CEO's address

The year 2019 was in many ways a year of change, both in the senior management and the Bank’s organization. Organizational and strategic changes were made in the second half of the year and the positive impact materialized in the fourth quarter earnings. The changes have had an effect on both the revenue and cost sides. Companies held for sale, however, had a negative impact on annual earnings which only amounted to ISK 1.1 billion. In 2020 we will work on bringing the sale of these companies to a conclusion. The capital ratio remains very robust and the Bank will take further steps to optimize its capital structure. We continued to achieve excellent results with our digital solutions and took decisive steps towards open banking. The Bank’s future is bright. We enjoy a strong market position, have clear goals and an ambitious future vision.

The objective of the organizational and strategic changes made towards the end of the third quarter was to simplify operations, enhance services to larger corporate clients and to improve earnings from regular operations. The number of divisions and managing directors was reduced from eight to six and there was a 12% reduction in the number of employees, primarily at the Bank’s headquarters. Many talented and hardworking colleagues left the Bank, and I have no doubt they will prosper in new surroundings. The fourth quarter is the first quarter where the effect of the changes can be felt and the return on continuing operations in the fourth quarter is 10.8% and the cost-to-income ratio is 54.9%. Earnings in the quarter were also positively affected by ISK 1.1 billion by the sale of a mortgage portfolio to the Housing Financing Fund. The Bank’s targets of ROE above 10% and 50% cost-to-income ratio remain unchanged.

Equity an expensive source of funding

In the years before Arion Bank was listed on the stock markets in Iceland and Stockholm the Bank's equity grew significantly. Achieving satisfactory return on equity presents a challenge when the Bank has unnecessarily high levels of equity. Equity is often referred to as the most expensive source of funding. Optimizing the funding structure is therefore vital for generating a good return on equity and using capital effectively.

The Bank’s policy is to reduce equity through dividends and share buy-backs. In October 2019 a share buy-back program was initiated and at the end of 2019 41 million shares, 2.27% of the outstanding shares, had been purchased. It will be proposed at the Bank's forthcoming AGM that extraordinary dividends of ISK 10 billion be paid out in addition to the dividends paid out in 2019. The objective is that equity belonging to shareholders (common equity tier 1 - CET1) will gradually be reduced to approximately 17% and the Bank will achieve a more optimal equity structure by fully using subordinated bonds under additional tier 1 and additional tier 2.

Profitability not growth is the goal

It is clear to us that becoming the largest bank in Iceland is not a goal in itself. Instead we aspire to be a well-run and profitable bank. Some of the organizational and strategic changes made last September concerned lending to major companies. Due to high capital requirements and high tax rates banks find it difficult to compete on lending rates with international banks, pension funds and the Icelandic bond market. We need to be realistic and we are simply not going to compete on pricing on these markets at the expense of acceptable profitability. This might entail that the Bank’s loan portfolio will shrink in the near term but it also means that the Bank is taking less risk on major loans and this will result in the more effective distribution of risk in the loan portfolio.

Arion Bank will continue to cultivate strong business relationships with Iceland’s largest companies. Advising these companies and sharing our financial expertise to help them secure the most effective sources of financing will be our focus. And, of course, we will also support our customers and provide funding when the market does not meet these companies' needs. For the fourth year in a row Arion Bank was in first place in equity trading volume on Nasdaq Iceland and advised Marel when the company was listed on the Euronext Amsterdam and also managed a successful stock offering for TM.

Our strategy on small and medium-sized companies as well as individuals will remain unchanged. If anything, the shift in focus regarding larger companies will make us even better equipped to serve these customer segments.

Open banking – Arion app for everyone

The Arion app and our digital solutions are an integral part of our service offering and future vision. The Arion app is now the Bank’s most popular and effective service channel and for the third year in a row was rated the best banking app by customers of the Icelandic banks.

Banking services are opening up, a trend we have taken on board when developing the app. The revised payment services directive, PSD2, which enables bank customers, to give third-party providers permission to retrieve their data from their banks, has yet to be implemented in Iceland. Nevertheless we paved the way for open banking by opening up our app so that anybody can download it and use it. We then launched a feature in the app designed to give our customers an unparalleled overview of their household finances. In partnership with Meniga, a new feature in the app also enabled customers to view their accounts at other banks. It gives our customers a more comprehensive and convenient insight into their personal finances in the Arion app, an innovation not offered by any other bank in Iceland. Maintaining the lead in this area is crucial in my opinion in order to keep a competitive advantage on the financial market.

In order to bring our services to the next level we are going to expand our involvement with cutting-edge fintech companies. Our partnership with Meniga and our acquisition of the majority of the fintech company Leiguskjól are prime examples of this. Leiguskjól is an attractive option for people on the rental market and together with the company we now offer renting guarantees which make it easier for tenants to get on to the rental market.

Wider range of services in partnership with Vörður

The partnership between Arion Bank and our subsidiary Vörður continues to go from strength to strength with the aim of offering customers of both companies comprehensive and convenient financial services. Our customers can now buy insurance from Vörður using the Arion app. Vörður and Arion Bank also opened a shared business space in Akureyri during the year.

Enabling our customers to buy insurance via the Arion app and providing a comprehensive overview of their insurance policies is a real innovation in Iceland and is the first step in offering third-party services in our app.

Solid year for asset management

The Asset Management division and our subsidiary Stefnir remain market leaders, with assets under management of ISK 1,013 billion. Assets under management at the Bank are therefore almost equal to the Bank’s balance sheet. It was a solid year and returns on assets were generally good.

Arion Bank has extensive experience of asset management and administration of pension and mutual funds, and private banking services. The Bank is the fourth largest pension fund administrator in Iceland. The Bank also manages Lífeyrisauki which is the largest defined contribution fund in Iceland which exclusively receives supplementary pension contributions. In 2019 AuM at Lífeyrisauki topped ISK 100 billion and it has approximately 80,000 fund members. It goes without saying that asset management is a key component of our business and we are developing digital solutions which will make our services more readily available and even more convenient for our customers. Asset management is a fascinating area and potential regulatory changes in the near future may provide opportunities for the Bank, such as tax breaks for investments in shares and greater flexibility in managing private pension savings.

Banks have role to play on climate change

In December the Board of Directors adopted an ambitious environment and climate policy and targets for the next few years. According to the policy we have to confront the fact that climate change represents one of our greatest challenges and that banks, as lenders and investors, play a key role in combatting it. We are committed to contributing to efforts to ensure that Iceland can meet its obligations under the Paris Climate Agreement and other local and international environmental and climate agreements.

In 2020 we intend to evaluate the Bank’s loan portfolio according to green criteria and establish targets in this respect. We will increasingly turn our focus on to financing projects which relate to sustainable development and green infrastructure. Furthermore, when evaluating suppliers the Bank will require them to take into account the environmental and climate impact of their activities.

We are well aware there is no easy fix to the threat of climate change. It is, however, apparent that huge investment in the development of green infrastructure is necessary and such investment has to generate satisfactory returns for those providing the capital. Our response needs to be based on close cooperation between governments, companies, universities, entrepreneurs and banks across the world. During the year Arion Bank became a signatory to the UN Principles for Responsible Banking, along with 130 other banks. The principles place a strong emphasis on climate issues and are founded upon active cooperation between banks, something for which we have high hopes.

Setting a course for the future

Arion Bank is financially robust and there are positive signs throughout the business. We have a clear strategy and vision of how we intend to achieve our goals. I am confident that the Bank has consolidated its leading position on the Icelandic financial market and is now in the ideal position to provide our customers with improved and convenient services and to earn dividends for our shareholders in line with our targets.

I would like to thank the employees and the Board for all their work during the year. I am also grateful to my colleagues for the warm reception and guidance they have given me in my first few months in the job.