Funding and Liquidity

In 2022 Arion Bank continued to work on diversifying its funding, such as by issuing green bonds in euros and Icelandic krónur. The Bank pursues prudent funding and liquidity management strategies which is reflected in the Bank’s strong liquidity ratios and steady maturities of long-term debt over the next few years.

International bond issues

In September 2022 Arion Bank held its second green bond issue in euros. The green bonds had 3-year maturities and amounted to €300 million.

The bonds were sold at rates corresponding to a 2.65% margin over interbank rates. BofA Securities Europe SA, J.P. Morgan SE, Nomura Financial Products Europe and Citigroup Global Markets Europe managed the issue for the Bank. The bonds were issued under the Bank’s green financing framework. The framework sets out clearly and transparently the conditions which the Bank’s loans need to meet in order to be considered green.

In April 2022 Arion Bank issued euro-denominated covered bonds amounting to €200 million. The issue was additional to the 5-year €300 million issue in autumn 2021, bringing the total issue to €500 million. The bonds were sold at rates corresponding to a 0.37% margin over interbank rates. Barclays Bank Ireland PLC managed the issue for the Bank.

Domestic bond issues

In January 2022 Arion Bank issued a new green bond series in Icelandic krónur. The new series ARION 241020 GB attracted a positive response and bonds amounting to ISK 6,020 million were sold to a broad group of Icelandic investors. The bonds have a maturity of 2 years and 9 months and bear floating nominal 3M REIBOR rates + 0.70 margin. The bonds pay interest every three months and a single repayment of the principal at maturity in 2024. The bonds were issued under the Bank’s green financing framework.

Arion Bank continued to issue covered bonds which are secured in accordance with the Covered Bond Act No. 11/2008. In 2022 the Bank issued covered bonds amounting to ISK 10.1 billion.

Arion Bank renewed its agreement with Kvika, Íslandsbanki and Landsbankinn on market making for covered bonds issued by Arion Bank on Nasdaq Iceland. The purpose of the agreement is to stimulate trading with benchmark covered bonds issued by the Bank.

In December 2022 Arion Bank issued two series of subordinated bonds in Icelandic krónur which are classed as Tier 2, amounting to a total of ISK 12.1 billion.

A total of ISK 9,860 million at a yield of 5.01% was sold in series ARION T2I 33 which is an indexed coupon bond, paying interest twice a year. A total of ISK 2,240 million at a yield of 9.46% was sold in series ARION T2 33 which is a nominal coupon bond, paying interest twice a year. Both series mature on 15 December 2033 and can be called by the issuer on 15 December 2028 and on all subsequent due dates.

Credit rating

Moody's

Moody’s Investors Service rated Arion Bank for the first time. Arion Bank received the long-term rating A3 and the short-term rating Prime-2 for deposits in foreign and domestic currencies. Arion Bank was rated Baa1 as an issuer of unsecured bonds. The deposits rating and issuer rating have a positive outlook.

The credit rating reflects Arion Bank’s robust capital position, which materializes in its solid leverage ratio and positive and improving profitability on core activities, low default rate and adequate liquidity. These factors counterbalance the risk related to individual borrowers, geographical concentration, market risk and risk related to the Bank’s regular funding on the bond markets.

The positive outlook reflects the Bank’s enhanced risk profile and Moody’s expectation of reduced volatility in ROE over the next 12-18 months.

S&P Global Rating

Standard and Poor’s (S&P) affirmed Arion Bank’s BBB rating and the outlook remains stable. The Bank’s short-term rating is A-2.

S&P upgraded Arion Bank´s covered bond rating from A- to A with stable outlook. The covered bond rating now has the same credit rating as the Icelandic government. The credit rating of covered bonds reflects Arion Bank’s strength as an issuer, the solid framework of the Icelandic financial system and the quality of the bank’s mortgage loan portfolio.

The press release from S&P says that Arion Bank’s improved ROE supports the Bank’s ability to deal with the consequences of a possible price correction on the real estate market. S&P also expects the Bank to see off competition from pension funds on the mortgage market should it materialize.

The stable outlook also matches S&P’s expectations that the Bank’s own funds will remain very robust and that ROE will continue to be good over the next two years and will be generally higher than competitors. Net interest margin and commissions will increase from the low point reached during the Covid-19 pandemic and loan losses are expected to drop to 0.30% of total lending. S&P also assumes that it will be possible to rein in costs despite high inflation as the Bank will continue to provide services to most of its customers via digital channels.

*Foreign currency obligations. Please visit www.cb.is for further information.

Credit rating - timeline

Liquidity and liquidity risk

Arion Bank is largely funded with deposits from individuals, corporations and pension funds. One of Arion Bank's key objectives is to maintain a strong liquidity coverage ratio (LCR) to support the Bank’s strategic direction. The LCR, which is calculated according to rules issued by the Central Bank of Iceland and Basel III Standard, addresses risk factors relating to the stickiness of deposits and the maturity mismatch of the assets and liabilities. At year-end the Bank's LCR was 203% and the ratio for foreign currencies was 607%, well above the minimum requirement stipulated by the Central Bank of Iceland.

The Bank’s net stable funding ratio, NSFR, was 119% at the end of 2022. This ratio measures the ratio of the Bank’s available stable funding to necessary stable funding according to a method which takes into account the liquidity of assets and the maturity of liabilities. These high ratios underline the Bank’s robust funding and its ability to support the Bank’s lending activities in the future.