Arion Bank reported net earnings of 28.6 billion in 2014 compared with ISK 12.7 billion in 2013. Return on equity was 18.6% compared with 9.2% in 2013. Total assets amounted to ISK 933.7 billion, compared with ISK 938.9 billion at the end of 2013. The Bank's capital ratio at the end of 2014 was 26.3% compared with 23.6% at the end of 2013. CET1 ratio was 21.8% at year end 2014 compared with 19.2% at the end of 2013.
Net earnings amounted to ISK 28,594 million in 2014 compared with ISK 12,657 million in 2013. The increase in net earnings is mainly due to increased net financial income and earnings from discontinued operations, but the listing and sale of shareholdings in HB Grandi hf. had a significant effect on those items in the first half of the year. At the same time net fee and commission income increased by 19% between years.
Operating income increased considerably between years, up ISK 9,642 million. Operating income amounted to ISK 53,990 million in 2014. The increase is primarily due to a ISK 3,037 million increase in net financial income, ISK 2,578 million shift in net gain on foreign exchange and ISK 2,086 million increase in net commission income.
Net interest income amounted to ISK 24,220 million, an increase of 2% from 2013. The net interest margin as a percentage of average interest-bearing assets was 2.8% in 2014, compared with 2.9% in 2013. Despite lower inflation, affecting index linked loans, the net interest margin has changed little which is mainly explained by lower funding cost due to effective liquidity management.
Net financial income increased sharply between years to ISK 6,478 million in 2014, compared with ISK 3,441 million in 2013. The main difference is the valuation change due to the shareholding in HB Grandi hf. which was listed on NASDAQ Iceland in April 2014. In general, the return on equities was good during 2014 whilst return on bonds was rather low. Dividend income was ISK 829 million higher in 2014 than in 2013.
Net foreign exchange rate gain amounted to ISK 813 million, compared with a loss of ISK 1,766 million in 2013. The Bank’s net foreign exchange imbalance was ISK 18.9 billion at the end of the year, meaning that volatility in the exchange rate has some impact on operating income. The net foreign exchange imbalance was ISK 31.6 billion at the end of 2013 and the Bank has made a targeted effort to reduce its net foreign exchange position. The foreign exchange balance of the parent company is well within the 15% limit stipulated by the Central Bank of Iceland.
Other operating income amounted to ISK 9,171 million which is a considerable increase from 2013. The main types of income included in other operating income are share of profit and valuation changes of associates, lease income, valuation changes and profits from the sale of commercial property owned by Landfestar ehf. (subsidiary sold in June 2014) and the Landey group, and income from insurance premiums at OKKAR Life Insurance hf. The increase over last year is primarily a result of valuation changes and profits of associates or an increase of ISK 1,512 million. Lease income from commercial property decreased considerably due to the sale of the Bank's shareholding in Landfestar ehf. and the consequent cessation of Landfestar ehf. as a subsidiary in June.
Operating expenses amounted to ISK 27,042 million. The cost-to-income ratio decreased to 50.1% from 57.3% in 2013. The cost-to-assets ratio was 2.9%, compared with 2.8% in 2013.
Salaries and related expenses amounted to ISK 13,979 million, an increase of 3% between years. The increase is partly explained by contractual salary increases of 2.8%, the cost of the incentive scheme and a one-off expense related to employment termination. There were on average 1,128 full-time equivalent positions at the Group in 2014, compared with 1,159 in 2013.
Other operating expenses amounted to ISK 13,063 million, an increase of 10% between years. The increase can mainly be explained by relatively high one-off costs due to the impairment of assets and a fine imposed by the Icelandic Competition Authority, relating to the operations of banks and other credit card companies in Iceland that have existed for decades.
Net valuation change
Net valuation change amounted to ISK 2,135 million and is broadly divided into three types. Firstly, net valuation increases on loans to corporates of ISK 2,300 million. Secondly, net loan impairment on retail loans amounted to ISK 851 million. Thirdly, the net valuation increase of other assets of ISK 686 million.
Income tax amounted to ISK 4,679 million, compared with ISK 3,143 million in 2013. Income tax, as reported in the financial statements, comprises 20% income tax on earnings and a special 6% financial tax which is levied on the earnings of financial institutions in excess of ISK 1 billion. The effective income tax rate was 16.1% in 2014, compared with 17.2% in 2013. The bank levy amounted to ISK 2,643 million, compared with ISK 2,872 million in 2013. Income tax and bank levy amounted in total to ISK 7.3 billion in 2014, compared with ISK 6.0 billion in 2013.
Earnings from discontinued operations
Earnings from discontinued operations amounted to ISK 6,833 million in 2014. In April the Bank sold 18.8% shareholding in HB Grandi hf. (previously held 31%) and the majority of these earnings originate from this sale. Following this transaction and the company’s stock market listing the Bank’s remaining shareholding was classed as a financial asset and it changes in value in accordance with the listed share price. These valuation changes are categorized under net financial income in the Statement of Comprehensive Income.
Arion Bank’s total assets amounted to ISK 933,736 million at the end of the year. Changes to individual asset classes during the year are mainly due to changes in the Bank's liquidity management, partly related to the adoption of the Liquidity Coverage Ratio, LCR. This results in lower deposits at the Central Bank of Iceland, higher loans at credit institutions and increased securities holdings. There was new lending during the year, both to individuals and corporates in seafood, real estate and general industry. Investment property decreased relatively during the year due to the sale of the subsidiary Landfestar ehf. Non-current assets and disposal groups HFS decreased mainly due to the sale of shareholding in HB Grandi hf.
Loans to customers
Loans to customers amounted to ISK 647,508 million at the end of the year. Since 2010 the Group’s loan book has increased substantially, with two events being especially significant. Firstly, the Bank’s acquisition of Arion Bank Mortgage Institutional Investor Fund at the end of 2011; and secondly when the Bank took over retail loans from SPRON of a value of more than ISK 50 billion at the end of 2013. Mortgage loans represent a large proportion of loans to individuals and a substantial percentage of these are low-risk loans with very strong collateral.
The loan portfolio is well diversified. Loans are now evenly split between individuals and corporates. The distribution of the corporate loan book reflects the relative size of sectors in the Icelandic economy. The graph shows loans to corporates specified by sector at year end 2014.
Securities holdings amounted to ISK 101,828 million at the end of the year, compared with ISK 86,541 million at the end of 2013.
The increase is particularly attributable to changes in the Bank’s liquidity management and the growth in the Bank’s equities holdings following the listing and re-categorization of the holding in HB Grandi hf. and Eik fasteignafélag hf.
Intangible assets amounted to ISK 9,596 million at the end of the year, compared with ISK 5,383 million at the end of 2013. The increase is mainly due to the acquisition by Valitor Holding hf. of a Danish group of undertakings, AltaPay A/S. The aim of the acquisition is to support Valitor’s growing e-commerce business in the Nordics.
Total liabilities amounted to ISK 771,524 million at the end of the year, compared with ISK 793,903 million at the end of 2013.
Total deposits amounted to ISK 477,849 million at year end, decreasing between years, mainly due to large business transactions in the Icelandic market at the close of 2014.
Borrowings amounted to ISK 200,580 million at the end of 2014. The decrease is mainly due to an early redemption of the Bank’s own long-term covered bonds of ISK 20 billion in July and the issuance of new covered bonds of ISK 10 billion, which mature in 2015. Borrowings also decreased as a result of the sale of the real estate company Landfestar ehf., which has issued listed bonds of almost ISK 3 billion.
In early 2014 the Bank was assigned a rating by the international ratings agency Standard & Poor’s, the first Icelandic bank to obtain a rating for more than five years. The Bank’s rating of BB+ was affirmed by the rating agency in October and the outlook was changed from stable to positive. This rating and the positive outlook will increase Arion Bank’s opportunities in the capital markets both in Iceland and internationally in the coming years.