Financial results

Arion Bank reported net earnings of ISK 25.7 billion in 2023, compared with ISK 26.0 billion in 2022. Return on equity was 13.6%, compared with 14.1% in 2022.

The main change between years was in Net interest income, which increased by 11% and in Net financial income, which were positive by ISK 1.4 billion during the year, compared with ISK 3.3 billion negative results in prior year. Core income, defined as Net interest income, Net fee and commission income and Insurance service results, increased by 6.8%, excluding operating expenses from the insurance operation. Operating expenses increased less than the inflation in 2023.

Operating income

Operating income amounted to ISK 64.2 billion, compared with ISK 55.3 billion in 2022, an increase of 16.1%.

Net interest income increased by 11.2%, compared with 2022. The net interest margin was 3.1% in 2023, the same as in 2022. Average interest-bearing assets increased by ISK 147 billion between years, or 11.3%, but at the same time interest-bearing liabilities increased by ISK 122 billion or 10.7%, mainly deposits and borrowings.

The Central Bank’s of Iceland policy rate was 9.25% at year-end 2023, compared with 6.00% at year-end 2022. The effect of this increase was significant, both on assets and liabilities. Inflation was rather high through the year. The CPI-imbalance increased by ISK 75 billion in 2023. CPI-linked loans to customers increased by ISK 119 million, CPI-linked borrowings increased by ISK 27 billion and deposits by ISK 19 million.

The Bank expects a net interest margin of 3.0%-3.2% in the current economic environment, but there are several indications that the interest rate level has reached its maximum, based on the Central Bank’s message at the last interest rate notification. Due to increased CPI imbalance, increased fluctuations in net interest income can be expected in the near future, i.e. that the interest rate difference fluctuates with inflation.

Net fee and commission income were the same as last year, a total of ISK 16.4 billion. Income from cards and collection services increased somewhat, but due to less activity on the securities markets, fees from asset management remained almost unchanged and fees from brokerage and corporate advisory decreased. Fees on loans and guarantees remain stable despite the decline in lending rates, mainly due to sale of loans and services related to them that the Bank maintains its position there.

Insurance service results amounted to ISK 152 million in 2023, compared with ISK 615 million in 2022. Insurance income increased by 12.9% from 2022, whereas expense from claims increased by 15.1%. The year 2023 was in particular heavy on losses due to fires, with fire damage claims seven times the average damage claims in Iceland during the years 2017-2021. The combined ratio in 2023 was 97.0% compared with 93.3% in prior year. In 2023 the insurance subsidiary Vördur implemented the international accounting standard for insurance, IFRS 17, and the comparative figures in the Consolidated Financials Statements 2023 for Arion Bank were restated in accordance with the standard.

Net financial income was positive by ISK 1.4 billion in 2023, compared with negative net financial income of ISK 3.3 billion in 2022. Market conditions were difficult for the first three quarters of 2023 but during the fourth quarter the market conditions improved. Equity holdings, bond holdings and currency resulted in a profit whereas derivatives and calculated effect from insurance agreements resulted in a loss.

Other operating income amounted to ISK 1.6 billion, compared with ISK 1.3 billion in 2022, an increase of 17.3%. The change in valuation of the Bank’s investment property, Blikastadir, amounted to ISK 1.6 billion and is thus the main factor of the year’s income.

Operating expenses

Operating expenses, as stated in the income statement, amounted to ISK 25.7 billion, compared with ISK 24.3 billion in 2022, an increase of 3% between years. When looking at the total operating expenses, including the opex from the insurance operation, the total amount was ISK 28.7 billion, compared with ISK 27.0 billion in 2022 or 6.1% increase. The ratio of total cost to core income was 44.7% compared with 45.0% in 2022. The increase in expenses for the year is considerably below the inflation in 2023.

Salaries and related expenses amounted to ISK 16.8 billion, an increase of 5.5% from the previous year. This increase is partly due to the increased number of employees, especially in IT and in the insurance operation, and due to new labor agreement, active in early 2023. Full-time equivalent positions totalled 822 at the Group at year-end, compared with 781 at the end of 2022, a 4.4% increase between years. The estimated expensed cost of the incentive scheme was ISK 1.4 billion in 2023, compared with ISK 1.6 billion in 2022.

Other operating expenses amounted to ISK 12.0 billion in 2023, an increase of 7.0% from 2022. The increase is mainly in professional services, IT expenses and other administrative expenses.

Net impairment was negative of ISK 1,348 million in 2023, compared with positive effect of ISK 144 million in 2022. Following the unusual situation in 2021 and 2022 due to the pandemic, the impairment moved to a more normal level in 2023, and the impairment on the loan portfolio is calculated at 0.12% for the year. According to risk management calculations, an annual impairment of 30bps on the loan portfolio is expected as a rule over a lifetime, so the write-down for the year is somewhat below that.

Income tax amounted to ISK 9.6 billion, compared with ISK 9.9 billion in 2022, or a 4% decrease 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 27.2%, compared with 33.9.% in 2022. 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 taxes can be seen in the figure below.

Loss from discontinued operations was ISK 4 million in 2023, compared with profit of ISK 6.5 billion in 2022. At the end of June 2022 the subsidiary Valitor was sold to Rapyd for ISK 14.6 billion, resulting in a profit of ISK 5.6 billion. The positive effect of Valitor operations during the first six months of 2022 was ISK 1.1 billion. All assets of Sólbjarg and Stakksberg, which are both subsidiaries classified as held for sale, have been sold or reclassified in the Group’s financials.

Balance Sheet

Assets

Total assets increased by 4.1% from year-end 2022, 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 131 billion at year-end 2023 and decreased by ISK 28.7 billion, or 18.0% from year-end 2022. Liquidity management is the main explanation for changes in these items.

Loans to customers totalled ISK 1,152.8 billion at the end of 2023, representing a 6.3% increase from year-end 2022. Loans to corporates increased by 8.2% during the year. Loans to corporates represented approximately 47% of the loan book at year-end, compared with 46% at year-end 2022. Diversification matches sector diversification of the Icelandic economy. Loans to retail customers increased by 4.6% during the year, with mortgages being the main factor. At year-end approximately 47.7% of the loan portfolio were mortgages to individuals, on same level as at year-end 2022, 47.3%. The increase in individual loans during the year is to a considerable extent due to changes in the price level of indexed housing loans.

The health of the loan book continues to be good. The proportion of problem loans, which have been defined as loans with special write-downs, was 1.7% at the end of 2023 and increased from 1.2% at the end of 2022. With high interest rates as well as the fact that fixed interest rates on non-indexed housing loans have reached the review period, it can be expected that defaults will increase, but this trend has not reached any extent.

Financial assets amounted to ISK 205.7 billion at the end of 2023, compared with ISK 193.3 billion at the end of 2022. The increase is mainly in bond holdings and is mainly due to liquidity management. The Bank financed a euro issue with a maturity date of May 2024 and partially paid off, but the remainder is mostly in bond holdings. Also, bonds held by the Bank for economic hedging against asset swap derivatives, which were expected when stock markets have been falling and interest rates are high. The Bank has also worked systematically to reduce its position in unlisted shares during the year.

Liabilities and equity

Liabilities increased by 3.8% from year-end 2022. Equity increased by 6% in 2023 due to net earnings of ISK 25.7 billion, but was partly offset by a dividend payment and buybacks of own shares, a total of ISK 15.6 billion.

Deposits from customers amounted to ISK 792.7 billion at the end of 2023 and increased by 4.9% from year-end 2022. The loans to deposit ratio was 145% at the end of 2023 and increased from 144% at year-end 2022. The composition of deposits has continued to develop positively and the majority of deposits is 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 the recent interest rate hikes.

Borrowings totalled ISK 420.5 billion at the end of 2023, representing a 7.1% increase from year-end 2022. The increase is mainly due to the new issue of both covered bonds in króna and euros. Repayment profile of borrowing unsecured issue in króna and euro is well coverable. It is very pleasing that the Bank issued an unsecured issue in ISK in the fourth quarter, which is the first issue in quite a long time. The Bank is in a good position when it comes to refinancing as a strong issuer of covered bonds on the Icelandic market and a regular issuer in international markets.

Subordinated liabilities amounted to ISK 41.3 billion at the end of the year, compared with ISK 47.3 billion at the end of 2022. In the fourth quarter, the Bank paid off subordinated borrowing (Tier 2) for a total of ISK 6.6 billion. Further payments are planned for the year 2024.

Shareholders’ equity amounted to ISK 199.3 billion at the end of 2023, compared with ISK 188.0 billion at the end of 2022. The net change is mainly due to the net earnings of ISK 25.7 billion in 2023 and the buyback of own shares and dividend payments, in total amounting to ISK 15.6 billion. The CET 1 ratio was 19.7% at the end of 2023, compared with 18.8% at the end of 2022. The leverage ratio was 12.4% at the end of 2023, compared with 11.8% at the end of 2022, 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 13 billion following the AGM in March 2024. The Bank has set a financial target of 150-250 bps in excess of regulatory requirements. At year-end the position was 230-330 bps above target, mainly due to the views of the rating company S&P, which is somewhat expensive for the Bank.