FundingThe Bank’s main source of funding is customer deposits. Over the past few years the Bank has taken significant steps to diversify its funding, with measures including issuing bonds in euros and Norwegian kroner. On the Icelandic market the Bank has continued to issue covered bonds and commercial paper.
At the beginning of March Arion Bank issued euro-denominated bonds for a total of €300 million. This represented the first issue in euros by an Icelandic bank to a broad group of investors since the financial crisis. Offers were received from approximately 100 investors for more than €675 million, and demand outstripped supply more than twofold. The bonds are 3-year instruments and bear a fixed 3.125% coupon and were sold at terms equivalent to a 3.10% margin over interbank rates.
At the beginning of March Arion Bank issued euro-denominated bonds for a total of €300 million. This represented the first issue in euros by an Icelandic bank to a broad group of investors since the financial crisis.
In 2015 the Bank issued bonds denominated in Norwegian kroner. Five-year bonds totalling NOK 500 million were issued in June. The bonds bear floating NIBOR plus a 2.95% margin. The Bank has also entered a swap agreement under which part of the interest and principal are swapped into euros. The interest terms in euros are floating EURIBOR +2.74%. The issue attracted excess demand. In November the issue was tapped for an additional NOK 300 million at terms corresponding to NIBOR + 2.80%. The bonds were sold to investors in Norway, Sweden, Finland, Denmark and continental Europe.
At the beginning of 2016 the Bank concluded a funding agreement with Kaupthing. Under the agreement Arion Bank will issue a bond amounting to $747.8 million. The bond is a 7-year instrument and is callable on due interest dates the first two years. The bonds bear floating LIBOR + 2.6% margin in the first two years and after that the interest margin will be based on market rates. The bond will offset loans in foreign currency originally taken by the Bank from the Central Bank of Iceland and now owned by Kaupthing, and Kaupthing deposits in foreign currency at Arion Bank. The issue is part of the package of measures concerning Kaupthing and which are aimed at the lifting of the capital controls announced by the government on 8 June 2015.
At the beginning of 2016 the Bank concluded a funding agreement with Kaupthing. Under the agreement Arion Bank will issue a bond amounting to $747.8 million.
During the year the Bank paid off ISK 20 billion in subordinated loans from the Icelandic government. The Bank used proceeds from the Bank’s bond issues in foreign currencies to pay off these loans. By paying off these loans the Bank considerably reduced its interest expenses as the subordinated loans bore floating LIBOR/EURIBOR rates +5% at the beginning of 2015.
Credit rating upgraded – Arion Bank now investment grade
Standard & Poor’s (S&P) recently upgraded Arion Bank’s credit rating from BB+ to BBB- with a stable outlook. The upgrade followed the announcement of plans to lift the capital controls. The new credit rating makes Arion Bank investment grade.
At the beginning of 2016 S&P revised the outlook from stable to positive. The upgrade was primarily made on the basis of the brighter economic outlook in Iceland and S&P believes that this positive trend will continue in light of what has already been achieved in the lead-up to lifting the capital controls.
S&P Credit rating of Arion Bank and Iceland
Issues of covered bonds and commercial paper
Arion Bank continued to issue covered bonds which are secured in accordance with the Covered Bond Act No. 11/2008. The Bank issued covered bonds amounting to ISK 23,600 million in 2015. In August the Bank issued a new fixed rate series, ARION CB 22.
Arion Bank signed an agreement with Kvika, Íslandsbanki and Landsbankinn on market making for covered bonds issued by Arion Bank on Nasdaq Iceland. The purpose of the agreement is to stimulate trading with benchmark covered bonds issued by the Bank.
The Bank has continued to issue commercial paper on the domestic market and this has further diversified the Bank’s funding. Commercial paper amounting to ISK 6,030 million was issued in 2015.
Liquidity and liquidity risk
Arion Bank is partly funded with deposits from individuals, corporations and pension funds. One of Arion Bank's key aims is to maintain a strong liquidity coverage ratio (LCR) which is calculated according to rules issued by the Central Bank of Iceland. LCR uses as a reference European liquidity regulations based on Basel III standard and addresses risk factors relating to the stickiness of deposits and the maturity mismatch of the assets and liabilities. At the end of 2015 the Bank's LCR was 134% and the ratio for foreign currencies was 218%, well above the minimum requirement stipulated by the Central Bank of Iceland.
At the end of 2015 the Bank's LCR was 134% and the ratio for foreign currencies was 218%, well above the minimum requirement stipulated by the Central Bank of Iceland.
Uncertainty over the lifting of the capital controls has largely been eliminated and the planned auctions of offshore krónur will have a minimal effect on the Bank’s liquidity. The Bank’s liquid assets at the end of 2015 totalled ISK 192,183 million, or 19% of total assets.
The Bank’s net stable funding ratio, NSFR, was 105% at the end of 2015 and 123% in foreign currency. This ratio measures the proportion of Bank’s available stable funding to necessary stable funding according to a method which takes into account the liquidity of assets and the maturity of liabilities. These ratios indicate that the Bank has stable funding.
The Bank’s net stable funding ratio, NSFR, was 105% at the end of 2015 and 123% in foreign currency.