In 2014 Arion Bank was assigned a credit rating by Standard & Poor's of BB+ with a positive outlook. The Bank also established an international EMTN programme during the spring which will facilitate the Bank’s access to international capital markets. In Iceland the Bank began issuing commercial papers in October to complement its regular covered bond issues.
Funding
Issuing commercial papers
EMTN programme
Standard & Poor’s upgrades outlook from stable to positive
Arion Bank obtained a credit rating from Standard & Poor’s (S&P) at the beginning of the year. In October 2014 S&P affirmed Arion Bank’s credit rating at BB+ and upgraded the outlook from stable to positive. This came after S&P revised the economic risk trend for Iceland from stable to positive and stated that it expected economic imbalances to decline further. S&P therefore considers the outlook for the financial market in Iceland to be positive and expects a continued improvement in the banking system's asset quality.
A credit rating from an international ratings agency is vital as it improves the Bank’s access to international credit markets.
The Bank considers its rating from S&P to be good given that the Icelandic sovereign is rated BBB-. A credit rating from an international ratings agency is vital as it improves the Bank’s access to international credit markets. Furthermore, better access to international credit markets for Arion Bank and other Icelandic financial institutions is one of the prerequisites for lifting the capital controls, and it is also with this in mind that the Bank sees this as a positive step.
Issue and listing of structured covered bonds on NASDAQ Iceland
At the end of 2014 structured covered bonds issued by Arion Bank were admitted to trading on NASDAQ Iceland. The estimated value of the bonds is approximately ISK 100 billion. The bonds were originally issued by Kaupthing Bank hf. and then subsequently acquired by Arion Bank hf. The bonds are index-linked with fixed rates. Arion Bank is the leading issuer of covered bonds in Iceland. The Bank's total covered bond issue is ISK 129 billion.
Arion Bank is the leading issuer of covered bonds in Iceland.
Arion Bank continued to issue covered bonds which are secured in accordance with the Covered Bond Act No. 11/2008. In December two new series of covered bonds were issued. Both series are index-linked and mature in 2021 and 2029 respectively. The Bank issued a total of ISK 16.5 billion in covered bonds in 2014. The Bank expects to issue ISK 10-20 billion in covered bonds a year over the next few years in order to fund its mortgage loans to its customers. The Bank has been a market leader in Iceland for many years on the home loan market with a range of innovative products and competitive terms on mortgages.
The Bank intends to bring added diversity to its funding by continuing to issue covered bonds and other funding in Iceland and on the international markets.
Liquidity and liquidity risk
Arion Bank partly funds itself through deposits from individuals, corporations and pension funds. On 1 December 2013 new Central Bank rules on liquidity ratio came into effect. They are based on the same criteria as the liquidity requirements which will be made internationally from 2015 under the Basel III standard. In January 2014 the rules stated that the liquidity coverage ratio of Icelandic financial institutions should be a minimum of 70% and 100% in foreign currency.
At the end of 2014 the Bank's liquidity coverage ratio was 174% and the ratio for foreign currencies was 254%, well above the minimum requirement stipulated by the Central Bank of Iceland.
One of Arion Bank’s key objectives is to maintain a strong liquidity ratio. At the end of 2014 the Bank's liquidity coverage ratio was 174% and the ratio for foreign currencies was 254%, well above the minimum requirement stipulated by the Central Bank of Iceland. Icelandic liquidity rules are based on European regulations and should address risk factors relating to the stickiness of deposits and the maturity mismatch of the assets and liabilities of retail banks. Icelandic banks are faced with particular uncertainties linked to the possible outflow of capital triggered by lifting of the capital controls. Despite these factors, Arion Bank has a robust liquidity position and is well prepared to tackle the conditions that the lifting of the capital controls may create.
