Earnings from regular operations
Earnings from regular operations amounted to ISK 16.8 billion, compared with ISK 12.7 billion in 2014. The increase is mainly due to net interest income and net fee income in addition to favorable market conditions. Return on equity from regular operations was 10.4%, compared with 10.7% in 2014.Operating income
Operating income increased substantially between years, up 60%. The increase is largely attributable to the ISK 26 billion increase in the share of profit of associates and the ISK 5.6 billion increase in net financial income.
Net financial income increased by ISK 5,554 million from the previous year. The main factor here was the valuation increase of the direct and indirect 9.3% holding in the European drinks manufacturer Refresco Gerber in connection with the company’s IPO at the end of March. Returns on equities were generally good during the year but bond prices remained virtually unchanged. There was a net foreign exchange loss of ISK 182 million in 2015, compared with a net gain of ISK 813 million in 2014. This offsets to a small extent the positive performance of the securities market during the year.
Share in the profit of associates grew significantly between years. In 2015 two companies in which the Bank had a substantial shareholding were listed in the stock market. These were Reitir fasteignafélag hf. and Síminn hf. The Bank arranged the listings and divested its holdings in the companies. In 2015 the Bank prepared the sale of a 46% holding owned by the subsidiary BG12 slhf. in Bakkavor Group Ltd in collaboration with other shareholders in the company. At the beginning of 2016 the entire shareholding was sold and the sale value reflects the substantial valuation increase in the shares at the end of the year. The sale of shareholdings in these companies and valuation changes generated net earnings of ISK 29.3 billion in 2015.
Other operating income decreased slightly from the previous year, which can be attributed to the sale of the real estate company Landfestar hf. from the Group in 2014.
Operating expenses
Operating expenses amounted to ISK 28,196 million in 2015. The Bank’s cost-to-income ratio was 32.6% in 2015, compared with 50.1% in 2014. This substantial decrease is entirely attributable to high income from valuation changes of equities and asset sales and therefore does not give a realistic picture of future operations. The cost-to-assets ratio was 2.9%, the same as the previous year.
Salaries and related expenses amounted to ISK 14,892 million in 2015, an increase of 7% from 2014. Full-time employees numbered on average 1,139 at the Group, 11 more than in 2014. Salaries on average increased by approximately 6%, which is somewhat below the year-on-year increase in the salary index.
Other operating expenses amounted to ISK 13,304 million in 2015 which was an increase of 2% from 2014. The increase is mainly due to increased activities in subsidiaries.
Net valuation change was negative by ISK 3,087 million in 2015. There were considerable valuation increases on loans to corporates following restructuring and the repayment of loans. There was also a valuation increase of mortgages to individual borrowers following the government’s debt relief package at the beginning of 2015. However, there was a significant valuation decrease of loans at AFL Savings Bank, both loans to individuals and smaller companies, following the acquisition of the savings bank and the analysis of its loan portfolio. A significant impairment on loans to international companies in the oil and gas industry was recognized following difficulties in the industry.
Income tax amounted to ISK 3,135 million, compared with ISK 4,679 million in 2014. Income tax, as reported in the annual financial statements, comprises 20% income tax on earnings and a special 6% financial tax which is levied on the earnings of financial institutions in excess of ISK 1 billion. The effective income tax rate was only 6% in 2015, compared with 17.7% in 2014. The unusually low effective income tax rate is mainly explained by tax exemption at corporates due to valuation changes and profit from equity positions.
Balance Sheet
Arion Bank’s total assets increased by 8% from the previous year. The main changes result from increases in loans to customers, financial assets and investment in associates. Loans to credit institutions decreased, however.
Loans to customers totalled ISK 680,350 million at the end of 2015, a 5% increase from the previous year. Loans to corporates increased significantly during 2015, reflecting increased activity in the Icelandic economy. These new loans are chiefly in the real estate sector, transportation and tourism industries. Demand for credit has grown significantly recently on the corporate side. Loans to individuals have decreased mainly because of debt relief measures implemented by the Icelandic government at the beginning of 2015. New loans to individuals increased through 2015, both loans to buy property and loans to buy vehicles and equipment, an area which has seen a strong upturn in recent years.
The loan portfolio of the bank is well diversified, the split between loans to individuals and loans to corporates is almost even. Loans to corporates diversify across sectors in line with the Icelandic economy.
Several indicators are used to assess the quality of the Bank’s loan portfolio. The two main indicators are the ratio of problem loans, which the Bank defines as the ratio of the book value of loans 90 days or more in default and loans for which special impairment is required from the Bank’s total loans to customers. The ratio of problem loans was 2.5% at end of 2015, compared with 4.4% at the end of 2014. The Bank also looks to the proportion of its loans which have been impaired. This ratio was 4.9% at the end of 2015, compared with 7.0% at the end of 2014.
Financial assets amounted to ISK 133,191 million at the end of 2015, an increase of approximately 31%. The change during the year is due to an increase in bonds, which is a result of a sharper focus on liquidity management, and also to an increase in equities, which increased following the listing and divestment of companies which were previously categorized as associates in the accounts. The Bank now has reduced holdings in these companies and categorizes the asset as financial assets.
Shareholdings in associates increased by 24%, despite the fact that significant holdings in Reitir fasteignafélag hf. and Síminn hf. were sold during 2015. The ISK 20.8 billion valuation change of the shareholding in Bakkavor Group Ltd before it was sold in January 2016 resulted in a significant increase in the position.
Liabilities and equity
Liabilities increased slightly between years, which is primarily a result of new borrowing. Equity and minority interest increased significantly, primarily due to strong financial results.
Total deposits amounted to ISK 480,734 million at the end of 2015 which is a slight increase from 2014 when they amounted to ISK 477,849 million at year end.
Borrowings amounted to ISK 256,058 million at the end of 2015, an increase of 28% from 2014. Arion Bank continued to issue covered bonds which are secured in accordance with the Covered Bond Act No. 11/2008. The Bank issued a total of ISK 23.6 billion in covered bonds in 2015. During the year the Bank also issued unsecured euro-denominated bonds totalling €300 million. The bonds are 3-year instruments and were sold to around 100 international investors. The issue represented the first bond issue by an Icelandic bank in euros to a broad range of investors and the largest single bond issue since 2008, and it marked a major step towards opening up the international bond and credit markets for Icelandic banks. The Bank also issued a 5-year bond in Norwegian kroner, NOK 800 million in two tranches. Investors in these bonds came from Scandinavia and continental Europe. This issue was used to repay a more expensively priced issue in Norwegian kroner from 2013. The Bank has now bought back two thirds of this issue which matures in March 2016.
Subordinated loans totalled ISK 10,365 million at the end of 2015, a decrease of 67% from the previous year. This change is a result of a loan prepayment of ISK 20 billion, whereby the proceeds of a new bond issue were partly used to pay off subordinated loans to the Icelandic government. The interest on subordinated loans increased at the beginning of 2015 in accordance with the terms of the loan from LIBOR + 4% to LIBOR + 5%. This provided an even greater incentive to pay off the loan and the Bank will seek to complete repayment of the loan as conditions allow.
Total Equity of the Group amounted to ISK 201,984 million at year-end 2015, increased by 24.5% from year-end 2014. Shareholders’ equity amounted to ISK 192,786 million at the end of 2015, compared with ISK 160,711 million at the end of 2014. The increase is mainly explained by the financial results for the period and is partly off-set by a dividend payment in April amounting to ISK 12.8 billion. The Tier 1 ratio was 23.4% at the end of 2015, compared with 21.8% at the end of 2014.
Minority interest amounted to ISK 9,108 million at the end of 2015 and had increased by ISK 7,607 million from year-end 2014. The increase is mainly related to valuation change of shareholding in Bakkavor Group Ltd. at the end of 2015, held by the subsidiary BG12 slhf.