Financial results

Operating income 

Operating income amounted to ISK 48.0 billion compared with ISK 46.2 billion in 2018, an increase of 4%. Net interest income, Net insurance income and Net financial income developed positively whereas Net fee and commission income and Other operating income decreased between years.

Net interest income for 2019 increased by 3% compared with 2018. Net interest margin was equal for the years 2018 and 2019, or 2.8%. Average interest bearing assets increased by ISK 19.5 billion between years, or 1.8% but decreased significantly during the fourth quarter when ISK 48 billion mortgage portfolio was sold to the Housing Financing Fund and strong liquidity was used for prepayment of foreign currency bonds issued.

Net fee and commission income for 2019 decreased by 3% compared with 2018. The decrease between years is mainly due to less activity in the market, both corporate finance and capital markets.

Net insurance income amounted to ISK 2.9 billion, compared with ISK 2.6 billion in 2018. The insurance company Vörður became part of Arion Bank in late 2016 and has performed very well since. Premium earned increased by 9% from 2018 and the claim rate decreased slightly. The combined ratio for 2019 was 93.1% compared with 92.3% in 2018 and are highly competitive in the domestic market.

Net financial income for 2019 increased by 40% compared with 2018, mainly from equity holdings. Markets were favorable during the year, both domestic and international.

Other operating income amounted to ISK 0.9 billion, compared with ISK 1.6 billion in 2018 or decrease of 45%. Profit from sale of real estate in operation was the main source of income during 2019 while fair value changes on investment property was the main source in 2018.

Operating expenses 

Operating expenses amounted to ISK 26.9 billion, compared with ISK 26.3 billion in 2018, increase of 2%. The Bank’s cost-to-income ratio was 56.0%, compared with 56.9% in 2018. Higher operating expenses in 2019 compared with the previous year is mainly due to redundancy cost following the structural changes and corresponding staff reduction at the end of September.

Salaries and related expenses amounted to ISK 14.6 billion, an increase of 3% from the previous year. Redundancy expense following structural changes in September was ISK 1.1 billion and is the main reason for increased salary expense between years. Full-time equivalent positions at the end of the year totalled 801 at the Group, 103 or 11% decrease between years.

Other operating expenses amounted to ISK 12.2 billion in 2019, an increase of 2% from 2018. The increase is mainly in IT expense and depreciation and amortization on fixed and intangible assets.

Net impairment was ISK 0.4 billion in 2019 compared with ISK 3.5 billion in 2018. Net impairment was significant for the first half of 2019 but was partly offset by positive net impairment in the second half of 2019. Net impairment was negatively affected by the bankruptcy of WOW Air as well as the operational difficulties at TravelCo but positively affected by the release of a discount on the ISK 48 billion mortgage portfolio which was sold during the fourth quarter of 2019. In 2018 the main impairments was due to the bankruptcy of Primera Air, or ISK 2.8 billion on loans and guarantees.

Income tax amounted to ISK 3.7 billion, compared with ISK 4.0 billion in 2018 or 8% decrease between years. 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 20.9%, compared with 29.2% in 2018. Lower tax rate is largely due to different combination of income. In addition to the income tax, Arion Bank and other large Icelandic financial undertakings, pays a bank levy (calculated as 0.376% on total liabilities in excess of ISK 50 billion) and a 5.5% financial sector tax on employees’ salaries. A summary of the above taxes can be seen in the figure below.

The loss from discontinued operations was ISK 13.0 billion in 2019. The main reason for significant negative results of discontinued operations in 2019 is negative operational results of Valitor of ISK 8.6 billion, including impairment of Valitor’s intangible assets of ISK 4.0 billion and ISK 1.2 billion damages in the case against Datacell and Sunshine Press Production, ISK 3.8 billion impairment of Stakksberg’s silicon plant and ISK 0.6 billion impairment of Sólbjarg’s assets.

Balance sheet

Arion Bank’s total assets decreased by 7% from year-end 2018.

Cash and balances with the Central Bank and Loans to credit institutions amounted to ISK 113.7 billion at year end 2019 and decreased in total by ISK 25.8 billion or 21% from year-end 2018 The liquidity position has mainly been affected by prepayments of borrowings, dividend payment and share buy-back in 2019 but apart from that liquidity management is the main reason for changes.

Loans to customers totalled ISK 774.0 billion at the end of 2019, representing a 7.0% decrease from year-end 2018. In October, Arion Bank paid in full the structured covered bond issuance (Arion CB2) in the amount of ISK 62 billion, which was largely owned by the Housing Financing Fund (HFF). At the same time, the Bank sold a mortgage loan portfolio amounting to ISK 48 billion to the HFF. The strategic focus on returns rather than growth also partly explains the decrease as well as the fact that the Icelandic economy is stabilizing following a significant period of growth during the last few years. The decrease was mainly related to mortgage loans, following the sale to HFF, and corporates in real estate and wholesale and retail trade sectors and lower level of financial and insurance activities.

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 are largely in line with the composition of the Icelandic economy.

Financial assets amounted to ISK 117.4 billion at the end of 2019, compared with ISK 114.6 billion at the end of 2018. The combination of securities held by the Bank, especially bond holdings, is closely related to the liquidity position at any given time.

Assets and disposal groups held for sale amounted to ISK 43.6 billion at the end of 2019, compared with ISK 48.6 billion at year-end 2018. The subsidiaries Valitor Holding ehf., Stakksberg ehf. and Sólbjarg ehf. are classified as held for sale. The total assets of Valitor were ISK 30.7 billion at the end of 2019 compared with ISK 40.0 at the end of 2018, with majority cash and bank accounts.

Liabilities and equity

Liabilities decreased by 9% from year-end 2018. Equity decreased due to a dividend payment of ISK 9.1 billion and purchase of own shares for ISK 3.3 billion in 2019. Net earnings for the year partly offset the decrease.

Deposits from customers amounted to ISK 492.9 billion at the end of 2019 and had increased by 6% from year-end 2018. The loans to deposit ratio was 178.9% at the end of 2018 and decreased to 157.0% following the sale of the mortgage portfolio. The combination of deposits have developed favourable 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. Deposits remain the most important source of funding for Arion Bank.

Borrowings amounted to ISK 304.7 billion at the end of 2019, a 27% decrease from year-end 2018. In October 2019 the Bank prepaid in full the structured covered bond issuance (Arion CB2) in the amount of ISK 62 billion as well as repurchase of ISK 35 billion of EMTN issuance from 2017 with maturity in June 2020. The Bank issued covered bonds to finance mortgages in the Icelandic market, totalling ISK 32.0 billion during the year and commercial papers of ISK 14.5 billion.

Subordinated liabilities amounted to ISK 20.1 billion at the end of 2019, compared with ISK 6.5 billion at the end of 2018. The Bank issued Tier 2 subordinated bonds for the total amount of ISK 13.6 billion in 2019, both in ISK and foreign currencies. The total issued Tier 2 bonds reflects 2.8% additional capital. In June 2019 the Bank received a tax ruling from the Icelandic tax office stating that coupons on AT1 issuance will not be tax deductible. The Bank is aiming for issuance of AT1 in the first quarter of 2020 and is optimistic that tax issues will be resolved with changed legislation early in 2020.

Shareholders’ equity amounted to ISK 189.6 billion at the end of 2019, compared with ISK 200.7 billion at the end of 2018. The decrease is explained by a dividend payment of ISK 9.1 billion and purchase of own shares for the amount of ISK 3.3 billion, which is partly offset by an increase in equity due to the financial results for the year. The CET 1 ratio was 21.2% at the end of 2019, the same as it was at the end of 2018 and the leverage ratio was 14.1% at the end of 2019, compared with 14.2% at the end of 2018, which is very high in all comparison in the international banking market. At year-end 2019 the Bank had bought 41 million shares in a share buy-back program from early November, with 18 million shares remaining from the program. In January 2020 the FSA approved further buy-back of own shares for up to ISK 3.5 billion. The dividend payment and share buy-back are in line with the Bank’s strategy to work towards the optimization of its capital structure.