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 few years. Arion Bank performed well in 2023 and reached almost all of its financial targets.
Targets for 2023
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 2023 and actual performance.
| Target | 2023 | |
|---|---|---|
| Return on equity | Exceed 13% | 13.6% |
| Core operating income / REA | Exceed 6.7% on core income | 7.1% |
| Premium growth | Premium growth (net of reinsurance) to exceed the growth of the domestic market by more than 3% | 15.0% (Growth rate on the domestic market was 10.2% first 9 months) |
| Cost-to-income ratio | Below 48% | 44.7% |
| CET1 ratio | 150-250 bps management buffer | 480 bps |
| Dividend ratio | 50% | 50% |
The Bank reached nearly all of its financial targets in 2023 with the exception of the target on capital ratio.
The target CET1 ratio of 16.4% - 17.4% was not achieved. At year-end the Bank had ISK 13-23 billion surplus capital, and the CET1 ratio was 19.7%. Dividends and the Bank’s buyback scheme are part of the strategy to achieve this goal. Arion Bank’s dividend policy states that the Bank aims to pay 50% of net earnings in dividends and that additional dividend or share buybacks can be considered when the Bank’s capital levels exceed the minimum regulatory requirements together with the Bank’s management buffer. The Bank’s target is to maintain CET1 ratio 150-250 bps above regulatory requirements. In the near term, however, capital thresholds as per external rating methodologies will impact the Bank’s capital management. This is especially relevant for the Bank’s BBB rating from Standard & Poor’s. To maintain the current rating, the Bank will need to accumulate Tier 1 capital in excess of regulatory requirements by 4-5% of REA. The Bank’s issuer rating from Moody’s is A3 with a stable outlook.
The proposed dividend for the year 2023, which will be subject to the approval of the Annual General Meeting on 13 March 2024, corresponds to ISK 9.0 per share or around ISK 13 billion, net of own shares. In March 2023, the Bank paid a dividend of ISK 8.5 per share, approximately ISK 12.5 billion.
Updated targets came into effect for 2023
In 2022 changes were approved to Arion Bank’s financial targets applicable in 2023. The changes concerned the goals on loan growth, which was suspended, and indicators on operating income.
The target on loan growth was suspended, at least temporarily, due to 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, 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.
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.