Key financials

Arion Bank reported net earnings of ISK 28.6 billion in 2021, compared with ISK 12.5 billion in 2020. Return on equity was 14.7%, compared with 6.5% in 2020.

The improved performance in 2021 is mainly due to net fee and commission income, net financial income, a reversal in net impairments, and assets held for sale and discontinued operations performing significantly better than the previous year.

Net earnings
ISK bn.

Operating income

Operating income amounted to ISK 58.2 billion, compared with ISK 50.8 billion in 2020, an increase of 15%.

Net interest income increased by 3% in 2021. The net interest margin was 2.8% in 2021, compared with 2.9% in 2020. Average interest-bearing assets increased by ISK 72 billion between years, or 6.7% but at the same time interest-bearing liabilities increased by ISK 84 billion or 9.2%, mainly deposits and borrowings. The Central Bank of Iceland’s policy rates were at an all-time low at the beginning of the year, but in May the process of raising interest rates began and is still continuing. The Bank expects a net interest margin of 2.7%-2.9% in the current environment, but forecasts assume a further rise in interest rates that could have a positive effect on the net interest margin going forward.

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

Net fee and commission income increased by 26% in 2021 compared with 2020. The increase is diversified between the Bank’s divisions but the increase in fees is driven by lending and by asset management, where performance-based fees are partly behind the increase. Volume-related fees, e.g. from foreign exchange and payment card turnover from tourists increased again following a decrease in 2020 due to the pandemic.

Net fee and commission income
ISK bn.

Net insurance income amounted to ISK 3.4 billion, compared with ISK 3.1 billion in 2020, which is an increase of 12%. Premiums earned increased by 12% from 2020. The combined ratio for 2021 was 93.2%, compared with 94.4% in 2020, and is competitive with the ratios of the main competitors on the Icelandic market.

Net insurance income
ISK bn. / %

Net financial income increased by 127% from 2020. There was a significant turnaround in income from securities between years, especially during the first half of 2021. Income from equity holdings was excellent following a difficult 2020 due to the pandemic. Both the domestic and the international markets were very favorable in 2021.

Net financial income
ISK bn.

Other operating income amounted to ISK 1.8 billion, compared with ISK 2.1 billion in 2020, a decrease of 16%. Profit from the sale of real estate previously in the branch network and profit from the sale and fair value changes on investment property, in particular land for residential housing in the Reykjavík area owned by the Bank’s subsidiary Landey, represented the majority of other operating income in 2021.

Other operating income
ISK bn.

Operating expenses

Operating expenses amounted to ISK 25.9 billion, compared with ISK 24.4 billion in 2020, an increase of 6%. The cost-to-income ratio was 44.4% in 2021, compared with 48.1% in 2020. The increase in operating expenses is mainly due to expenses from the incentive scheme of ISK 1.6 billion in 2021.

Salaries and related expenses amounted to ISK 14.6 billion, an increase of 19% from the previous year. This increase is mainly due to the incentive scheme in 2021. Full-time equivalent positions totalled 751 at the Group at year-end, compared with 776 at the end of 2020, a 3% decrease between years.

Other operating expenses amounted to ISK 11.2 billion in 2021, a decrease of 7% from 2020. The decrease is mainly in IT expenses, due to more insourced IT work and a decrease in housing expenses, with the optimizing of the branch network the main driver.

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

Net impairment was positive by ISK 3.2 billion in 2021, compared with negative effect of ISK 5.0 billion in 2020. This shift is mainly due to more certainty regarding the effect of the pandemic and the outlook is good regarding the tourism industry and domestic investments over the next few years. At the outset the Bank defined part of the loan portfolio as affected by the pandemic. At the end of 2021, 8% of loans to customers were defined with underlying risk due to the pandemic compared with 12% at the end of 2020.

Income tax amounted to ISK 6.8 billion, compared with ISK 3.2 billion in 2020, or a 110% increase 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 19.9%, compared with 16.2.% in 2020. The variance in tax rate is largely due to a different combination of income, with a different 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) 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.

Income from discontinued operations was ISK 1.4 billion in 2021, compared with a loss of ISK 4.3 billion in 2020. The main explanations for this change are the improved financial results at Valitor and the profit from the sale of assets of Sólbjarg. The value of Stakksberg's assets decreased slightly during the year.

Balance Sheet


Total asset increased by 12% in 2021, 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 99.2 billion at year-end 2020 and increased by ISK 29.0 billion or 41.1% from year-end 2020. The liquidity position primarily changed due to increased deposits and liquidity management.

Loans to customers totalled ISK 936.2 billion at the end of 2021, representing a 13.8% increase from year-end 2020. Loans to retail customers increased by 21.5% during the year, with mortgages being the main factor. At year-end approximately 50% of the loan portfolio are mortgages to individuals, up from 46% at the end of 2020. Loans to corporate customers increased by 5.2% during 2021, especially in the last quarter and demand for new corporate lending is significant.

Similar to 2020, there was significant turnover in the loan book in 2021, both in the form of refinancing and new loans. Proportionally, the largest change remained in the  mortgage portfolio to individuals, as the majority of the mortgage loans are new or were refinanced in the last two years. The same applies to corporate loans, with continuing refinancing need as well as new lending.

The health of the loan book improved significantly during the year. The proportion of problem loans, which have been defined as loans with special write-downs, was 1.9% at the end of 2021 and decreased from 2.6% at the end of 2020. Loans in moratoria have decreased from 4.13% at the end of 2020 to 0.03% but on the other hand, the ratio of forbearance loans has risen from 1.8% to 4.3%, which is normal following the pandemic.

Loans to customers

The Group’s loan portfolio is well diversified. More than half of the loan portfolio is to retail customers, of which 50% 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 225.7 billion at the end of 2021, compared with ISK 227.3 billion at the end of 2020. The increase is mainly in equity holdings and securities held by Vörður. Favorable market conditions and liquidity management are the main reasons for the change in financial assets 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 16.0 billion at the end of 2021, compared with ISK 16.8 billion at year-end 2020. The subsidiaries Valitor hf., Stakksberg ehf. and Sólbjarg ehf. are classified as held for sale. The total assets of Valitor were ISK 12.3 billion at the end of 2021, compared with ISK 11.9 billion at the end of 2020, mainly in the form of accounts receivable, fixed assets and intangible assets. The net book value of these three companies at the end of 2021 was ISK 10.5 billion.

Liabilities and equity

Liabilities increased by 14.8% from year-end 2020. Equity decreased due to dividend payments and buybacks of own shares of ISK 31.5 billion but increased due to net earnings of ISK 28.6 billion for the year.

Liabilities and equity
ISK bn.

Deposits from customers amounted to ISK 655.5 billion at the end of 2021 and increased by 15.3% from year-end 2020. The loans to deposit ratio was 145% at the end of 2020 and decreased during 2021, down to 143% despite significant lending growth. The composition of deposits has continued to develop positively, and the large majority of deposits now originate from retail customers, smaller companies and corporates with business relations with the Bank, 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 356.6 billion at the end of 2021, representing a 19.3% increase from year-end 2020. The increase is mainly due to two issued bonds on the international markets in the third quarter of 2021. Firstly, there was an issue of green bonds of EUR 300 million and secondly an issue of covered bonds of EUR 300 million, which Arion Bank is the first Icelandic bank to issue. The maturity profile of borrowings is favorable and the Bank is in a good position when it comes to refinancing as a strong issuer of covered bonds in the Icelandic market and a regular issuer in international markets.

Subordinated liabilities amounted to ISK 35.0 billion at the end of 2021, compared with ISK 36.1 billion at the end of 2020. The change between years is strictly due to changes in FX, as the majority of the issued subordinated liabilities are in foreign currencies.

Shareholders’ equity amounted to ISK 193.9 billion at the end of 2021, compared with ISK 197.7 billion at the end of 2020. The net change can be explained by the net annual earnings of ISK 28.6 billion and the buyback of own shares and dividend payment total amounting to ISK 31.5 billion. The CET 1 ratio was 19.6% at the end of 2021, compared with 22.3% at the end of 2020. The leverage ratio was 12.6% at the end of 2021, compared with 15.1% at the end of 2020, which despite the decrease is very high in all comparisons in the international banking market. Calculations of capital ratios factor in the proposed dividend payment of ISK 22.5 billion following the AGM in March and the proposed share buyback of ISK 4.3 billion over the next few weeks, which was approved by the Financial Supervisory Authority of the Central Bank of Iceland in October 2021. At year-end the Group had ISK 48.6 billion of CET1 capital in excess of regulatory requirements and ISK 21 billion in excess of the Group’s target CET1 ratio of 17%. This surplus capital, factoring in the ISK 26.8 billion equity reduction through the aforementioned dividend and share buybacks, which are part of the Bank’s efforts to optimize its capital structure, is beneficial for the shareholders and the Bank’s operation in general.