Arion Bank’s current ownership structure was put into place at the beginning of 2010 and it was clear from the outset that this was not a long-term arrangement. The task was clear, to develop a good bank that was a viable investment option for long-term owners. It has been a complex and multifaceted venture but the results are clear for all to see. Today, Arion Bank is a robust financial institution, with a solid client base, a dedicated team of employees and it occupies a strong position on its chosen markets. The Bank is on a strong financial footing with a capital ratio of 24.2% and a leverage ratio of 16.7%. The Icelandic economy has become stronger during this period. Economic growth in recent years has been good, purchasing power has grown and unemployment has decreased significantly. Furthermore, household, corporate and government debt has decreased substantially as a percentage of GDP. Positive achievements have therefore been made in the financial and economic environment in recent years.
An excellent year behind us
The year 2015 was a good year for Arion Bank. Return on equity was 28.1% which was a result of the Bank's solid core operations and the positive impact of irregular items. Regular operations are consistently strong and yielded a satisfactory return on equity of 10.4%, while shareholders’ equity is high at ISK 202 billion.
One of the key focuses in recent years has been to reinforce the Bank’s infrastructure and core operations. The Bank’s secure position today is a result of these efforts.
Economy on the right track – end of capital controls in sight
The role of banks is to support the growth and development of companies and individuals. Our role is to provide financial services so that good ideas can be realized, as good ideas create employment and stimulate economic growth and foster a better quality of life. We at Arion Bank have felt the effects of increased activity in the Icelandic economy. We have endeavoured to be ambitious and to lend our support to key projects throughout the business sector. This is our most important role, it is here we make the most difference.
Our role is to provide financial services so that good ideas can be realized, as good ideas create employment and stimulate economic growth and foster a better quality of life.
The Icelandic economy is currently thriving, for a number of reasons. While debt levels have fallen, purchasing power has increased. Moreover, external factors such as a slump on the commodities markets and a strong Icelandic króna have depressed inflation. The massive increase in tourism has also played a crucial role in revitalizing the Icelandic economy. Thanks to the tourism industry, the Icelandic economy is currently operating at full employment. Economic growth has picked up in recent years and forecasts assume robust growth going forward. Investment has grown although has yet to regain previous levels. It is likely that capital controls, which have been in place for the past seven years, will, for the most part, be successfully removed this year, thereby closing one of the most important chapters relating to post-crisis legacy issues. Consequently, Treasury debt is expected to decline markedly and credit ratings are set to improve further.
Arion Bank well prepared
The government’s plans to lift the capital controls, announced in the summer of 2015, were meticulously prepared and there seems to be a general consensus on the government’s plans. Important steps have already been taken, not least the approval of composition arrangements with the estates of the failed banks at the beginning of the year.
One of the tasks we have been working on since 2010 is to prepare the Bank for the capital control liberalization. It was obvious to us that Arion Bank would need to be financially robust so that the Bank would never be put at risk by the lifting of the controls. We have therefore been ready for this next phase for several years.
It was obvious to us that Arion Bank would need to be financially robust so that the Bank would never be put at risk by the lifting of the controls.
Refunding agreements with Kaupthing, finalized in early 2016, amounting to ISK 97 billion were part of the package of measures undertaken by Kaupthing to comply with the stability conditions imposed by the government. These agreements represent the largest loan deals which Arion Bank has entered into. It involved the refinancing of Kaupthing’s deposits in foreign currency and loans from the Central Bank of Iceland acquired by Kaupthing.
Re-energizing companies and households
Since 2010 the Bank has faced a diverse range of challenging assignments. One of the most pressing issues was to deal with the extreme financial distress and excessive debt burden that Icelandic companies and households were struggling with. Now, more than five years on, around one thousand corporate clients of Arion Bank have undergone financial restructuring.
They were complex and sensitive assignments yet the outcome in most cases exceeded expectations. It was critically important that when these cases were being resolved the Bank was following clear and coordinated procedures. Thousands of households availed themselves of the special measures offered by Arion Bank to tackle debt. With lower debt levels, a recovering Icelandic economy and increasing purchasing power the position of Icelandic companies and households has been transformed and must be considered in reasonably good shape today. Household and corporate debt levels are now at similar levels, as a percentage of GDP, to what they were at the beginning of the century. In 2015 household debt fell 10% as a percentage of GDP and is now around 85%.
Major recovery cases completed
Some of the recovery cases which Arion Bank was required to deal with were highly complex and it has taken a considerable amount of time to finally bring them to a resolution. One of the characteristic features of 2015 has been the completion of some of the final major recovery cases. Prominent in this regard has been the sale of shareholdings the Bank acquired as part of the debt restructuring process. During the year Arion Bank sold shares in public offerings in Reitir, Eik and Síminn. The companies were subsequently listed on the main list of Nasdaq Iceland. The Bank also divested its shareholding in the international drinks manufacturer Refresco Gerber and the company was listed on the stock market in the Netherlands. The shareholding of the subsidiary BG12 slhf. in Bakkavor Group Ltd. was also sold in January 2016 after sale process arranged by Barclays. Arion Bank’s sale of its shareholdings in all these companies had a highly positive impact on the annual financial results.
During the year Arion Bank sold shares in public offerings in Reitir, Eik and Síminn. The companies were subsequently listed on the main list of Nasdaq Iceland.
This means that the Bank has resolved all the major corporate recovery cases and the outcome is very satisfactory for the Bank. It is worth remembering that at the time these shareholdings were acquired there was a great deal of uncertainty over their real value and it was far from certain how much could be recovered.
Higher quality loan portfolio - no stone left unturned
One consequence of the efforts invested in financially restructuring companies has been to reduce the debt levels of companies and households, which in turn has a highly positive impact on the economy. A second consequence has been that Arion Bank has gained a far more in-depth understanding of its loan portfolio. In fact, no stone in the loan portfolio has been left unturned and the quality of the portfolio is well known. It is of paramount importance for the future of the Bank that it has this solid foundation to build on.
Milestone in the Bank’s international funding – Arion Bank rated investment grade by S&P
In 2015 Arion Bank issued a €300 million bond to a broad group of investors. It represented a landmark issue for Arion Bank and in fact the Icelandic financial system as a whole. The issue was an important step towards further diversifying the Bank’s funding.
Standard & Poor’s upgraded Arion Bank’s credit rating to BBB-, investment grade, and the outlook is rated positive. S&P pointed at the Bank’s strong position, both its financial strength and its solid position on the Icelandic banking market. The agency also referred to the regeneration of the Icelandic economy. The credit rating is also influenced by the Icelandic sovereign rating as revisions of the Bank's rating have generally come in the wake of upgrades to the sovereign rating.
In 2015 Arion Bank issued a €300 million bond to a broad group of investors. It represented a landmark issue for Arion Bank and in fact the Icelandic financial system as a whole.
Arion Bank will continue to take the initiative in entering the international funding markets as conditions allow.
An eventful and positive year - Arion Bank named bank of the year by The Banker
It is no coincidence that Arion Bank was named bank of the year in Iceland for 2015 by the magazine The Banker, which is published by The Financial Times. The employees deserve thanks for their excellent work. Our intention at the beginning to was to create a good bank and together we have done just that.