Arion Bank had an excellent year in 2014. As in recent years, the Bank’s operations were characterized by stability. The Bank is financially robust, with a capital ratio of more than 26%, and has a strong liquidity ratio. The financial results were also very satisfactory and return on equity was just under 19%. All business segments consolidated their positions and commission income grew in line with expectations.
Strong results from regular operations
We are pleased to have achieved good results in all our key markets and reached our main objectives. The Bank’s regular operations are in good shape. We will continue to focus on developing our income streams and increasing efficiency by expanding the range of goods and services and enhancing our service channels.
Irregular items had a positive impact on the 2014 financial results. The key event in this respect was the IPO of HB Grandi. We at Arion Bank were of the opinion that an IPO would be the best way forward and in good cooperation with other shareholders this was the conclusion we reached. The listing of a major seafood company is vital to the continued development of the stock market and is also important for the sector, the company itself and its shareholders.
Financial strength important
HÖSKULDUR H. ÓLAFSSON
CEO of Arion Bank
Ever since Arion Bank was established, financial strength has been pivotal to the Bank’s strategy. The capital ratio is now very high by international standards. The Tier 1 capital is 21.8%, the leverage ratio is 15.4%, and the Bank’s strong liquidity is reflected by a liquidity ratio of 174%. The Bank comfortably meets the minimum requirements on capital ratio and liquidity.
Diversifying the Bank's funding has been a key focus in recent years and we have made great progress in this area. The Bank has issued covered bonds and also began issuing commercial papers during the year. Arion Bank is currently the largest issuer of covered bonds in Iceland. The Bank issued bonds in Norwegian kroner in 2013. In early 2014 Arion Bank became the first Icelandic bank to obtain an international credit rating from Standard & Poor’s. The Bank was rated BB+ and the outlook was upgraded from stable to positive in October. The credit rating is important, particularly for those investors interested in bonds issued by the Bank. At the beginning of March 2015 the Bank issued a senior unsecured bond for €300 million to a broad group of investors, the largest international bond issue by an Icelandic bank for many years.
At the beginning of March 2015 the Bank issued a senior unsecured bond for €300 million to a broad group of investors, the largest international bond issue by an Icelandic bank for many years.
Diverse and high quality loan portfolio
In order to bring it in line with the Bank’s strategy, the loan portfolio has undergone substantial change. Loans to individuals now represent approximately 50% of total loans, compared with 25% in 2010. In recent years Arion Bank has acquired two large mortgage portfolios, launched new products on to the mortgage market and increased its market share of new loans. Mortgages now account for 42% of loans to customers.
The Bank’s corporate loan portfolio remains stable although a substantial amount of loans were paid up in 2014. New loans make up for the prepayments which is pleasing, particularly considering that economic growth was only around 2% in 2014. It is also positive that the sector breakdown in the corporate loan portfolio broadly reflects the relative size of these sectors in the Icelandic economy, as has been our aim.
During the Bank's first few years, a substantial amount of effort was focused on helping those customers experiencing financial difficulties. The financial restructuring of companies went well and a great deal of progress had been made by 2012. While this work continues, it has been greatly reduced in scope. The quality of the loan portfolio has steadily improved and problem loans have now decreased to 4.4% of the Bank’s loan portfolio. This represents a major change from a few years ago and is testament to the results achieved in this respect. One consequence of this is that corporate and household debt is at its lowest level for a decade, which is essential for stimulating future investment.
A strong partner in major investments
It is vital for the Icelandic economy and business sector that investment increases. Financial institutions can have a positive effect in this respect and provide backing to ambitious companies and individuals who wish to invest in Iceland. Despite the capital controls, the Icelandic economy has a lot going for it at the moment and it is therefore important to seize the opportunity and develop for the future. Arion Bank led the way in major investments in Iceland during the year. The Bank was a lender and adviser on two of the year’s largest investment projects. Firstly, the construction of a silicon plant by United Silicon at Helguvík, and secondly funding for Alvogen’s research facility in Reykjavík. Providing backing for projects like this is one of the most important tasks for banks and therefore it is particularly pleasing to have played a key role in making them a reality.
Arion Bank led the way in major investments in Iceland during the year. The Bank was a lender and adviser on two of the year’s largest investment projects.
Rapidly changing service channels
Banking services are undergoing major and rapid changes, particularly in the retail banking sphere. The popular Arion Bank smartphone app makes the Bank accessible to its customers 24 hours a day, seven days a week. The rate of change now is actually faster than it was when the online bank was launched almost two decades ago.
The advent of new technology and service channels creates huge opportunities and also challenges. We have opportunities to provide better services, more valuable services, quicker, more accessible and at a lower cost to the customers. There is a challenge in the fact that the number of products and services increases as not everyone wants the same service. Arion Bank is a relationship bank and places great importance on being able to offer a wide choice. The supply is there as long as there is demand. This calls for a more transparent tariff of charges as the aim is for everyone to meet the costs of the services that they use. This is the fair way of doing things. At the same time we offer a wide range of service channels including state-of-the art ATMs, online banking, smartphone apps and cashier services.
In only two years the app has gained such popularity that 45% of the Bank's customers now use it on a regular basis. Arion Bank is at the forefront of developments in this area. In less than 20 years Arion Online Bank has grown so that 95% of our customers now use it. All of our customers use the services offered by the branches to some extent. The customers’ level of contact with the Bank has thus multiplied since electronic services were introduced. The number of visits to branches has decreased and the type of service changes. Branch services will continue to be an integral component of the Bank’s service offering. The Bank operates 23 branches in 6 geographical regions. The network has been decentralized and decision-making has been spread from the headquarters to individual regions and branches, bringing it closer to the customers. Shorter lines of communication result in better banking.
As consumption patterns have changed, we have modified the focus at our branches. We have adapted services to today's customers' needs. In 2014 we opened a new branch opposite the headquarters in Reykjavík and introduced our new areas of focus. The branch has a new generation of ATMs in which customers can carry out far more transactions than they could in a traditional ATM. In these ATMs customer can quickly and easily deposit, withdraw or transfer money and pay bills. This new generation of ATMs has been introduced to all our branches in the Reykjavík area and in core branches outside the capital region. At the branches we place even greater importance on personalized advice and services relating to major decisions in people’s lives, such as savings, buying a house or pensions. Arion Bank has a team of qualified financial advisers offering top quality advice.
We want the meeting point with our customers to be where it best suits them, whether via their home computer, on the phone, at a café, in the countryside or by welcoming them into one of our many branches. Wherever it is most convenient for the customer.
Thinking of the future
We don’t just focus on new ideas in financial services but also endeavour to support innovation in Iceland. It is important to plan carefully for the long term and to consider how the nation will generate income in the future. That is why we are providing backing to enterprising and creative people who are taking their first steps in business.
Over the last three years we have run the seed investment program Startup Reykjavík where 10 teams are chosen from several hundred applicants. For 10 weeks during the summer we provide the teams with facilities to work on their ideas and a whole host of experienced professionals from the business sector get involved as mentors. Arion Bank invests in each company in return for a 6% stake. The experience with Startup Reykjavík has been so positive that it was decided to set up Startup Energy Reykjavík in partnership with the energy sector in Iceland. Arion Bank has invested in seven companies through that project. This brings to 37 the total number of startups in Iceland in which the Bank has invested in in recent years.
It is important to plan carefully for the long term and to consider how the nation will generate income in the future. That is why we are providing backing to enterprising and creative people who are taking their first steps in business.
In 2014 the foundations were also laid for the Bank’s investment in the venture capital fund Eyrir Sprotar, which specializes in investments in promising new companies. In early 2015 it was announced that the Bank had committed up to ISK 1 billion to the fund.
We also decided to use the template for seed investment programs on our own business. This spring five teams made up of employees were selected to work on their new ideas which are all designed to improve customer service and to boost efficiency. It will be very exciting to keep track of our people working on their ideas and seeing them transform them into reality using this template combined with their fertile and creative thinking.
Comprehensive financial services – dynamic subsidiaries
The core of Arion Bank’s strategy is to provide our customers with comprehensive financial services. In addition to the services we provide companies and individuals in the fields of investment, savings and day-to-day management of finances, the Bank has three subsidiaries which perform key roles in the Bank's core operations. Stefnir is one of the largest fund management companies in Iceland and its role is to manage capital owned by its clients. Okkar Life Insurance is one of Iceland’s leading life insurance companies, and Valitor is a market leader in payment solutions and card-related services. All are outstanding in their fields.
Towards the end of the year Arion Bank acquired Landsbankinn’s 38% share in Valitor and now owns 99% in the company. The future is exciting for Valitor as it develops its business in both the UK and Denmark. This growth is supported by the valuable knowledge base it has developed in Iceland. In the UK the focus is on organic growth. In 2014 Valitor acquired the Danish company AltaPay which specializes in e-commerce and it will play a pivotal role in developing Valitor’s Danish operations.
Focus on quality and enhanced efficiency
The year 2014 was an excellent one and Arion Bank consolidated its position in virtually all areas. We aim to continue in this direction, further reinforcing the Bank’s core operation and increasing efficiency. Over the next few years the effect of irregular items such as valuation changes and the sale of companies owned by the Bank can be expected to decrease. In recent years these factors have had a positive impact on the Bank’s financial results.
The Bank’s employees deserve thanks for what was accomplished in 2014. We thank our customers for their business during the year. We have mapped out how we will provide our services in the future, with the aim of developing different service channels and meeting the needs of our customers as best suits them. We will not waver from this course and will continue to offer better banking.