Financial results

Arion Bank reported net earnings of ISK 12.5 billion in 2020, compared with ISK 1.1 billion in 2019. Return on equity was 11.8%, compared with 0.6% in 2019.

Net earnings from continuing operations amounted to ISK 16.7 billion for 2020, compared with ISK 14.1 billion for 2019. Return on equity from continuing operations measured 8.8% for 2020, compared with 7.2% for 2019.

The 2020 results represented a significant improvement on 2019, particularly due to stronger continuing operations, profits from the sale of assets and lower operating losses from assets and disposal groups held for sale.

Net earnings from continuing operations
ISK bn.

Operating income

Operating income amounted to ISK 50.8 billion, compared with ISK 48.0 billion in 2019, an increase of 6%.

Net interest income increased by 3% in 2020. Net interest margin was 2.9% in 2020, compared with 2.8% in 2019. Average interest bearing assets increased by ISK 5.7 billion between years, or 0.5%. This is a strong result in a decreasing interest rate environment and the Central Bank of Iceland’s policy rates are at an all-time low. The main reasons for this increase are the lower average funding cost due to the higher percentage of deposits in total fundingand activities on the lending side, especially in the corporate loan book.

Net interest income and Net interest margin
ISK bn. / %

Net commission income increased by 17% in 2020 compared with 2019. The increase is mainly driven by lending and guarantees, while volume-related fees, e.g. from foreign exchange and tourist payment card turnover, decreased substantially due to the pandemic

Net fee and commission income
ISK bn.

Net insurance income amounted to ISK 3.1 billion, compared with ISK 2.9 billion in 2019. Premium earned increased by 3% from 2019. The combined ratio for 2020 was 94.4% compared with 93.1% in 2019 and despite the YoY increase it remains lower than the ratio of the main competitors on the Icelandic market. In 2020 Vörður granted its customers a discount on premiums due to COVID-19. Otherwise the combined ratio would have been 92.4%.

Net insurance income
ISK bn. / %

Net financial income decreased by 15% in 2020 but was nevertheless strong considering the COVID-19 pandemic. Despite huge market volatility, income from equities and fixed income instruments was positive. However, there was a loss on the buyback of senior bonds and FX position during the year.

Net financial income
ISK bn.

Other operating income amounted to ISK 2.1 billion, compared with approximately ISK 1 billion in 2019, an increase of 145%. Profit from the sale of real estate previously in the branch network, and profit from the sale and fair value changes on investment property, particularly land for residential housing in the Reykjavík area owned by the Bank, represented the majority of other operating income in 2020.

Other operating income
ISK bn.

Operating expenses

Operating income amounted to ISK 24.4 billion, compared with ISK 26.9 billion in 2019, a decrease of 9%. The cost-to-income ratio was 48.1% in 2020, compared with 56.0% in 2019. The reduction operating costs in 2020 from 2019 is primarily due to the rationalization measures taken by the Bank in the second half of 2019.

Salaries and related expenses amounted to ISK 12.3 billion, a decrease of 16% from the previous year. Redundancy expenses following structural changes in 2019 amounted to ISK 1.1 billion and are the main reason for the decrease in salary expenses between years. Full-time equivalent positions totalled 776 at the Group at year-end, compared with 801 at the end of 2019, a 3% decrease between years.

Other operating expenses amounted to ISK 12.1 billion in 2020, a decrease of 1% from 2019. COVID-19 had a considerable impact on other operating expenses in both directions, with IT expenses rising sharply while other administrative expenses decreased significantly. Housing costs increased as the Bank undertook extensive refurbishments and reorganization of its headquarters and branches which will eventually result in reduced costs.

Operating expenses / Cost to income ratio
ISK bn. / %

Net impairment was negative by ISK 5.0 billion in 2020, compared with ISK 0.4 billion in 2019. This is increase is mainly due to the COVID-19 pandemic and its impact on the Bank’s portfolio via various impairment scenarios in the Bank’s models. Impairments were 0.71% of the Bank’s loan portfolio, mainly due to assumptions in IFRS 9 models but also due to direct impairments relating to individual companies, manly in the travel sector. How COVID-19 develops will determine to a great extent the need for further impairment. The Bank has defined 12% of its loan portfolio as at special risk from the impact of COVID-19. This involves loans to the travel industry and companies which have experienced financial difficulties after suffering a loss in revenue due to the pandemic.

Income tax amounted to ISK 3.2 billion, compared with ISK 3.7 billion in 2019, or a 13% decrease between years. Income tax, as reported in the annual financial statement, comprises 20% income tax on earnings and a special 6% financial tax on the earnings of financial institutions of more than ISK 1 billion. The effective income tax rate was 16.2%, compared with 20.9.% in 2019. The lower tax rate is largely due to a different combination of income, with a higher proportion of non-taxable income. In addition to income tax, Arion Bank and other large Icelandic financial undertakings pay a bank levy (calculated as 0.145% on total liabilities in excess of ISK 50 billion – 0.376% in 2019) and a 5.5% financial sector tax on employees’ salaries. A summary of the above taxes can be seen in the figure below.

ISK bn.

The loss from discontinued operations was ISK 4.3 billion in 2020, compared with a loss of ISK 13.0 billion in 2019. The main explanation for these heavy losses is the ISK 1.4 billion loss at Valitor, ISK 1.4 billion impairment of Stakksberg’s assets and ISK 1.6 billion impairment of Sólbjarg’s assets.

Balance Sheet


Total asset increased by 8% in 2020, mainly due to the growth of loans to customers and increased liquidity.

Cash and balances with the Central Bank and Loans to credit institutions amounted to ISK 135.6 billion at year-end 2020 and increased by ISK 21.9 billion or 19% from year-end 2019. The liquidity position primarily changed due to increased deposits and liquidity management.

Loans to customers totalled ISK 822.9 billion at the end of 2020, representing a 6% increase from year-end 2019. Loans to retail customers increased by 18% during the year, with mortgages being the main factor. At year-end 46% of the loan portfolio are mortgages, up from 40% at the end of 2019. Loans to corporate customers, reported in Icelandic krónur, decreased slightly, but if the depreciation of the króna against foreign currencies is taken into account, the real decrease is far greater.

The turnover in the loan book was substantial in 2020, both refinancing and new loans. The main change relatively was in retail mortgages, where more than half of the loans were new or refinanced during the year, a total of ISK 211 billion. The same is true of corporate loans where a significant proportion of the loan book was refinanced or new loans were made, which is something to be expected in a decreasing interest rate environment.

Arion Bank has provided strong backing to its customers and has cooperated with the Icelandic authorities on providing state-guaranteed loans to companies experiencing financial difficulties as a result of COVID-19. At year-end 2% of the book value of retail loans (particularly mortgages) and almost 7% of corporate loans were subject to payment holidays. At year-end Arion Bank had provided more than 320 state-guaranteed loans totalling ISK 4.1 billion.

Loans to customers

The Group’s loan portfolio is well diversified. More than half of the loan portfolio is to retail customers, of which 46% are mortgages, and just under half are to companies in a broad range of companies spanning the Icelandic economy.

Loans to customers by sector

Financial assets amounted to ISK 227.3 billion at the end of 2020, compared with ISK 117.4 billion at the end of 2019. The year-over-year increase is primarily in bonds due to the strong liquidity position, and the combination of securities held by the Bank is largely determined by the liquidity position at any given time.

Financial instruments
ISK bn.

Assets and disposal groups held for sale amounted to ISK 16.8 billion at the end of 2020, compared with ISK 43.6 billion at year-end 2019. The subsidiaries Valitor hf., Stakksberg ehf. and Sólbjarg ehf. are classified as held for sale. The total assets of Valitor were ISK 11.9 billion at the end of 2020 compared with ISK 30.7 billion at the end of 2019, mainly in the form of accounts receivable, fixed assets and intangible assets. The net book value of these three companies at the end of 2020 was ISK 10.8 billion.

Liabilities and equity

Liabilities increased by 9% from year-end 2019. Equity increased due to the net earnings of the year but was reduced by the buyback of own shares at the beginning of 2020 amounting to ISK 4.4 billion. 

Liabilities and equity
ISK bn.

Deposits from customers amounted to ISK 568.4 billion at the end of 2020 and increased by 15% from year-end 2019. The loans to deposit ratio was 157.0% at the end of 2019 and decreased significantly during the year, down to 144.8%, due to increased deposits and moderate lending growth. The composition of deposits has continued to develop positively, and the majority of deposits now originate from retail customers and smaller companies, while the proportion from institutional investors continues to decrease. Deposits remain the most important source of funding for Arion Bank and the Bank will aim to maintain as strong a position as possible on the deposits market.

ISK bn.

Borrowings totalled ISK 298.9 billion at the end of 2020, representing a 2% decrease from year-end 2019. The decrease is mainly due to the restructuring of the Bank’s borrowings, as deposit growth has reduced the need for borrowing. There is limited refinancing need in the next few quarters and the outstanding €200 million issue maturing in the fourth quarter of 201 is the next significant maturity.

Subordinated liabilities amounted to ISK 36.1 billion at the end of 2020, compared with ISK 20.1 billion at the end of 2019. The Bank issued its first AT1 instrument in February 2020 in the amount of approximately ISK 13 billion (USD 100 million). The Bank has previously issued a number of Tier 2 subordinated bonds in line with its capital strategy and has now issued the required subordinated bonds.

Shareholders’ equity amounted to ISK 197.7 billion at the end of 2020, compared with ISK 189.6 billion at the end of 2019. The net increase is mainly due to the net annual earnings of ISK 12.5 billion and the buyback of own shares amounting to ISK 4.4 billion. The CET 1 ratio was 22.3% at the end of 2020, compared with 21.2% at the end of 2019. The leverage ratio was 15.1% at the end of 2020, compared with 14.1% at the end of 2019, which is very high in all comparisons in the international banking market. Calculations of capital ratios factor in the proposed dividend payment of ISK 3 billion following the AGM in March and the proposed share buyback of ISK 15 billion over the next few months which was approved by the Financial Supervisory Authority of the Central Bank of Iceland in February 2021. At year-end the Group had ISK 66 billion of CET1 capital in excess of regulatory requirements and ISK 40 billion in excess of the Group’s target CET1 ratio of 17%. This excess capital, factoring in the ISK 18 billion equity reduction through the aforementioned dividend and share buyback, which are part of the Bank’s efforts to optimize its capital structure, is beneficial for the shareholders and the Bank’s operations in general.