Chairman's address

One of the fundamental duties in business is to manage companies responsibly and profitably for the benefit of all stakeholders: customers, shareholders, employees and society as a whole. In the long term only profitable companies are able to invest in services to their customers and to contribute to society. One of our main objectives in 2019 was to build stronger foundations for the future and better enable the Bank to support our customers and earn dividends for shareholders. In mid-2019 the Bank appointed a new CEO, Benedikt Gíslason, and a new organizational chart was introduced during the autumn following extensive restructuring.

Banks play a pivotal role in the economies of all countries. One of their most important functions is to be a financial intermediary, efficiently allocating funds from savers to those seeking to invest in areas such as business or homes. Banks therefore perform a vital role in society and contribute to economic growth, job creation and a thriving business sector. So it is crucial that banks are provided with a conducive operating environment and that the authorities do not place obstacles in their way.

Government policy results in higher interest rates

The regulatory framework in which financial institutions operate has undergone numerous changes in the last decade. These changes are to a great extent based on European Union directives and their adoption into Icelandic law. When these directives were introduced into Icelandic law, the government added a number of restrictive clauses specific to Iceland in response to the unusual conditions which existed in Iceland at the time. These clauses chiefly concern high capital requirements and taxes far in excess of the norm in Europe. These requirements and taxes still apply despite the fact that the Icelandic economy has undergone enormous change, namely a financial sector tax, a special financial sector tax and a bank levy. Despite plans to reduce the bank levy, it will nevertheless remain many times higher than comparable taxes in Europe. These special taxes are not calculated on revenue or earnings but on costs and are imposed on things such as funding and salary expenses.

Specific Icelandic taxes push up the operating costs of Icelandic banks and undermine their competitiveness compared with other lenders in Iceland and abroad. As a direct consequence of government policy, lending rates offered by Icelandic banks are made more expensive, which in turn has a detrimental impact on economic growth and job creation. Government measures during the last decade, many of which represented a logical response to circumstances at that time, restrict the ability of Icelandic banks to lend money and reduce their capacity to support value creation and economic growth. Now that economic growth has slowed down, it is more important than ever for financial institutions to be able to perform their roles as financial intermediaries effectively. The authorities need to review their policy and consider the role of the banks in invigorating a diverse business sector and boosting prosperity and the quality of life in Iceland.

Closer cooperation on infrastructure would be beneficial

It’s a widely held view in Iceland that the financial system is too expensive. There is some truth to this, given that there are three banks which are defined as systemically important, and this entails certain obligations and costs. It would be beneficial if Icelandic banks were able to cooperate more closely on infrastructure such as IT, defences against money laundering and operating ATMs without it having a negative impact on healthy competition between the banks. While financial institutions do currently cooperate, e.g. via the Icelandic Banks’ Data Centre (RB), there are opportunities elsewhere which should to be taken and the authorities need to smooth the way.

Restructuring a necessary step

During the year Arion Bank took proactive steps in response to the situation on the Icelandic financial market and the operating environment created by the authorities. At its meeting on 26 September, the Board of Directors approved organizational changes which resulted in a 12% reduction in the number of employees and the Bank's divisions were reduced from eight to six.

Despite this restructuring, the Bank’s strategy to provide our customers with universal banking services remains broadly unchanged. However, there was a certain shift in strategy, not least with regard to loans to major companies. Due to high capital requirements and taxes the Bank is simply unable to compete if the loans are supposed to yield satisfactory returns. Arion Bank’s focus will be on providing these companies with expert advice and helping them secure the most effective financing at any given time. This strategy also results in more effective risk distribution in the Bank's loan portfolio, as Arion Bank seeks to have few large exposures in its accounts. A key focus going forward will be developing partnerships with lenders in Iceland and abroad.

Companies held for sale weigh heavily

This shift in strategy concerning larger corporate clients is partly a result of the setbacks the Bank has suffered in recent years. The bankruptcies of airlines WOW air and Primera Air had a negative impact on the Bank’s financial results and the Bank’s involvement in the funding of the silicon plant Helguvík is well known. The Bank has sustained considerable damage in respect of these companies, both financial and reputational, and we have learned some valuable lessons. Arion Bank has made necessary changes to our strategy and methods concerning major loans. The Bank is now working to resolve these issues and to sell these acquired companies and we will take as long as is necessary to ensure we get a satisfactory outcome.

Change of strategy at Valitor

Valitor, a subsidiary of Arion Bank has invested heavily in growing its international business in recent years. In addition to its Icelandic business, Valitor operates in Denmark and the United Kingdom and provides services to companies across Europe. Although it has performed well in many areas and developed cutting-edge payment solutions, revenue from its international operations have fallen short of expectations. At the end of 2019 the board of directors of Valitor decided to scale back investments in the company’s international business and to strengthen core operations. Approximately 20% of employees were made redundant at Valitor in the year. These changes are expected to help the company generate positive EBITDA in 2020.

Valitor has been in a sale process for some time and the aim is to sell the entire company or partially. The sale process has taken longer than planned and will continue in 2020. One of the objectives of the changes made by Valitor was to facilitate the sale of the company.

Responsible banking

In September 2019 Arion Bank became a signatory to the UN Principles for Responsible Banking. These principles, presented during the autumn at the start of the UN General Assembly, align banking with international goals and commitments such as the UN Sustainable Development Goals and the Paris Climate Agreement. Arion Bank was one of 130 banks from 49 countries which announced they would comply with the principles.

As intermediaries on the financial market banks have a vital role to play in the fight against climate change and it is critical that banks throughout the world devote resources to promoting green energy and the development of green infrastructure. Banks have a great responsibility and this will increasingly shape the operations of Arion Bank, whether in terms of suppliers, the day-to-day business or serving our customers.

In 2019 the Board of Directors adopted a new environment policy and agreed targets for the next few years. The Bank will assess the carbon footprint of our loan portfolio and in the future will set targets on how we can reduce this carbon footprint by 2030 in line with the goals of the Paris Agreement.

Positive share price performance

During the year Arion Bank paid our shareholders a dividend in line with our stated policy and also bought own shares under a buyback agreement. The Bank’s share price on the stock exchanges in Iceland and Stockholm has developed positively during the year and has been one of the best performing Nordic banks. Shareholders appear to have responded positively to the changes taking place at Arion Bank and subsidiaries and the strategy adopted by the Board of Directors and new management team. We will continue along this path and strive towards attaining the Bank's targets, such as return on equity of over 10% and a cost-to-income ratio of 50%.

Ideally placed to move forward

The Board of Directors underwent a number of changes at the beginning of the year. I took over as Chairman at the AGM, and a new CEO and Deputy CEO joined the Bank in the second half of the year. Höskuldur H. Ólafsson, who had been CEO for nine years, left the Bank as did some of the senior management team. I would like to thank them and all the other employees who moved on during the year for their efforts and important contribution to the Bank over the past few years.

New people naturally bring in new focuses, as reflected by the organizational changes made during the autumn. I am confident that the Bank is on a firm footing and has consolidated its position as a leader on the Icelandic financial market. Arion Bank is ideally placed to move forward, to provide our customers with even better services and to generate returns for our shareholders.

I would like to thank the employees, management and Board for all their work during the year.