Funding and liquidity

Over the past few years Arion Bank has taken significant steps to diversify its funding issuing senior unsecured bonds in euros and other currencies. The Bank did its inaugural subordinated bond issue in November 2018, when it issued Tier 2 note denominated in Swedish krona. On the Icelandic market the Bank has continued to issue covered bonds and commercial paper.

Combination of total funding

EMTN issues

In March Arion Bank issued 5-year bonds in the amount of €300 million. The issue was oversubscribed, attracting offers for €375 million from more than 40 investors. The instruments bear a fixed 1.0% coupon and were sold at terms equivalent to 0.65% margin over interbank rates. This is the lowest margin over interbank rates on a bond issue that any Icelandic bank has achieved in recent years.

In December 2018 the Bank repurchased €300 million of bonds maturing in April 2019. The Bank received offers of €155 million and all offers were accepted.

Subordinated debt issues

Arion Bank concluded its inaugural Tier 2 issuance in 2018, issuing floating rate notes in the amount of SEK 500 million. The bonds are eligible as Tier 2 capital under the Icelandic Financial Undertakings Act No. 161/2002. The bonds are pre payable on behalf of the issuer in November 2023 with final maturity in November 2028. The bonds were priced at a spread of STIBOR +310. The Tier 2 bond issue strengthens the Bank’s own funds and is a milestone towards reaching a more optimal capital structure.

Maturity profile

Credit rating

Standard & Poor’s (S&P) affirmed Arion Bank’s credit rating at BBB+ with a stable outlook. The short-term rating is A-2.

S&P noted that the Icelandic financial system was stable and that the economy was continuing to grow but signs of overheating were declining. S&P opined that the participation of the pension funds in the mortgage market distorted the competition environment of Icelandic financial institutions.

Long-term credit ratings

Source: Central Bank of Iceland, S&P

Standard & Poor's (S&P)

Category Arion Bank The Republic of Iceland*
Long term BBB+ A
Short term A-2 A-1
Stable Stable
Last rating action
17 July 2018 17 March 2017

*Foreign currency obligations. Please visit for further information.

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 31.6 billion in 2018. In January the Bank issued a new inflation-linked series, ARION CBI 48.

Arion Bank renewed its 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 31.4 billion was issued in 2018. Outstanding commercial paper at the end of 2018 amounted to ISK 15.6 billion. 

Liquidity and liquidity risk

Arion Bank is partly funded with deposits from individuals, corporations and pension funds. One of Arion Bank's key objectives is to maintain a strong liquidity coverage ratio (LCR) which is calculated according to rules issued by the Central Bank of Iceland. LCR takes into account 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 2018 the Bank's LCR was 164% and the ratio for foreign currencies was 439%, well above the minimum requirement stipulated by the Central Bank of Iceland.

The Bank’s net stable funding ratio, NSFR, was 120% at the end of 2018 and 155% 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.

Customer deposits by LCR categories
Short-term funding