Financial results

Arion Bank reported net earnings of ISK 25.4 billion in 2022, compared with ISK 28.6 billion in 2021. Return on equity was 13.7%, compared with 14.7% in 2021.

In 2022 net financial income was negative, compared with a positive performance in 2021, mainly due to difficult market conditions. Positive net impairments were significantly lower than the previous year. Core performance was stronger, with higher net interest income and net fee and commission income and expenses increased less than general price levels.

Operating income

Operating income amounted to ISK 57.2 billion, compared with ISK 58.2 billion in 2021, a decrease of 2% from last year.

Net interest income increased by 25.6%, compared with 2021. The net interest margin was 3.1% in 2022, compared with 2.8% in 2021. Average interest-bearing assets increased by ISK 144 billion between years, or 12.5%, but at the same time interest-bearing liabilities increased by ISK 150 billion or 15.1%, mainly deposits and borrowings.

The Central Bank of Iceland started raising interest rates in May 2021, after policy rates had been at an all-time low since the second half of 2020. The policy rate increased from 2% at the beginning of 2022 to 6% at year-end, and this change effected both the assets and liabilities of the Bank. Inflation has also been higher during the last few months.

The Bank expects a net interest margin of 2.9%-3.2% in the current environment, but forecasts are difficult, as competition for deposits will increase and the cost of market funding is expected to rise, but is currently fluctuating.

 

Net fee and commission income increased by ISK 1.4 billion or 9.5% in 2022 compared with 2021. The increase is diversified between the Bank’s divisions and the increase in fees is driven by cards, partly due to the deconsolidation of Valitor and income from capital markets, which is number one in both equites and bonds in the Icelandic markets. Income from lending decreased from a strong year in a low interest rate environment in 2021. Income from asset management is very strong despite the difficult markets, but the inflow of assets was strong during the year.

 

Net insurance income amounted to ISK 2.6 billion, compared with ISK 3.4 billion in 2021, which is a decrease of 24%. Premiums earned increased by 10,2% from 2021 but the cost of claims increased by 22.7%, in a challenging year, partly due to weather conditions. The combined ratio for 2022 was 99.2% compared with 93.2% in 2021, which is the highest ratio since the merger with Okkar líf in 2017.

 

Net financial income was negative by ISK 3.1 billion during 2022, a significant change from 2021 when net financial income was positive by ISK 3.4 billion in a strong market environment, both domestic and internationally. 2022 was a difficult year for both equities and bonds. The Bank also expensed ISK 1.9 billion due to an immaterial error in the treatment of bonds at fair value through comprehensive income. This error did not affect the total equity of the Bank.

 

Other operating income amounted to ISK 1.3 billion, compared with ISK 1.8 billion in 2021, a decrease of 41%. Profit from the sale of real estate previously in the branch network, profit from the sale of foreclosed assets and profit from sale of holdings in associated company Audkenni ehf. were the main contributors to other income during 2022. 

Operating expenses

Operating expenses amounted to ISK 26.9 billion, compared with ISK 25.9 billion in 2021, an increase of 4% between years. The cost-to-income ratio was 47.0% in 2022, compared with 44.4% in 2021. Cost-to-core income was 45.6%, compared with 51.6% in 2021. The increase in operating expenses was significantly below the level of inflation during the year and was mainly due to salary expenses.

Salaries and related expenses amounted to ISK 15.9 billion, an increase of 8.3% from the previous year. This increase is partly due to the increased number of employees following the decision to insource again the operation of IT systems, which had been outsourced since 2016. Full-time equivalent positions totalled 781 at the Group at year-end, compared with 751 at the end of 2021, a 4% increase between years. The estimated expensed cost of the incentive scheme was ISK 1.6 billion in 2022, compared with ISK 1.5 billion in 2021.

Other operating expenses amounted to ISK 11.1 billion in 2022, a decrease of 1.6% from 2021. The decrease is mainly due to changes in the Depositors’ Guarantee Fund Act, as from 1 April banks with deposits were not required to pay into this fund. There was also a decrease in IT expenses, due to the fact that more IT work was insourced.

Net impairment was positive by ISK 144 million in 2022, compared with positive effect of ISK 3.2 billion in 2021. Positive net impairment in 2021 was mainly due to revised impairment after greater certainty was gained over the effect of the pandemic. In 2022 the positive impairment is mainly due to income from loans that had been provisioned for or written off.

Income tax amounted to ISK 9.8 billion, compared with ISK 6.8 billion in 2021, or a 45% 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 34.3%, compared with 19.9.% in 2021. The variance in tax rate is largely due to a different combination of income, with the proportion of non-taxable income varying between years. 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.

 

Income from discontinued operations was ISK 6.5 billion in 2022, compared with ISK 1.4 billion in 2021. At the end of June the subsidiary Valitor was sold to Rapyd for ISK 14.6 billion at a profit of ISK 5.6 billion. The positive effect of Valitor operations in the first six months was ISK 1.1 billion. Profit from the sale of assets of Sólbjarg was ISK 0.4 billion, but the loss from the assets of Stakksberg (valuation change and operational expenses) was ISK 0.5 billion. All those assets have now been sold or reclassified in the Group’s financials.

Balance Sheet

Assets

Total assets increased by 12% from year-end 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 159.6 billion at year-end 2022 and increased by ISK 60.3 billion, or 60.7% from year-end 2021. The liquidity position primarily changed due to increased deposits in 2022 and liquidity management.

Loans to customers totalled ISK 1,084.8 billion at the end of 2022, representing a 15.9% increase from year-end 2021. Loans to corporates increased by 22.6% during the year, but demand for new lending has been significant in most sectors. Loans to corporates represented approximately 46% of the loan book at year-end, compared with 44% at year-end 2021. Diversification matches sector diversification of the Icelandic economy. Loans to retail customers increased by 10.6% during the year, with mortgages being the main factor. At year-end approximately 47.3% of the loan portfolio were mortgages to individuals, down from 49.5% at the end of 2021.

 

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 1.2% at the end of 2022 and decreased from 1.9% at the end of 2021. With higher interest rates it is more likely that defaulted loans will increase but this has yet to materialize.

Financial assets amounted to ISK 193.3 billion at the end of 2022, compared with ISK 225.7 billion at the end of 2021. The decrease is mainly in bond holdings and is mainly due to liquidity management. The decrease is also in securities held for economic hedging against asset swap derivatives, an expected development when the stock markets have been on a downward trajectory. The Bank has also worked systematically to reduce its position in unlisted equity holdings and key steps were taken in that direction during the year.

 

Assets and disposal groups held for sale amounted to ISK 61 million at the end of 2022, compared with ISK 16.0 billion at year-end 2021. The subsidiary Valitor hf. and assets from subsidiaries Stakksberg ehf. and Sólbjarg ehf. were sold or reclassified during the year. At year-end, only real estate, foreclosed by the Bank is balanced in this group of assets.

Liabilities and equity

Liabilities increased by 14.5% from year-end 2021. Equity decreased due to dividend payments and buybacks of own shares of ISK 32.3 billion in 2022 but increased due to net earnings of ISK 25.4 billion for the year.

 

Deposits from customers amounted to ISK 755.4 billion at the end of 2022 and increased by 15.2% from year-end 2021. The loans to deposit ratio was 144% at the end of 2022 and increased during 2021 from 143%, with significant loan-growth during the year. 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 but more competition is expected in the deposit market following interest rate hikes.

 

Borrowings totalled ISK 392.6 billion at the end of 2022, representing a 10.1% increase from year-end 2021. The increase is mainly due to issued bonds, both covered bonds in ISK and EUR as well as green bonds in ISK and EUR. The maturity profile of borrowings is favorable and the Bank is in a good position in terms of refinancing as a strong issuer of covered bonds in the Icelandic market and a regular issuer in international markets.

Subordinated liabilities amounted to ISK 47.3 billion at the end of 2022, compared with ISK 35.0 billion at the end of 2021. In December the Bank issued Tier 2 subordinated bonds in ISK for a total of ISK 12.1 billion. The issue was partly held to meet bond maturities in November 2023 and in 2024.

Shareholders’ equity amounted to ISK 188.3 billion at the end of 2022, compared with ISK 194.6 billion at the end of 2021. The net change is mainly due to the net earnings of ISK 25.4 billion in 2022 and the buyback of own shares and dividend payments, in total amounting to ISK 32.3 billion. The CET 1 ratio was 18.8% at the end of 2022, compared with 19.6% at the end of 2021. The leverage ratio was 11.8% at the end of 2021, compared with 12.6% at the end of 2021, which despite this reduction remains very high in all comparisons in the international banking market. Calculations of capital ratios factor in the proposed dividend payment of ISK 12.5 billion following the AGM in March 2023 and the proposed share buyback of ISK 3.3 billion over the next few weeks which was approved by the Financial Supervisory Authority of the Central Bank of Iceland during 2022. The Bank has set a financial target of 150-250 bps in excess of regulatory requirements. The current position at year-end is 300 bps or ISK 4.5 billion to ISK 13.3 billion.