Highlights of 2019

Arion Bank has set itself the goal of being the leading digital bank in Iceland and our customers have been quick to adopt the new products we have launched over the last few years.

Convenient banking

A host of innovative products were released in 2019, including a new feature in the Arion app in partnership with Meniga, My Finances, which gives customers an excellent overview of their household finances and analyzes where they spend money. The app was also made available to customers of other banks. Users of the app can now get information on their accounts at other banks and in doing so get an exceptional insight into their personal finances. App users can also buy services from another company for the first time as they can now buy insurance from Vörður via the app. Apple Pay and payment solution for Android were enabled so that customers can use their phones and other smart devices to pay for goods and services.

Retail banking has been transformed in the last few years and now around 99% of customer contact with the Bank is through digital channels. The Arion app is going from strength to strength and 2019 was the first year in which more customers used the app than online banking. We refer to Finalta’s Digital and Multichannel Benchmark to measure the Bank's results in terms of digital services and sales and according to this Arion Bank is among the global leaders in terms of digital sales.

Our focus on developing digital solutions is matched by our emphasis on good quality personal services in our branches and call centre. Many of the Bank's employees at the headquarters and front line underwent focused service training during the year.

The Bank continued to target greater efficiency in the branch network and to make services more readily accessible to our customers by reducing the size of our branches and prioritizing self-service channels. The Bank’s branch in Hella was modified and our branch in Akureyri moved to a new location. The new branch at Akureyri has video conferencing equipment, meeting and conference rooms which can be used by customers and to host various events. In Akureyri the Bank also shares space with the insurance company Vörður and customers can now obtain banking and insurance services in one place.

Changes to senior management and organization

The Board of Directors underwent considerable change during the year. At the Annual General Meeting in March, Liv Fiksdahl and Renier Lemmens were elected as new Board members. Brynjólfur Bjarnason was elected as chairman and Herdís Dröfn Fjeldsted as vice chairman. At a shareholders’ meeting in August, Paul Richard Horner and Gunnar Sturluson were elected as new Board members.

In April Höskuldur H. Ólafsson, who had been CEO for nine years, stepped down and Stefán Pétursson, CFO, took over on a temporary basis while the process of hiring a new CEO was in progress. Benedikt Gíslason, a Board member since 2018, was appointed CEO and took over the position on 1 July. In July Ásgeir H. Reykfjörð Gylfason joined the Bank and took up the new position of Deputy CEO.

In September organizational changes were approved which resulted in a 12% reduction in the number of employees and the number of divisions and managing directors was reduced by two, from eight to six. These organizational changes did not represent a fundamental shift in strategy and the Bank's strategy of offering its customers universal banking services remains unchanged. However, the changes did bring a certain change in emphasis, particularly as far as loans to large companies are concerned. As a consequence of high capital requirements and taxes it is difficult for the Bank to compete on this market, if the loans are to generate satisfactory returns. Arion Bank’s focus will be on providing larger companies with expert advice and helping them secure the most effective financing at any given time. The Bank’s policy on lending to individuals and SMEs has not changed.

Companies and investors

The Bank advised Marel when the company was listed on the Euronext Amsterdam and also managed a successful stock offering for TM. The Bank had the highest market share in equities on Nasdaq Iceland, with a turnover of ISK 248 billion or 20.5%, the number one company for the fourth year in a row. Arion Bank had a turnover of ISK 432 billion on the fixed income market, the third largest turnover on the market.

The Asset Management division and the Bank's subsidiary Stefnir remain asset management leaders in Iceland with AuM of more than ISK 1,013 billion and returns were good during the year. Lífeyrisauki, the largest defined contribution fund in Iceland which exclusively receives supplementary pension contributions, is administered by the Bank. Lífeyrisauki has AuM of more than ISK 100 billion and approximately 80,000 fund members. The majority of the fund’s investment options yielded historically high real returns during the year.

Implementing new data systems

During the year substantial work went into the implementation of new data systems from Sopra and solutions from RB. The purpose of the update is to bring added efficiency to the business and to reduce the costs of running the Bank’s IT system and facilitate further product development. The new system will make it easier for the Bank to develop its services and to launch new digital solutions aimed at simplifying banking for customers. The implementation of the new system is an extensive undertaking and involves more than 100 employees of Arion Bank, RB and Sopra. The new system is expected to launch before year-end 2020.

Responsible banking and focus on the environment

The Bank became a signatory to UN PRB, Principles for Responsible Banking, along with 130 banks from various countries during the year. The principles are created by United Nations Environment Programme – Finance Initiative (UNEP FI), which is a partnership between United Nations Environment and more than 250 financial institutions across the world working to understand today’s environmental, social and governance challenges. The principles place a strong emphasis on environmental issues and they are designed to align banking with international goals and commitments such as the UN Sustainable Development Goals and the Paris Climate Agreement.

Arion Bank and Kolviður reached an agreement on offsetting the carbon emissions produced by the Bank's activities. Kolviður fixes the carbon in plants and soil through soil reclamation and forestry to offset the carbon emissions resulting from the Bank's activities in 2019. Kolviður is expected to plant up to 5,000 trees this year.

In December the Board of Directors adopted an ambitious environment and climate policy and targets for the next few years. Under the policy Arion Bank is 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. Targets for the next few years were also adopted and in 2020 Arion Bank will evaluate its loan portfolio according to green criteria and establish targets in this respect. These targets entail that the Bank will increasingly turn its focus on to financing projects which relate to sustainable development and green infrastructure. When evaluating suppliers the Bank will require them to take into account the environmental and climate impact of their activities.

More information on environmental issues

Balance sheet

The Bank continued to issue covered bonds, issuing ISK 32 billion in 2019. Arion Bank fully prepaid the bond series ARION CB 2, a total of ISK 81 billion. At the same time as prepaying ARION CB 2, which was largely owned by the Housing Financing Fund, the Bank sold a mortgage loan portfolio worth ISK 48 billion to the HFF.

In 2019 the Bank issued ISK 14 billion under its EMTN program. In November 2019 the Bank repurchased €300 million of bonds maturing in June 2020. The Bank received offers worth €258 million and all were accepted.

Discontinued operations and companies held for sale had a negative impact on the Bank’s results. This chiefly refers to the companies Stakksberg, a holding company for the silicon plant at Helguvík, and Valitor, a subsidiary of Arion Bank. The travel company TravelCo, which the Bank had to take over during the year, also had an impact on financial results. All these companies are in the process of being sold and their combined negative impact on the Bank's net earnings was ISK 13 billion.

Arion Bank is working on optimizing its capital structure as part of the efforts to improve return on equity. A key factor in this respect is reducing the Bank’s surplus capital. In March the Annual General Meeting approved a dividend payment of ISK 10 billion, or ISK 5 per share. The Bank’s share buy-back program, which was initiated in October, authorized the purchase of up to 3.2% of issued shares or a maximum of 59 million shares. At year-end the Bank had bought 41 million own shares and SDRs, approximately 2.27% of issued shares, for ISK 3.3 billion. The dividend and share buy-back in 2019 therefore totalled ISK 12.4 billion.