Funding and Liquidity

In 2023 the Bank continued to diversify its funding options, which included issuing senior preferred bonds in Icelandic krónur and obtaining a new rating for its covered bond programme from Moody’s. The new rating from Moody’s is the highest rating achieved by an Icelandic issuer, and the fact that Arion Bank has been rated three notches higher than the Icelandic government represents a certain milestone.

International bond issues

In May 2023 Arion Bank issued €300 million senior preferred notes with a maturity of 3 years. The notes pay a coupon of 7.25% which corresponds to a spread of 407bp over mid-swaps. The bonds attracted strong demand from a diverse group of investors on the international bond market. The final orderbook stood firm at €600m+ from over 70 individual accounts from more than 15 countries across Europe and Asia. At the same time Arion Bank announced an invitation to holders of its outstanding €300 million senior notes due in May 2024 to tender their notes and 73.5% of bond holders accepted this offer. The joint leader managers were Barclays, Deutsche Bank and UBS.

Domestic bond issues

In November Arion Bank completed the sale of a new series of senior preferred bonds. The new series, ARION 28 1512, sold for a total of ISK 8.7 billion at a yield of 4.40%. The series is indexed-linked and will pay a coupon semi-annually. It matures on 15 December 2028.

Arion Bank continued to issue covered bonds which are secured in accordance with the Covered Bond Act No. 11/2008. In 2023 the Bank issued covered bonds amounting to ISK 23.2 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.

Credit rating

Moody's

Moody’s Investors Service rated Arion Bank’s covered bonds for the first time. Arion Bank was assigned an Aa2 long-term rating for its euro-denominated covered bonds. The rating reflects the high credit quality of Arion Bank’s covered bond pool, the strength of the Icelandic covered bond legislation and the systemic importance of covered bonds. The covered bonds are governed under the Icelandic legal framework which is fully aligned with the EU harmonization directive and regulations. This is the highest rating achieved by an Icelandic issuer, and the fact that Arion Bank has been rated three notches higher than the Icelandic government represents a certain milestone.

Arion Bank’s long term-issuer rating was upgraded from Baa1 to A3. Additionally, the long-term and short-term deposit rating was upgraded to A2/P-1. The outlook was changed from positive to stable. The upgrade of Arion Bank’s ratings reflects the Bank’s sustained performance in terms of profitability, capitalization and strong asset quality as well as shift towards a bancassurance business model over the past 18 months.

Moody’s assessment of Arion Bank’s Environmental, Social and Governance Risks Methodology was also raised to G-2 from G-3. This reflects low governance risks following the Bank’s improved financial strategy and risk management practice.

S&P Global Rating

In May S&P Global Ratings affirmed its BBB rating for Arion Bank and revised the outlook from stable to negative. In November the outlook was revised back to stable. The Bank’s short-term rating is A-2.

S&P Global Ratings believes that the economic risks facing Iceland’s banks are receding in tandem with a stabilizing housing market and unwinding private sector leverage and therefore sees the economic risk trend as positive.

S&P Global Ratings expects Iceland will continue to post solid growth following an already substantial recovery from the pandemic-induced recession, with GDP growth of 3.8% in 2023 and averaging 2.5% in 2024-2026. The agency sees the industry risks affecting the banking sector to be broadly stable, with incumbent banks remaining profitable and well-capitalized.

S&P Global Ratings revised its rating for Arion Bank’s covered bond programme from A to A+ with a stable outlook. The covered bond rating is now the same as that of the Icelandic government and reflects Arion Bank’s strong foundations as an issuer, the robust structure of the Icelandic financial system and the high quality of the Bank’s mortgage portfolio.

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

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 192% and the ratio for foreign currencies was 828%, well above the minimum requirement stipulated by the Central Bank of Iceland.

At the end of 2023 the Bank’s Net Stable Funding Ratio (NSFR) was 119%. This ratio measures the proportion of 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.