Arion Bank’s financial results for 2018 were below expectations. Nevertheless, we saw positive developments in core operations, such as interest income and income from insurance operations. A downturn in financial income, partly as a consequence of conditions on the bond and equity markets and a volatile airline sector, did have a negative impact on net earnings, which amounted to ISK 7.8 billion, and return on equity was 3.7%. The capital ratio at year-end was 22%, compared with 24% at the end of 2017. This decrease is primarily due to dividends and share buybacks totalling ISK 33.3 billion, and the proposed ISK 10 billion dividend for 2018. The Bank concluded its inaugural Tier 2 issue during the year. This is all part of the Bank's strategy to optimize its capital structure, as the Bank is financially robust compared to banks in neighboring countries. This can be seen in the Bank's 14% leverage ratio. This ratio is commonly around 5% in Scandinavia. In 2018 Arion Bank was listed on the main markets of Nasdaq Iceland and Nasdaq Stockholm following a successful IPO, in which approximately 30% of the Bank was sold to Icelandic and international investors.
It has been our goal for many years to create a financially robust and profitable bank which provides high quality financial services – a bank which represents an attractive investment option. The IPO and dual listing in Iceland and Sweden was therefore an important milestone. It represented not only a watershed for Arion Bank, but for the Icelandic financial market and economy as a whole. The market capitalization when the Bank was listed was ISK 135 billion. It was pleasing to see the level of interest the Bank attracted before the IPO, and in the end it was heavily oversubscribed, with investors chiefly from the United Kingdom, the United States, Germany and Sweden taking part.
Arion Bank – a cross section of the economy
Many investors see an investment in Arion Bank as an investment in the Icelandic economy. There is a lot of truth to this. Arion Bank is an Icelandic bank, operating almost entirely in Iceland. The Bank provides universal financial services, has a strong market share on its markets and the loan portfolio is equally divided between retail and corporate customers. The Bank’s corporate loan portfolio is well diversified across the sectors which make up the Icelandic economy.
Arion Bank is an Icelandic bank, operating solely in Iceland. The Bank provides universal financial services, has a strong market share on its markets and the loan portfolio is equally divided between retail and corporate customers.
Arion Bank has been committed to supporting its customers, both retail and corporate, over the last few years which have been characterized by growth in the Icelandic economy. Although economic growth is beginning to tail off, there is every reason to remain upbeat and our customers have seldom been so well set in terms of net assets and low debt levels. During the year our corporate advisory team managed two of the largest corporate transactions in Iceland in the last ten years, also arranged the year’s biggest bond issue and played a key role in the IPO of Arion Bank.
The tourism sector has been the main driver of economic growth in Iceland but there are signs that it is slowing down. Rising global oil prices have left their mark on the tourist industry and negatively affected the airline business. The bankruptcy of an airline had a negative impact on Arion Bank’s third quarter financial results. The Bank needed to impair assets, and as a result, net earnings and return on equity fell short of expectations and the Bank's targets.
Strength in depth
The Bank’s core operations remain strong, as demonstrated by the stable commission income, the positive performance of interest income and solid growth in income from insurance operations. The net interest margin increased in the fourth quarter, something never guaranteed given the fierce competition on the market. In the near future we will concentrate more on the profitability of our loan portfolio, even at the expense of achieving portfolio growth.
The Bank’s core operations remain strong, as demonstrated by the stable commission income, the positive performance of interest income and solid growth in income from insurance operations.
In recent years the Bank has only paid dividends to a limited extent and equity has therefore increased significantly during this period. It can be difficult to generate satisfactory return on equity when equity is too high, without raising interest rates and fees paid by customers. Therefore the Bank has set itself the goal of gradually reducing equity, and in line with this policy, the Bank paid a dividend of ISK 16.3 billion and bought ISK 17.1 billion of its own shares in 2018. The Bank remains strongly capitalized and the objective over time is to reduce the CET 1 ratio to 17%. The liquidity coverage ratio (LCR) was 164% at year-end, well in excess of the minimum stipulated by the Central Bank of Iceland.
We will continue to work towards achieving our stated financial targets in areas such as CET 1, cost-to-income and return on equity. The Bank has set itself the medium-term target of 10% return on equity and we are setting up the business to ensure we achieve this. Keeping costs in check is therefore of utmost importance and a series of initiatives aimed at reducing costs has been launched. The Bank benefits from its digital journey and from having introduced lean management, where the emphasis is on reducing waste, continuous improvements and the ability to effect rapid and effective change.
Diverse funding
Deposits continue to be one of the Bank’s most important sources of funding, and in 2019 there will be a particular emphasis on increasing customer deposits at the Bank. Over the past few years Arion Bank has taken significant steps towards diversifying its funding, such as by issuing subordinated bonds and bonds in euros and other currencies. On the Icelandic market the Bank has continued to issue covered bonds and commercial paper.
During the year 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 Bank also issued subordinated bonds (Tier 2) in the amount of SEK 500 million, which was part of the Bank's strategy to optimize its capital structure.
Putting the customer in first place – digital and personal services
Arion Bank has achieved great success in recent years in adapting our services to customers' changing needs. Our key focus has been on digital solutions, developing the Arion App, online banking and other online services which enable our customers to take care of their finances whenever it suits them. Surveys show we are on the right track, with the Arion App rated as the best banking app in Iceland.
During the year we launched nine new digital products, bringing the total over the past two years to around 20, including digital mortgage applications and car loans. These innovations have been warmly received by customers and the Bank won three international awards during the year for its approach and for the solutions themselves.
During the year we launched nine new digital products, bringing the total over the past two years to around 20.
We have also adapted our branch network to the new digital services. Firstly, the aim is to enhance the Bank's core branches, where we offer a comprehensive range of services and financial advice. Secondly, the goal is to remodel the smaller branches, placing the focus on helping and teaching our customers how to use the Bank's solutions, even to relocate branches so that they are more conveniently located for customers, for example in shopping centres. Several branches were closed or merged with others during the year, making the branch structure more cost effective and reducing the space the Bank occupies in the Reykjavík area alone by almost 40%.
Arion Bank implemented a new service strategy which incorporates the Bank's focus on digital solutions and the remodelled branch network. The aim is to consolidate the Bank’s leading position as a provider of digital solutions, while at the same time provide a stronger framework for integrated personal services and advice. Our frontline employees will undergo comprehensive training where they will learn to combine the key elements of digital and personal service in order to improve the customer experience.
The Bank’s achievements in this area have certainly made waves, as at the end of 2018 the Bank was named marketing company of the year by the Icelandic marketing association ÍMARK, a proud achievement indeed.
The Bank’s achievements in this area have certainly made waves, as at the end of 2018 the Bank was named marketing company of the year by the Icelandic marketing association ÍMARK, a proud achievement indeed.
Responsible banking
Arion Bank places great importance on performing our duties responsibly and acting in the interests of the Bank’s different stakeholders, namely our employees, customers, shareholders and society as a whole. Responsible operations and sustainability were, as ever, matters of great importance to us. I would particularly like to highlight how we revised the Bank’s credit rules to ensure that loan decisions now take sustainability into account, and also the work carried out by Asset Management to analyze the social and environmental commitment of listed companies.
In 2018 Arion Bank became the first Icelandic bank to be given permission to use the Ministry of Welfare’s equal pay symbol. Equality has been a key priority in recent years, and the Bank first received equal pay certification from the union VR in 2015. The Bank has retained this certification ever since, and the focus on equal rights and the knowledge that employees receive the same salary for equally valuable jobs has had an extremely positive effect on the Bank’s culture. The Bank is also performing excellently compared with listed companies in Sweden, placing 17th out of 329 on AllBright’s list of companies in Sweden in terms of the gender ratio in management teams.
In 2018 Arion Bank became the first Icelandic bank to be given permission to use the Ministry of Welfare’s equal pay symbol. Equality has been a key priority in recent years and the Bank first received equal pay certification from the union VR in 2015.
The Bank’s 2018 annual report contains chapters on sustainability and non-financial information and it therefore also serves as the Bank's sustainability report. It underlines our conviction that sustainability is not a specific area of activities but an integral component of what we do. One important change in this year’s report is that we take the first steps in reporting non-financial information in accordance with the GRI Core standard. We also take into account the 10 Principles of the UN Global Compact and the criteria specified by Nasdaq in the Nordic and Baltic region concerning the reporting of non-financial information and key performance indicators.
Momentous year in the Bank's history
The year 2018 was a memorable year and key milestones were reached. The IPO was an undoubted highlight, as was the huge success we have achieved in digital sales, a fact underscored by the number of awards we have won both at home and abroad. Customer satisfaction continues to grow and our commitment to enriching the quality of service and the customer experience remains a priority.
I would like to thank our employees and customers for their contribution to the important milestones we reached in 2018.