CEO's address

Arion Bank performed well in 2020 despite the challenging economic and social situation caused by the COVID-19 pandemic. When it was apparent that restrictions on mass gatherings and a sharp contraction in demand throughout the economy would impact the lives and work of our customers, the Bank responded quickly and offered loan payment holidays. The Bank also provided special supplementary and business support loans which formed part of a raft of government measures designed to tackle the pandemic. New lending reached almost record levels, driven to some extent by the Central Bank of Iceland’s interest rate cuts. The Bank’s income increased by 6% year-over-year and expenses were down on the previous year. The Bank reported net earnings of ISK 12.5 billion and return on equity was 6.5% which fell somewhat short of targets, partly because of the fact that the Bank has capital far in excess of the regulatory minimum but also due to first quarter impairments and losses on the assets markets as uncertainty over the pandemic took hold. The Bank posted strong earnings in the other quarters. There was excellent news at the beginning of 2021 when the Financial Supervisory Authority of the Central Bank of Iceland agreed to the Bank’s request to be allowed to buy back up to ISK 15 billion of its own shares. The board of directors of Arion Bank will propose at the AGM that a dividend of approximately ISK 3 billion be paid. Despite the dividend and buyback the capital adequacy ratio was 27% at year-end and the Bank is one of the most financially robust in Europe.

Our employees deserve plaudits for their initiative and resourcefulness in the unique circumstances of the pandemic which left no one unaffected in 2020. For several months up to 80% of our employees worked from home, continuing to serve our customers and attending to a wide range of tasks. Despite the fact that the Bank’s places of work increased from 20 to around 500, our employees managed through sheer dedication to keep services going uninterrupted, developing and launching measures in response to COVID-19 and keeping all projects up and running. Product development was kept moving along and the Bank launched several new services during the year.

Shift in focus delivers results

The Bank’s financial results improved substantially between years, both net earnings and earnings from continuing operations, illustrating that the organizational changes and shifts in focus made at the end of the third quarter of 2019 have been effective. Interest and commission income and income from insurance activities, i.e. income from our core business, increased by approximately 6% YoY while expenses decreased by 5%, if one-off expenses in 2019 are excluded. The cost-to-income ratio was in line with our target, i.e. under 50% and we have now set ourselves an even more ambitious goal, i.e. cost-to-income ratio of 45% or lower.

Targeted response to COVID-19 and interest rate cuts

In March Arion Bank became the first Icelandic bank to offer its customers, both retail and corporate, payment holidays on loans. At some point in 2020 loans amounting to ISK 130 billion were subject to deferrals at the request of customers. At the end of the year the figure had fortunately dropped by almost ISK 100 billion, down to ISK 35 billion.

This may seem at odds with the fact that the Bank has never granted as many mortgage loans as in 2020. The explanation can be found in the changing interest rate environment in Iceland following the Central Bank’s policy rate cuts. Demand for mortgages with variable non-indexed rates subsequently skyrocketed. At year-end approximately half of the Bank’s mortgage portfolio consisted of loans granted in 2020, a total of ISK 200 billion. Lending to corporates was also unusually strong, with ISK 440 billion being lent to companies in 2020, a significant proportion of which being to companies refinancing loans. New corporate loans included more than ISK 1 billion in the form of supplementary loans and approximately ISK 3 billion in business support loans which formed part of the raft of government measures linked to COVID-19.

The public health situation meant that our branches had to be closed for some time except by appointment only. This arrangement seems to have worked out well and allowed our financial advisors to be better prepared than ever to attend to our customers’ needs. However, the restrictions on visiting branches did result in a record surge in traffic to the Call Centre, whose staff were ably assisted by our employees from branches around the country.

Arion app the best banking app in Iceland for fourth successive year

The migration to digital services in financial services in Iceland proved to be invaluable in 2020 as retail and corporate customers were able to take care of nearly all their financial needs at home using digital platforms and could make contactless payments to buy goods and services.

We interacted with all of our customers once a day on average in 2020, a total of 42 million interactions, 99% of which were digital. The growing popularity of our digital platforms provides us with huge potential to further enhance our services in the future, making them even more convenient and efficient.

The app has become the Bank’s most popular service channel with more than 86,000 users. For the fourth year in a row the Arion app has been named Iceland’s best banking app in surveys of bank customers. In fact, a study by Finalta, a subsidiary of the international consultancy McKinsey, indicates that Arion Bank is one of the global leaders among financial institutions in developing digital services.

We have continued to improve the app and users can now get a comprehensive overview of their pensions and set up supplementary pension savings in the app. We are also proud that during the year Arion Bank received a special award at the Icelandic Web Awards for being a trailblazer in digital services in Iceland, and insurance in the app was named tech solution of the year.

Digital services are an integral component of the Bank’s strategy and the Arion app is a strong weapon to have in a field which is only going to get more competitive. It is crucial that we have at our disposal service channels which our customers value and use day in day out. We also seek to engage in partnerships with exciting fintech companies to give our business greater momentum going forward and to make us more competitive.

Supporting Icelandic companies

One of the changes we made to the business was the added emphasis on profitability over growth which ties in well with our commitment to finding the best solution for our customers. What this means is that in addition to using our balance sheet to make loans, we harness the expertise of our employees to help companies raise funding on the market by issuing bonds and equity as best suits their needs.

During the year we helped numerous companies raise capital on the market. Companies such as Eskja and Icelandic Salmon (Arnarlax) are excellent examples, as is Controlant, which is one of the most exciting growth companies in the country, performing the vital role of distributing the coronavirus vaccine across the world. Arion Bank managed two stock offerings for the company and the sale of an 11.33% stake. It is hugely satisfying to be able to support the growth of such an exciting and important company.

Focus on green products

Environmental and climate issues are very high on our agenda since they represent one of the most pressing issues of our time. In recent years we have made great effort to reduce carbon emissions from our activities and with good success. At the same time we are well aware that our greatest impact is from our services and product offering.

In 2020 we sought to increase the number of green products the Bank offers. Mid-year we launched a new deposit account called Green Deposits which has been used to finance the Bank’s green car loans. It enables our customers to play their part in the vital transition to green energy. By the end of the year our customers had invested more than ISK 5 billion in the account, exceeding all our expectations. Owing to the popularity of Green Deposits the account framework was expanded and now deposits are also used to finance projects which support the circular economy, pollution prevention and better waste management.

In 2020 Arion Bank became the first Icelandic bank to offer green mortgages. Customers buying environmentally certified housing now enjoy special mortgage rates. By offering green mortgages we want to encourage individuals, construction companies and real estate companies to build more of this kind of housing as in our opinion there is currently too little available.

Continued commitment to sustainability and responsible financial services

The Bank’s environment and climate policy, adopted at the end of 2019, spells out the Bank’s commitment to efforts to help ensure that Iceland can meet its obligations under the Paris Climate Agreement and other domestic and international commitments. We will also continue to be an active participant in the initiatives launched by the United Nations, where we are signatories to the Principles for Responsible Banking and Principles for Responsible Investment as well as the Global Compact, the United Nations’ corporate sustainability initiative.

We have chosen six Sustainable Development Goals which we intend to focus on: gender equality; affordable and clean energy; decent work and economic growth; industry, innovation and infrastructure; responsible consumption and production; and climate action.

We are proud that Arion Bank achieved an outstanding score in Reitun’s ESG rating in 2020, scoring 86 out of 100 possible points. Approximately 30 Icelandic issuers have been rated by Reitun and the average score is 60 points. This provides us with great incentive to stay true to our commitment to sustainability.

New and ambitious strategy

In December the board of directors approved an updated strategy for the Bank. It is founded on the journey the Bank has been on in recent years, our culture and values and the shifts in focus which were announced in September 2019. The Bank’s new core strategy is to excel by offering smart and reliable financial solutions which create future value for our customers, shareholders and society as a whole.

We have already begun to implement the strategy and it will shape our entire business and services over the coming years. To back the implementation of this strategy we have set clear performance indicators and targets which also form the basis of the Bank’s 2021 bonus scheme, which applies to all of our employees. At the beginning of 2021 employees were also invited to join a 5-year stock option scheme, with the aim being to better align the interest of employees with the long-term interests of the Bank.

We have a clear strategy and goals.

I would like to thank the board of directors and employees of Arion Bank for their outstanding work during the year and for their fortitude and selflessness during a year which will live long in the memory.