Chairman's address

The year 2021 was an excellent 12 months for Arion Bank. Despite the challenges posed by the global pandemic, the Icelandic economy thrived during the year and Arion Bank felt the positive impact. The Bank’s loan portfolio grew 14% during the year and amounted to ISK 936 billion at year-end. The Bank remains financially robust, with a capital ratio of 23.8% and a leverage ratio of 12.6% at year-end. The Bank’s equity was ISK 194 billion and share buybacks and dividends to shareholders amounted to ISK 31.5 billion during the year. The CET 1 ratio was 19.6% at year-end, while the Bank’s target is 17%. The Bank is thus in a strong position and has the capacity to release further capital in the form of dividends and buybacks.

We stand by our customers

The Covid-19 pandemic has had a far reaching impact on the economy, companies as well as households, although the extent of the impact has varied by sector. Various areas of society have emerged relatively unscathed as the pandemic has had a limited impact. Other areas, particularly the travel and catering sectors and the arts and culture, have been badly hit by the pandemic and the consequent restrictions on gatherings. Coordinated measures by the authorities and financial institutions are no longer in place. Instead the Bank assesses the situation on a case-by-case basis. During the year the Bank has worked closely with those customers requiring support.

Convenient banking is here to stay

The rapid changes which have occurred throughout the financial services industry over the last decade are here to stay. In today’s unique environment, being able to attend to one’s finances online, via our online banking platform or the app and to pay for goods and services using contactless solutions, has proven invaluable. The convenience and utility of digital services have proven their worth time and time again. Arion Bank has pioneered this digital revolution in Iceland and the Arion app was named the best app in Iceland for the fifth year in a row by bank customers in a survey by MMR.

As digital services have gained ground, the number of visits to branches has fallen away, and today most visits involve interaction with the Bank’s advisors on issues such as mortgages, savings, insurance or pensions. As a result, there is less need for a dense branch network across the country. Over the last few years Arion Bank has gradually been simplifying its branch network, consolidating its core branches located in all parts of the country, while reducing the number of smaller branches. Furthermore, there has been a big reduction in the handling of cash at branches, and indeed some branches no longer deal with cash. This trend is set to continue as it is possible to deposit and withdraw cash in most of the numerous ATMs distributed throughout the country.

We take our role seriously

Witnessing the boom in the intellectual property industry in Iceland over the last few years has been very rewarding. The IP industry has sometimes been called the fourth pillar of the Icelandic economy, alongside the fisheries, energy-intense industry and the travel industry. The unique thing about the IP industry is that it does not deplete Iceland’s natural resources and it is often highly scalable. This year Arion Bank has continued to work with a whole host of dynamic companies, such as Controlant, which are growing and likely to perform key roles in the Icelandic business sector in the next few decades. I have no doubt that new and promising companies which are taking their first steps today, or are experiencing their first growth spurt, will with time fulfill important roles in the Icelandic economy. Companies like this need the support of the Bank and access to capital in order to fund their growth and development. We are resolved to further cultivate this role in the future.

Arion Bank and green finance

Arion Bank adopted an environment and climate policy in 2019. Under the policy we set ourselves the target of reducing the Bank’s carbon footprint and contributing to Iceland’s efforts to meet its commitments on climate issues. In recent years the Bank has made green financial services, such as green car loans, deposits and mortgages, available to our customers and these options have proven very popular.

In 2021 the Bank issued its first comprehensive green financing framework, after having previously issued a financial framework for green deposits. The green financing framework encompasses the Bank’s financing and lending. What this means is that the Bank has pledged to use the capital it obtains on the credit markets and through green deposits in green projects as defined in the framework. This represents an important step for us and enables us to obtain capital more cheaply and to lend it onwards to green projects.

The Bank issued green bonds this year, both in Iceland and abroad, for approximately ISK 50 billion. Green corporate loans, which generally bear lower interest rates, provide companies with an incentive to invest their energy in and finance projects which are more environmentally friendly and therefore better for the future. During the year Arion Bank provided its first new green corporate loan under the framework, namely a ISK 16 billion loan to Norðurál which will use the money to create a new production line which will reduce energy consumption by 40%.

We are just starting out on this journey and I sincerely hope that we will see a surge in green corporate loans at Arion Bank in the years to come.

Effective reporting

In 2021 the Bank defined sustainability risk as one of its principal risk factors. Sustainability is now formally part of the Bank’s organizational structure and comes under the responsibility of the board of directors and the CEO. This reflects the strong focus on environmental, social and governance issues in our business. 

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, the United Nations’ corporate sustainability initiative. For the second time we are publishing information on the Bank’s position as a signatory to Principles for Responsible Banking and an assessment of climate-related risk to the Bank according to criteria set by the Task Force on Climate-related Financial Disclosure (TCFD), which now forms part of the Pillar 3 Risk Disclosures.

Deloitte has provided an opinion with limited assurance on non-financial reporting by Arion Bank in 2021 which is presented in accordance with the Global Reporting Initiative (GRI) and the Nasdaq ESG Reporting Guide.

Vibrant stock market – Arion Bank’s share price up 101%

Arion Bank was listed on the stock markets in Iceland and in Stockholm in the summer of 2018. At the time it marked the first listing of a financial institution on the main list of the Icelandic stock market for several years. Since flotation, the Bank’s share price has climbed more than 150% as of year-end 2021. The main gains were made in 2021, when the share price rose 101%, the biggest leap by a listed company during the year. The market generally performed very well and it might be argued that the gains had been coming, as increases on the stock market had been fairly moderate in recent years. The market’s strong performance can also be partly put down to the fact that many of the listed companies, including Arion Bank, had been posting improved financial results. Over the last two years the Bank has shown a substantial improvement in performance, as backed up by return on equity of 14.7% in 2021.

The number of shareholders continues to grow, totalling around 11,300 at the end of 2021, an increase of more than 50% over the year. More than 90% of shareholders are Icelandic. Icelandic pension funds added to their holdings during the year and held close to 47% of the Bank’s share capital at the end of 2021.

Less government involvement in the financial market

Growing public interest in stock market trading also has a positive impact on the Icelandic equities market. Two highly successful IPOs, namely Icelandair in 2020 and Íslandsbanki in 2021, fuelled public interest and attracted substantial participation from public investors.

It is important that the Icelandic government reduced its interest in Íslandsbanki by holding an IPO. The fact that the Icelandic government fully owned two of the country’s three main banks was detrimental in terms of healthy competition on the banking market. It is a good sign that the government intends to further reduce its shareholding in Íslandsbanki this year and we expect the government to entirely divest its holding in Íslandsbanki sooner or later.

It is crucial for the development of an effective financial market that the government continues to step back from this market. It would therefore be a good idea for the government to consider reducing its share in Landsbankinn as soon as possible, although it could be argued that the government should continue to have a controlling stake in Landsbankinn in the future.

Solid operations and balance sheet

Arion Bank is on a very firm footing and is in the ideal position to carry out its role in Icelandic society. The Bank has performed excellently, and the changes in focus and strategy implemented in the past two years have certainly proven their worth. During the year all employees of the Bank, excluding those in internal control units, were offered share options and the right to participate in a bonus scheme which has clearly defined targets concerning the main areas of operations. Employee participation is an important factor in aligning the interests of employees with those of the Bank and I believe it has been a success.

The Bank’s plans to distribute surplus capital, i.e. capital in excess of the minimum required by law and considered optimal by the Bank, remain unchanged. Although the Bank paid ISK 31.5 billion in dividends to its shareholder in 2021, primarily in the form of share buybacks, surplus capital at the end of 2021 amounted to ISK 21 billion. The Bank’s target is for the CET1 ratio to be 17%, and it was 19.6% at the end of 2021. The high CET1 at year-end can be attributed to the Bank’s solid net earnings in recent years and to the government’s recommendation that financial institutions do not pay out dividends. At the Bank’s next annual general meeting to be held on 16 March 2022, the board of directors will propose that a dividend of ISK 22.5 billion be paid out in 2022. Even if the 17% CET1 target is not reached, it represents a crucial step in the right direction.

Bright future ahead

Although we are still in the grips of a global pandemic, analysts’ forecasts are fairly upbeat about the Icelandic economy in 2022. GDP growth is forecast to be 5-6% which must be considered encouraging. We will continue to make every effort to support our customers in any way we can. Helping our customers is how we perform our role most effectively, supporting innovation and development in Iceland, for the benefit of society as a whole.

I would like to thank the employees and board of directors of Arion Bank for their excellent work in 2021.