The year 2018 was an important one in the history of Arion Bank. Ever since it was established, the goal has been to rebuild the Bank after the turmoil of the financial crisis 10 years ago. The aim has been to create a good, profitable and strong bank, which provides quality services to its customers and which plays a leading role in the Icelandic financial system and business sector. A bank which would eventually become an attractive investment option and be listed on the stock market. It was therefore particularly pleasing that a successful international IPO was held in 2018 in which Arion Bank shares were sold to international and Icelandic investors. Arion Bank was subsequently listed on the main lists of Nasdaq Iceland and Nasdaq Stockholm. It represented a vital step in the Bank's development and is testament to what has been achieved over the past 10 years.
It has been clear from the beginning that Arion Bank's ownership structure was not going to be a long-term arrangement. Since 2010 the Icelandic government had owned a 13% stake and Kaupthing, through its subsidiary Kaupskil, held 87%. Both parties intended to sell their shares in the future. In 2017 Kaupthing took the first step towards reducing its holding with a private placement, selling approximately 30% in the Bank.
The next step in the evolution of the Bank’s ownership structure was taken in early 2018, when the Icelandic government divested its entire holding in the Bank. Arion Bank thereby became wholly privately owned, while the Bank’s main competitors remain under full government ownership.
Stock market listing in Iceland and Sweden
The most significant milestone during the year was the successful initial public offering, in which 30% of the Bank was sold to domestic and international investors which showed strong interest in Arion Bank. 70% of the shares in the IPO were sold to international investors.
Arion Bank was subsequently listed on the main lists of Nasdaq Iceland and Nasdaq Stockholm. It represented the second ever largest stock market listing in Iceland and the second biggest in Sweden of the year to date. Arion Bank became the first Icelandic financial institution to be listed on the main list of a stock exchange for more than a decade. It is a significant achievement for the Bank and has been a key objective for many years.
Arion Bank became the first Icelandic financial institution to be listed on the main list of a stock exchange for more than a decade.
Today the Bank’s shareholder base is well diversified between domestic and international investors. Furthermore, nearly all the Bank's employees are shareholders in the Bank, having received shares in a stock grant following the IPO.
Growing economy
It has been pleasing to see how well the Icelandic economy has performed in recent years. Economic growth has been strong, and the country has done well to extricate itself from a difficult situation. The debts of government, companies and households are at their lowest level for many years and the country is now highly competitive.
Tourism has been a key contributor to economic growth, and the sector has grown rapidly in recent years. Obviously, such rapid growth presents certain challenges, and these became evident during the year, particularly in the airline business. After a period of such sustained growth, it makes sense to slow down and reassess objectives and future vision. The tourism sector, and indeed the economy as a whole, are forecast to continue to grow, and although the growth rate has eased off, the economic outlook in Iceland is bright.
Financially robust
Arion Bank is financially robust and in prime position to perform its role of providing support to a dynamic business sector.
The Bank has been profitable every year since its foundation. The Bank’s performance in its regular operation was acceptable in 2018, apart from the negative impact on the Bank’s results and profitability from dire market conditions and difficulties in the airline industry. The Bank’s medium-term target for return on equity is to exceed 10%. To reach this ambitious target the Bank will place increased focus on efficiency and return, rather than growth.
The Bank’s medium-term target for return on equity is to exceed 10%.
The regulatory authorities have stepped up the supervision of financial institutions and the requirements made of them in recent years, with capital and liquidity requirements increasing. Arion Bank’s equity currently amounts to ISK 200 billion. The capital ratio is 22% and the leverage ratio 14.2%, and they both meet the requirements made by the Financial Supervisory Authority. The Bank is also obliged to report its large exposures as they can have an impact on the Bank’s financial strength and results. We can report that there are no such large exposures in the Bank's accounts at the end of 2018. The Bank’s loan portfolio is well diversified between individual and companies and also between sectors.
Business environment
The government recently published a white paper on the future of the financial system in Iceland. It discusses various aspects of the financial sector and provides a good platform for discussing the future shape of the Icelandic financial system. It is important that a strong consensus seems to have been reached on the fundamentals of the system and no major negative changes are likely to occur.
It is disappointing that the white paper did not say anything more explicit on the scrapping of the specific taxation of the banking system, in particular the bank levy. The bank levy, which is in fact a tax on deposits and bonds issued by Icelandic financial institutions, is 10 times higher in Iceland than in the handful of other European countries which impose such a tax. Similar taxes are not collected from other financial institutions operating on the joint European financial market.
The bank levy, which is in fact a tax on deposits and bonds issued by Icelandic financial institutions, is 10 times higher in Iceland than in the handful of other European countries which impose such a tax.
The bank levy greatly distorts the competition environment and in fact leads to market failure. The end result is that the current system favours international banks, which are increasingly offering their services in Iceland, and Icelandic pension funds, which can offer their fund members mortgages at terms which the banks cannot match due to fees and capital requirements placed on them but from which the pension funds are exempt.
When the playing field is no longer level, it undermines the regular banking system and favours the shadow banking system. We would have liked to have seen it spelled out more clearly how the banking levy will be abolished and we think it's only fair that it be abolished as quickly as possible.
Sustainability
Arion Bank shows its commitment to sustainable banking by making a difference to our customers and performing our role as a financial institution conscientiously and responsibly. More than ever before, it is vital that individuals, organizations and companies take into account the needs of different groups and consider society and environmental issues, not least now that climate change is becoming a pressing issue for us all. We are well aware of our responsibility to our employees, shareholders, customers, partners and society and want to have a positive impact on our environment and the projects our customers choose to undertake.
Since 2014 Arion Bank has been a signatory to the UN Women/UN Global Compact Empowerment Principles and signatory to UN Global Compact, the UN's initiative to encourage businesses to adopt sustainable and socially responsible practices, since 2016. The Bank has also been a signatory to the UN’s Principles for Responsible Investments (UN PRI) since the end of 2017.
Strategy
In 2018 we set about reviewing the Bank's strategy. The strategy remains fundamentally unchanged, i.e. the Bank’s market continues to be primarily in Iceland and the Bank provides its customers, i.e. individuals, investors and companies with universal financial services. However, there is an enhanced focus on competitiveness and efficiency, as well as digital services and a positive customer experience.
...there is an enhanced focus on competitiveness and efficiency, as well as digital services and a positive customer experience.
Our subsidiaries continue to be integral to the Bank’s overall product offering. Stefnir, Iceland’s largest fund management company, is a key component of the Bank's services, while the insurance company Vördur plays an increasingly vital role in the Bank’s strategy and income generation. Our partnership with Stefnir has been very fruitful and we see great opportunity for increasing our collaboration with Vördur, for the benefit of both companies and our customers.
Valitor, one of Iceland’s leading payment services companies, has been expanding internationally and in 2018 70% of the company's revenue was generated abroad. The company now has around 400 employees and offices in three countries. Valitor has become a large company and its focus on international operations and its plans to further expand its business mean that it requires substantial investment, and therefore Arion Bank has decided to put the company up for sale and intends to sell it, wholly or partly, in 2019.
A solid platform for continued success
Arion Bank is developing its business on solid foundations. The Bank occupies a strong position in its chosen markets and is a leader in digital financial services. Digital services and increased automation are crucial for making the business more efficient and generating higher income. Our aim is to continue in this direction, to make the Bank more efficient and competitive so that we can achieve our financial objectives.
I would like to thank the management and employees for their contribution to the Bank's success in 2018. A solid platform for continued success has been created.