Arion Bank reported net earnings of ISK 14.4 billion in 2017, compared with ISK 21.7 billion in 2016. Return on equity was 6.6%, compared with 10.5% in 2016.
Net earnings of Arion Group decreased between years, primarily due to negative one-off items in Net financial income, Share of profit from associated companies and net valuation change and Net valuation change on loans. However, there was a positive one-off item relating to the reversal of a liability to the Depositors’ and Investors’ Guarantee Fund.
Operating income amounted to ISK 53.4 billion, compared with ISK 54.5 billion in 2016. Net commission income and net insurance income increased between years and net interest income was stable. However, Arion Bank’s write down of its investment in United Silicon had a considerable impact on operating income in 2017, reducing net financial income (shares and bonds) as well as the share of profit of associates by a total of ISK 1.9 billion.
Net interest income decreased slightly between years. The net interest margin as a percentage of average interest-bearing assets was 2.9% in 2017, compared with 3.1% in 2016. Interest-bearing assets increased by ISK 96 billion from year-end 2016 but high amounts of cash and cash equivalents in foreign currency, which bear low interest rates, and low inflation compared with 2016, mean that net interest income remains relatively unchanged between years.
Net fee and commission income increased by 10% between years, primarily due to increased activity in cards and payment solutions, which increased by 16%, and an increase in commission income due to a rise in lending activity, both new lending and prepayment of loans. Other commissions are similar to last year or slightly higher.
Net financial income amounted to ISK 4,091 million, compared with ISK 5,162 million for 2016. Positive market changes in equity holdings is the main reason for the positive contribution from net financial income while the profit from the sale of the equity share in Visa Europe was the main reason behind last year’s positive figures. The Bank’s investment in shares and bonds related to United Silicon had a negative effect on net financial income by ISK 965 million in 2017.
Net insurance income amounted to ISK 2,093 million, compared with ISK 1,396 million in 2016. The increase is primarily due to the acquisition of the insurance company Vördur at the end of September 2016 and the positive performance of the insurance operation in general.
Share in the profit of associates and impairment was negative by ISK 925 million, compared with positive ISK 908 million in 2016. This change is mainly due to the ISK 907 million impairment of the Bank’s equity holdings in United Silicon in 2017, as the company was classified as an associated company for part of the year. In comparative figures for 2016 the Bank reported a profit from the sale of equity holdings in Bakkavor Group Ltd.
Other operating income was ISK 2,927 million in 2017, compared with ISK 3,203 million in 2016. Fair value changes on investment property affect other operating income in 2017, while profit from the sale of assets had a greater effect on income in 2016.
Operating expenses amounted to ISK 29,961 million, compared with ISK 30,540 million in 2016. The Bank’s cost-to-income ratio was 56.1%, compared with 56.0% in 2016. Higher operating expenses in 2017 compared with the previous year are partly related to the subsidiary Vördur, which became part of the Group in late 2016, and higher expenses due to the growth of international operations at the subsidiary Valitor. The increase in operating expenses is partly offset by the reversal of a liability the Bank had recognized against the Depositors’ and Investors’ Guarantee Fund in the amount of ISK 2,669 million. The Bank has received confirmation from the Fund that the claim will not be collected. The Cost-to-Total Assets ratio was 2.7% in 2017, compared with 3.0% in 2016.
Salaries and related expenses amounted to ISK 17,189 million, an increase of 3% from the previous year. The increase is mainly due to the acquisition of Vördur and the increased number of employees at the subsidiary Valitor. The average salary per employee decreased by close to 1% between years, but at the same time the salary index in Iceland rose by approximately 7%. The reasons for this include changes in the composition of employees with the arrival of new subsidiaries, and the strengthening of the ISK against foreign currencies, as Valitor, the Bank’s largest subsidiary, has some of its operations abroad. Full-time equivalent positions at the end of the year totalled 1,284 at the Group, 45 more than at the end of 2016. The increase is largely a result of Valitor’s investments in the UK. The decrease in number of FTEs is ongoing at the parent company, mainly due to the outsourcing of projects, for example in IT operations and the effect of increasing digitalization and automation which has been a focus at the Bank.
Other operating expenses amounted to ISK 12,772 million, an 8% decrease from 2016. As stated above, this decrease is mainly due to the reversal of a liability to the Depositors’ and Investors’ Guarantee Fund of ISK 2,669 million, but some of the increase is related to the new subsidiary Vördur, the growth of the international operations of Valitor and higher IT expenses due to the outsourcing of segments of the Bank’s IT operation in 2017.
Net valuation change was positive by ISK 186 million, compared with ISK 7,236 million in 2016. Prepayments of mortgage loans and composition payments from corporate customers and final loan payments from bankrupt entities, which had previously been impaired, had positive impacts, whereas impairments on loans to United Silicon amounting to ISK 2,962 million had a negative impact.
Income tax amounted to ISK 5,806 million, compared with ISK 6,631 million in 2016. Income tax, as reported in the annual financial statements, comprises 20% income tax on earnings and a special 6% financial tax on the earnings of financial undertakings of more than ISK 1 billion. The effective income tax rate was 28.4%, compared with 23.4% in 2016. The high tax rate for the year is due to the high proportion of income from the parent company, which calculates an additional 6% tax on income above ISK 1 billion and thus the effective income tax rate is higher. In addition to the above taxes on earnings, the Bank pays a bank levy of 0.376% on 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.
Arion Bank’s total assets increased by 11% from year-end 2016. The main reason for the increase is the growth in cash and balances with the Central Bank and loans to customers. Loans to credit institutions increased, mainly due to increased cash.
Cash and cash balances with Central Bank amounted to ISK 139,819 million at the end of the year, compared with ISK 87,634 million at the end of 2016. The increase is mainly due to increased deposits, primarily in Retail Banking but new borrowings during the year also had a positive effect on liquidity.
Loans to customers totalled ISK 765,101 million at the end of 2017, representing a 7.4% increase from year-end 2016. Loans to corporates increased by 6.7%, mainly in the real estate sector and transportation. Loans to individuals increased by 8.3% during the year, primarily mortgage loans despite strong competition from the pension funds in that market.
The Group’s loan portfolio is well diversified. Just under half of loans are to individuals and just over half are to companies. Loans to corporates diversify across sectors in line with the composition of the Icelandic economy.
Financial instruments amounted to ISK 109,448 million at the end of 2017, compared with ISK 117,456 million at the end of 2016. The composition of financial assets has changed as shares have been sold. For example the entire shareholdings in Fasteignafélagið Reitir hf. and Síminn hf. have been sold, but the increase is related to new investment in international debt funds as a part of liquidity management.
Liabilities and equity
Liabilities increased from year-end, which is primarily a result of deposits and new borrowings. Equity increased as a result of the positive financial results of 2017.
Deposits from customers amounted to ISK 462,161 million at the end of 2017, compared with ISK 412,064 million at the end of 2016, an increase of more than 12%. The increase is mainly due to new deposits from retail customers.
Borrowings amounted to ISK 384,998 million at the end of 2017. In January, Arion Bank tapped its EUR 300 million November 2016 issue for a further EUR 200 million. The proceeds of the tap were partially used to repay the resettable EMTN bonds held by Kaupthing, which were fully repaid and replaced with market funding in June. At the end of June, Arion Bank issued new senior unsecured bonds for a total of EUR 300 million. The bonds are 3-year instruments and were sold at rates corresponding to a 0.88% margin over interbank rates. The proceeds from the issue were used to buy back EUR 100 million of notes maturing in 2018. The Bank participated in eight international private placement issues in 2017, amounting to ISK 19.6 billion in NOK and SEK. The Bank has also continued to issue covered bonds in the Icelandic market, a total of ISK 29.9 billion in 2017.
Shareholders’ equity amounted to ISK 225,605 million at the end of 2017, compared with ISK 211,212 million at the end of 2016. The increase is explained by the financial results for the year. No dividend payment was made in 2017. The CET 1 ratio was 23.6% at the end of the year, compared with 26.1% at the end of 2016. The decrease is chiefly due to the proposed dividend payment and share buyback, approved at a shareholders' meeting on 12 February and to be carried out in the coming weeks. Excluding this, the CET 1 ratio would have been 26.8%. The Bank’s capital ratios and liquidity ratios are nevertheless strong and well above the statutory minimums and the benchmarks set by the regulators.