Arion Bank and its subsidiaries provide a highly diverse and comprehensive range of financial services. The Bank’s activities are inextricably linked with the lives and work of the Icelandic people and as a result the Bank shared the ups and downs and uncertainty felt through most, if not all, areas of society in 2020. Arion Bank took a resolute response to one of the fastest and deepest economic downturns in recent times and we offered our customers a raft of vital measures to help them deal with the economic impact of the COVID-19 pandemic. The Bank’s assets at year-end amounted to ISK 1,173 billion and the loan portfolio accounts for approximately ISK 823 million of this figure. Equity amounted to ISK 198 billion at year-end. The Bank’s robust financial position, a capital ratio of 27.0% and a leverage ratio of 15.1% at year-end enabled us to support our customers through a year which presented great challenges.
Shortly after the coronavirus reached Iceland on the last day of February it was clear that the economy would significantly slow down and that international travel would largely grind to a halt. In response Arion Bank became the first bank to offer its customers a payment holiday on loans and many customers took advantage of this option. Other banks did the same and it is clear that these measures, along with the government job retention scheme, helped alleviate the economic impact of the downturn for companies and households.
Committed to standing by our customers
Numerous corporate customers of Arion Bank faced the prospect of having to take out a loan due to the sudden drop in income. The Bank is committed to standing by its customers and helping them through difficult times. However, this situation created specific problems as neither companies nor anybody else knew how long this shortfall in income would last, and in fact still we do not know. To accommodate our customers in these extraordinary times we relaxed our standard lending requirements in many cases. We examined the business history, the viability of companies and the fact that our relationship with our customers is fundamentally long-term and we want to be there when the going is good but also in times of adversity. In addition to traditional loans, the government also offered guarantees on loans to companies which the financial institutions provided once certain conditions were met. During the year the Bank granted a total of ISK 4 billion in loans with partial or full government guarantees.
To accommodate our customers in these extraordinary times we relaxed our standard lending requirements in many cases. We examined the business history, the viability of companies and the fact that our relationship with our customers is fundamentally long-term and we want to be there when the going is good but also in times of adversity.
Robust financial position was of key importance
The fact that households, companies and government finances were in an unusually strong position in terms of debt at the beginning the year proved vitally important. We benefitted from the fact that over the past decade a robust financial system has been built up in Iceland, government debt has decreased and the Central Bank of Iceland has amassed healthy foreign currency reserves. These factors made it easier for Iceland to respond to the economic downturn effectively and to prevent greater damage from occurring to the economy. Nevertheless the impact of the global pandemic was substantial in certain sectors, not least in tourism and related industries and it will take time for them to fully recover.
ISK 40 billion in excess capital
The sudden and deep economic downturn which hit in March clearly illustrated how important it is that systemically important financial institutions are well funded and have strong capital and liquidity positions. In Iceland financial institutions are subject to strict capital requirements, stricter than in many of our neighbouring countries. In addition the Central Bank of Iceland, like central banks in many places around the world, recommended that banks did not pay dividends in 2020. This was an appropriate recommendation when the uncertainty was at its height, even despite the unusually strict capital requirements in Iceland. But now this uncertainty is receding with the arrival of a vaccine and it looks as if the pandemic might be brought under control, it’s time to reassess the situation regarding dividends.
At the beginning of 2020 the Financial Supervisory Authority of the Central Bank of Iceland did just that and agreed to the Bank’s request to be allowed to buy back own shares worth ISK 15 billion, in addition to the dividend payment of ISK 3 billion. The FSA took into account the Bank’s very robust capital position, consolidated by an AT1 issue of ISK 13 billion in February.
The FSA took into account the Bank’s very robust capital position, consolidated by an AT1 issue of ISK 13 billion in February.
Even allowing for the share buyback and dividend Arion Bank had ISK 40 billion in excess capital at year-end, i.e. capital in excess of the minimum required by law and considered optimal by the Bank. This is capital that the Bank can neither lend to customers nor generate returns on. It could therefore be said that this is capital which is not being used as it should, and therefore we intend to pay dividends to shareholders or buy back shares in the coming years as circumstances allow.
We have a role to perform
We are faced with a period of renewal in the wake of the global pandemic, and we have the opportunity to put sustainability at the forefront of our efforts. Financial institutions have a vital role to perform in this process. In the near future the whole world needs to make the transition to sustainable energy in order to combat climate change. A transition of this nature requires huge investment which needs to be backed by financial institutions. In Iceland, for example, there are rich opportunities to develop environmentally friendly transport and a greener and more sustainable tourism industry. Iceland could become a green destination.
During the year Arion Bank performed an evaluation of its loan portfolio from an environmental perspective and is creating a green framework around its loans, with one of the objectives being to issue green bonds. The Bank is placing increasing emphasis on offering green financial services wherever possible, and during the year became the first Icelandic bank to launch green deposits and green mortgages. By doing so we are giving our customers more environmentally friendly options and it is precisely by doing this and through our lending activities that we can have the greatest impact in the fight against climate change.
As in previous years the Bank is publishing in its annual and sustainability report detailed non-financial information in compliance with the law and regulations, Nasdaq guidelines and the Global Reporting Initiative (GRI). We are also guided by the UN Sustainable Development Goals and the 10 Principles of the UN Global Compact, which the Bank will continue to support in 2021. We are publishing for the first time information on the Bank’s position as a signatory of the United Nations Principles for Responsible Banking and are also starting to evaluate climate-related risk to the Bank according to criteria set by the Task Force on Climate-related Financial Disclosure (TCFD).
Deloitte has provided an opinion with limited assurance on non-financial reporting by Arion Bank in 2020 which is presented in accordance with the Global Reporting Initiative (GRI) and the Nasdaq ESG Reporting Guide.
Open banking integral part of strategy
Open banking is an integral part of Arion Bank’s strategy and services as our focus on digital and convenient financial services in recent years has clearly shown.
We aim to harness the strength of the group, particularly in collaboration with our subsidiaries Vörður and Stefnir, to bring greater efficiency to the business and to further expand the product offering through digital channels. We also look outside the group to find exciting business partners. A good example of this is the Bank’s partnership with the tenant’s insurance agency Leiguskjól, which offers its customers a bank guarantee from Arion Bank which they can use instead of a security deposit. This new service has enabled many people to rent property which was previously beyond their reach.
We aim to harness the strength of the group, particularly in collaboration with our subsidiaries Vörður and Stefnir, to bring greater efficiency to the business and to further expand the product offering through digital channels. We also look outside the group to find exciting business partners.
The Arion app is a unique channel for open banking and in 2020 the app was named the best financial app in Iceland in a survey of bank customers, just as it was the three previous years. The Arion app is a highly effective sales and service channel which approximately 86,000 people in Iceland use on a regular basis. In addition to traditional banking services Arion Bank customers can use the app to buy insurance from Vörður and check their pensions at funds managed by the Bank.
Strategic changes yield results
In the second half of 2019 organizational and strategic changes were made at the Bank with the aim of boosting efficiency and reducing major financial obligations. This year we have seen the results of these changes. With the exception of the first quarter, which was beset with uncertainty and falling share prices, the Bank was close to its target of 10% ROE based on 17% CET1.
Arion Bank is listed on the stock markets in Iceland and Stockholm and is the only one of the three major banks in Iceland which is not government owned. The results we have achieved this year attest to how seriously we take our responsibilities towards our more than seven thousand shareholders.
The year has seen considerable changes among the major shareholders. Some international investors have reduced their holdings, while Icelandic pension funds upped their stakes. At the end of 2020 domestic investors owned 62% in the Bank, the highest figure since the Bank was listed in the summer of 2018. The Bank’s share price reflected the positive performance of the Bank during the year, gaining 10.5% in 2020 on the Icelandic stock market but losing 8.8% in Stockholm. This difference is primarily due to the near 20% depreciation of the Icelandic króna against the Swedish krona during the year.
Strong competition on the financial markets
Arion Bank occupies a somewhat unique position since the Icelandic government, as owner of two of the three major banks in the country, is our main competitor. In the long-term we do not consider this to be a healthy situation and we welcome the government’s plans to sell a stake in Íslandsbanki in 2021. By reducing its activities in the financial market the government is working towards healthier and more effective competition on the financial market which can only benefit the consumer.
Arion Bank is not just in competition with Icelandic banks but also international companies. International financial services providers are highly active in Iceland. This includes foreign banks which lend to many of the country’s largest corporations, such as energy and seafood companies, and also international tech and fintech companies such as Apple, Amazon and PayPal which also compete on the consumer market. It’s time that the Icelandic Competition Authority considered these facts when addressing issues on the financial market in Iceland.
Arion Bank is not just in competition with Icelandic banks but also international companies. International financial services providers are highly active in Iceland.
We welcome strong competition, both from domestic and international companies. It motivates us and makes us more focused on providing our customers with convenient, smart and dependable financial services.
A clear strategy for the future
In late 2020 the board of directors approved an updated strategy for Arion Bank. The changes represented a logical continuation of the organizational and strategic changes which were set into motion in late 2019. The aim is to devise a more focused future vision for the Bank and the subsidiaries and to create a solution-oriented and performance-driven culture.
The board of directors also approved changes to the Bank’s bonus scheme. One of the main changes is that now all employees are included in the scheme. We have set clear targets for 2021. The key target is that return on equity is higher than the weighted average return on equity of the Bank’s main competitors. In other words our goal is to outperform our competitors. This is a clear and straightforward goal which applies to all areas of the business and takes into account conditions in the Bank’s environment. The new strategy and goals provide a strong incentive for our employees which in turn will bring benefits to our customers, partners and shareholders. We look to the future full of optimism.
I would like to thank the employees, management and board for all their valuable work during the year.