by low markdowns, but also by net interest and fee income developing better than expected, while the insurance result disappointed. The guidance implies DKK 38–68 million in Q4 vs. DKK 70.6 million in Q4 2025, and the midpoint corresponds to a P/E of 11.5x. Even the top of the range is below last year's Q4. In our view, this aligns with the bank's track record of conservative guidance, as its 2025 expectations were raised three times.

The investment case for Føroya Banki centers on one of the largest banks in a small, stable, and hard-to-reach market, where returns are generated through a high return on equity and profit-sharing rather than high loan growth. We highlight three value drivers. First is the conservative guidance. The target of a return on equity above 12% is maintained in the new 2030 strategy, and the actual return has been ~15% in 2023–25. Second is the excess capital. The CET1 ratio of 25.1% is 2.1 percentage points above the target of ~23%, corresponding to ~DKK 150 million or ~DKK 16 per share before the period's profit. Third is a strong local franchise and diversified earnings. Unemployment in the Faroe Islands is 0.8%, corporate banking accounted for 62% of the group's profit before tax after nine months, and insurance (Trygd) and real estate brokerage (Skyn) supplement bank earnings.

The risk profile consists of three factors. First, earnings and efficiency are under pressure. Adj. net operating income fell by 5% after nine months, while costs rose by 4%, meaning the cost-to-income ratio of 57% is above the previous target of below 53%. That target has now been made internal. Next, exposure is concentrated toward fishing, which accounts for 95% of Faroese exports, making the economy sensitive to prices for fish and shellfish. However, direct lending exposure to agriculture, forestry, and fishing is limited to ~9% of gross lending. Finally, the bank operates in a structurally limited market with just under 55,000 inhabitants in the Faroe Islands. Following the sale of the Danish activities in 2021, the bank is more geographically constrained, but the Greenlandic branch Bankivik, which accounts for ~10% of revenue, continues to provide growth opportunities.

The quarter's biggest news was the new strategy for 2027–30. It maintains the targets for a return on equity above 12%, a CET1 capital ratio of around 23%, and a payout ratio of 70%. Growth is to be driven by digitalization and AI, enabling retail customers to onboard in ten minutes and a loan application to be processed in under an hour, within the current cost framework. At the same time, the quarter supported the value drivers. Loan growth came from retail customers, where lending rose by 11.7% y/y to DKK 5.1 billion, while corporate lending fell by 3.9%. Deposits continue to exceed lending by ~17%, and the LCR is 259%. Credit quality was confirmed by a net reversal of markdowns of DKK 2.5 million after nine months, and credit losses have now hovered around zero for nine consecutive quarters. Capital has also been strengthened. The CET1 ratio rose to 25.1% from 23.3% at the turn of the year, driven in part by a decline in risk-weighted assets, and in October the bank issued an additional DKK 250 million of Senior Non-Preferred to cover the MREL requirement.

In terms of valuation, Føroya Banki trades at a P/B of 1.38x and a P/E of 10.7x vs. a peer median of 1.29x and 12.0x among small and mid-sized Danish listed financial institutions. This represents a 7% premium on P/B and an 11% discount on P/E. In our view, the premium on P/B is supported by a 2025 ROE of 14.1% vs. the median of 11.7%, while the discount on earnings reflects limited growth potential and exposure to a small economy. The share is up 1.0% year-to-date, 24.6% over 12 months, and 74.1% over 3 years vs. a peer median of 7.2%, 19.4%, and 101.3%.

In addition to the peer comparison, the share will also be evaluated on whether earnings and profit-sharing combined provide an adequate return. The direct yield of 7.3% is the highest in the peer group. The median is 2.2%, with GrønlandsBANKEN following in second place at 6.3%. The dividend for 2025 was DKK 21.0 per share, corresponding to ~70% of the net result. In addition, the bank has a mandate to buy back up to 10% of its share capital through 2029, and since 2021, ~DKK 1.8 billion has been distributed to shareholders. With a capital ratio above the target and conservative guidance, we believe there is room for profit-sharing to remain the core of shareholder returns.

Further insights into the quarter can be gained by watching management's presentation here: https://www.inderes.dk/videos/foroya-banki-praesentation-af-regnskabet-for-3-kvartal-2026

Disclaimer: HC Andersen Capital receives payment from Føroya Banki for a Digital IR/Corporate Visibility subscription agreement. Rasmus Køjborg, CFA and William Jørck, 12:00 PM, November 10, 2026.