Financial targets and achievements
Arion Bank operates in accordance with clear financial targets which the Bank releases publicly. The Bank’s financial targets were updated at the end of 2022 and apply for the next three years. Arion Bank performed well in 2022 and reached most of its financial targets. Return on equity was 13.7%, exceeding the 13% target for the year.
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Targets for 2022
Arion Bank publishes its financial targets in releases to the stock market and in the Bank’s interim financial statements. The table below shows the financial targets for 2022 and actual performance.
| Target | 2022 | |
|---|---|---|
| Return on equity | Above 13% | 13.7% |
| Operating income / REA | Above 7.3% | 6.7% |
| Premium growth | Premium growth (net of reinsurance) is 3% above the growth rate on the domestic market | 10.2% (Growth rate on the domestic market was 7.5% first 9 months) |
| Loan growth | In line with nominal GDP growth | 15.9% (Nominal GDP estimated at 15%) |
| Cost-to-income ratio | Below 45% | 47% |
| CET1 ratio | 150-250 bps management buffer | 300 bps |
| Dividend ratio | 50% | 79% (113% dividend + share buyback) |
As the table illustrates, the Bank reached most of its main operating targets in 2022.
The target CET1 ratio of 17.3%-18.3% was not achieved. At year-end the Bank had ISK 4.5-13.3 billion surplus capital and the CET1 ratio was 18.8%. Dividends and the Bank’s buyback scheme are part of the strategy to achieve this goal. Share buybacks and dividend payments totalled ISK 32.3 billion in 2022. The Board of Directors will propose at the Bank’s AGM on 15 March 2023 that dividends of ISK 12.5 billion be paid to the Bank’s shareholders excluding own shares. This is equivalent to ISK 8.5 a share.
Despite the fact that interest and commission income and insurance income, which the Bank defines as core income, increased by 17.5% over the year and expenses only grew by 4%, the Bank did not achieve its 45% cost-to-income ratio target. The cost-to-income ratio was 47%. The main reason was the challenging market conditions which resulted in negative financial income of ISK 3.1 billion during the year. Negative financial income also meant that the target of operating income/REA above 7.3% was not achieved, the final figure being 6.7%.
Updated 3-year targets
The Board of Directors approved the Bank’s new financial targets in December 2022 following the updating of the Bank’s business plan. The updated targets are shown below.
| Target for 2023 | |
|---|---|
| Return on equity | Above 13% |
| Core income / REA | Above 6.7% |
| Premium growth | Premium growth (net of reinsurance) is 3% above the growth rate on the domestic market |
| Cost-to-core income | Below 48% |
| CET1 ratio | 150-250 bps management buffer |
| Dividend ratio | 50% |
The changes concern the goals on loan growth and indicators on operating income.
It was decided to suspend, at least temporarily, the target on loan growth due the uncertainty in the Bank’s economic environment. It was considered unreasonable to commit the Bank to a loan growth target against such an economic backdrop, when instead it needed to be able to respond to the prevailing conditions at any given time.
Two of the indicators concerning operating income in particular, i.e. cost-to-income and operating income/REA, will no longer include financial income but instead only that income which the Bank has defined as core income, i.e. interest and commission income and insurance income. These targets were redefined with reference to these amended indicators.
Setting clear targets is the key to success
In addition to these financial targets, the Bank, its divisions and employees work towards a range of other targets. Many of them are integral to the Bank’s bonus scheme, and the employees can monitor how these targets develop throughout the year. Such indicators include knowledge of customers (KYC/AML), uptime of online banking and the app, and customer satisfaction.