Financial results

Arion Bank reported net earnings of ISK 7.8 billion compared with ISK 14.4 billion in 2017. Return on equity was 3.7% compared with 6.6% in 2017.

Net earnings in 2018 was lower than 2017, particularly due to net financial income as well as other operating income, considerably higher net impairment and the reversal of liability to the Depositors‘ and Investors‘ Guarantee Fund in 2017.

The subsidiary Valitor Holding hf. is classified as operation held for sale from year-end 2018. Comparative figures for the year 2017 have been restated accordingly.

Operating income

Operating income amounted to ISK 46.2 billion compared with ISK 46.9 billion in 2017. Net interest income and Net commission income increased slightly between years, Net insurance income increased significantly but other operating income decreased due to less fair value changes in investment property.

Net interest income are similar between years but the interest margin based on average interest bearing assets was 2.8% in 2018, compared with 2.9% in 2017. Interest bearing assets increase by ISK 37 billion from year-end 2017, but due to changed combination of liquid assets, with larger part in FX that bears lower interest, net interest income remain stable between years.

Net commission income remains relatively stable between years, or an increase of 1%. The combination of net commission income changes as commission from asset management decreases, in particular due to lower performance based payments compared with prior years but commission from investment banking and cards increases, in particular due to tourism.

Net financial income amounted to ISK 2.3 billion, compared with ISK 4.0 billion in 2017. Profit from shares was lower in 2018 compared with prior year, mainly due to significantly reduced holding in shares. The main reason for the shift between years is due to good performance of Refresco in 2017 as well as better market performance in 2017 than in 2018.

Net insurance income amounted to ISK 2.6 billion, compared with ISK 2.1 billion in 2017. The insurance company Vördur became part of Arion Bank in late 2016 and has performed very well since. Premiums earned increased by 11% from 2017 and the claim rate has decreased. Further opportunities are on the income side in synergy between the branch network and digital solutions with the Bank's products and the Bank's customers, as a minority are customers of Vördur.

Other operating income amounted to ISK 1.6 billion, compared with ISK 2.5 billion in 2017. Fair value changes on investment property affect other operating income significantly. Fair value changes were higher in 2017 compared with 2018 and profit from assets held for sale were also lower in 2018.

Operating expenses

Operating expenses amounted to ISK 26.3 billion, compared with ISK 22.9 billion in 2017. The Bank’s cost-to-income ratio was 56.9%, compared with 48.9% in 2017. Higher operating expenses in 2018 compared with the previous year is mainly due to the reversal of a liability the Bank had recognized against the Depositors’ and Investors' Guarantee Fund in the amount of ISK 2.7 billion in 2017. The Cost-to-Total Assets ratio was 2.3% in 2018, compared with 2.1% in 2017.

Salaries and related expenses amounted to ISK 14.3 billion, an increase of 5% from the previous year. The increase is mainly due to general wage increase in 2018, following a new wage agreement from May 2018. The average salary per employee increased by close to 6% between years, but at the same time the salary index in Iceland rose by 6.3%. Full-time equivalent positions at the end of the year totalled 904 at the Group, 45 more than at the end of 2017. The decrease partly due to outsourcing of cash-center in cooperation with the other two main banks in Iceland, Íslandsbanki and Landsbankinn, and started operation early 2018, optimization of the branch network and effect of digital solutions with automation of processes.

Other operating expenses amounted to ISK 12.0 billion in 2018, an increase of 29% from 2017. As stated above, this decrease is mainly due to the reversal of a liability to the Depositors’ and Investors’ Guarantee Fund of ISK 2.7 billion in 2017 but combination of operating expenses have changed with IT expense increasing but professional services decreased following the listing of the Bank. Significant one-off expense due to the IPO process was in 2017 and early 2018.

Net valuation change was negative by ISK 3.5 billion, compared with positive ISK 0.3 billion changes in 2017. The main impairments in 2018 was due to the bankruptcy of Primera Air, or ISK 2.8 billion on loans and guarantees. Other impairments were rather low and more in line with normal impairment as a percentage of the total loan-book. In 2017 prepayments of mortgage loans and composition payments from corporate customers and final loan payments from bankrupt entities, which had previously been impaired, had a positive impacts, whereas impairments on loans to United Silicon amounting to ISK 3.0 million had a negative impact.

Income tax amounted to ISK 4.0 billion, compared with ISK 6.0 billion in 2017. Income tax, as reported in the annual financial statements, comprises 20% income tax on earnings and a special 6% financial tax on the earnings of financial undertakings of more than ISK 1 billion. The effective income tax rate was 29.2%, compared with 28.9% in 2017. The high tax rate is largely due to the bank levy (calculated as 0.376% on total liabilities in excess of ISK 50 billion) is not deductible from tax base. In addition there is a 5.5% financial sector tax on employees’ salaries. A summary of the above taxes can be seen in the figure below.

Operations held for sale amounted to  a loss of ISK 1.2 billion in 2018, compared with a loss of ISK 0.7 billion in 2017. The main part of this is from reclassification of Valitor as a discontinued operation held for sale at year-end 2018 and comparative figures for 2017 were changed accordingly. Valitor has invested significantly in revenue growth over the last few years and will continue on that path going forward but Arion Bank is expecting to offload at least a majority of Valitor holdings during the next 12 months.

Balance sheet

Arion Bank’s total assets increased by 1.4% from year-end 2018.

Cash and balances with the Central Bank amounted to ISK 83,139 million at the end of the year, compared with ISK 139,819 million at the end of 2017. The decrease is partly due to the buyback of own shares and dividend payments totaling ISK 33.3 billion in 2018.

Loans to customers totalled ISK 833,826 million at the end of the year, representing a 9% increase from year-end 2017. Loans to corporates increased by 8.3% between years, mainly loans to wholesale and retail on the one hand and real estate and construction on the other. Loans to individuals increased by 9.6%, primarily mortgage loans, as the Bank’s market share remained stable during the year. In 2018 the Bank had to make impairments in relation to the bankruptcy of Primera Air by total of ISK 2.8 billion, which affected the loan growth slightly. 

The Group’s loan portfolio is well diversified. Just under half of loans are to individuals and just over half are to companies. Loans to corporates diversify across sectors in line with the composition of the Icelandic economy.

Financial assets amounted to ISK 114,557 million at the end of the year, compared with ISK 109,450 million at the end of 2017. The combination of securities held by the Bank is heavily related to the liquidity position at any given time. Transfers from international debt funds to highly rated foreign currency bonds during the year of 2018 represent part of the Bank’s liquidity management but the Bank has also sold a significant part of its listed and unlisted equity holdings during 2018.

Assets and operation held for sale amounted to ISK 48,584 million at the end of 2018 compared with ISK 8,138 million at year-end 2017. The main changes are due to reclassification of the subsidiary Valitor, which is now classified as operation held for sale. The total assets of Valitor at year-end were ISK 40,003 million, with majority cash and bank accounts.

Liabilities and equity

Liabilities increased by 4% from year-end 2017. Equity decreased due to the purchase of treasury stock and dividend payments in 2018, totalling ISK 33.3 billion. Net earnings for the year and the effects of the adoption of IFRS 9 partly offset the decrease.

Deposits from customers amounted to ISK 466,067 million at the end of 2018 and had increased by 1% from year-end 2017. However the combination of deposits have developed favorable as higher share of deposits are now from individuals and SME’s through Retail Banking but share of deposits from institutional investors have decreased accordingly. Deposits remain the most important source of funding for Arion Bank and the Bank will aim to maintain as strong a position as possible on the deposits market.

Borrowings amounted to ISK 417,782 million at the end of 2018. In March Arion Bank issued a new 5-year €300 million bond on the international markets (ISK 37 billion). The Bank has also continued to issue covered bonds on the Icelandic market, a total of approximately ISK 32 billion in 2018, as well as commercial papers for a total of ISK 31 billion.

Subordinated liabilities amounted to ISK 6,532 million at the end of 2018, following a Tier 2 issuance of SEK 500 million bond in November. The bonds were priced at a spread of STIBOR 310 and have ten year maturity with option to pay in 2023.

Shareholders’ equity amounted to ISK 200,729 million at the end of 2018, compared with ISK 225,606 million at the end of 2017. The decrease is explained by a buyback of shares during the first quarter of 2018 and dividend payments during the first and the third quarters of 2018, a total of ISK 33.3 million, which is partly offset by an increase in equity due to the adoption of IFRS 9 and the financial results for the year. The CET 1 ratio was 21.2% at year-end 2018, compared with 23.6% at year-end 2017.