Business segments

Corporate Banking

Corporate Banking provides comprehensive financial services and customized solutions to Iceland’s largest companies. The division offers solutions in funding, deposits, payment services and value-added digital services. Many of Iceland’s leading companies have a successful business relationship with Corporate Banking spanning many years. Fostering effective communication with clients and gaining an in-depth knowledge of their needs are essential for developing long-lasting relationships. The managing director is Freyr Thórdarson.

About Corporate Banking

The division is divided into three specialist sector teams: trade and services, seafood, and real estate and energy. Each team contains account managers who arrange funding and provide other services to the Bank’s major clients. Corporate Banking collaborates closely with other divisions, such as Retail Banking, Vehicle and Equipment Financing, Capital Markets and Corporate Finance. Corporate Banking’s account managers play a key role in providing advice and facilitating solutions and universal banking services for our clients. 

Main tasks and highlights of the year

Our clients invested heavily during the year as the Icelandic business sector performed strongly and demand for debt financing grew. Competition was tough in 2017 but demand for credit was substantial and probably in excess of the amount available in the economy. The special tax on the Bank’s balance sheet distorts competition with lenders who are not subject to this tax, i.e. the pension funds and international banks trying to gain the business of the top Icelandic companies. As usual Corporate Banking focused hard on nurturing its relationships with existing clients.

The seafood team provides services to Iceland's largest seafood companies whose activities include fishing, processing and sales of marine products.

The seafood team provides services to Iceland's largest seafood companies whose activities include fishing, processing and sales of marine products. The team has also taken prudent steps in funding the development of salmon farming in Iceland. The team is also responsible for implementing the Bank’s strategy of funding international seafood companies, both in connection with investments by Icelandic companies and direct investments in international companies, with the aim of diversifying the client base in the seafood industry and thereby spreading the risk in the Bank’s loan portfolio. Icelandic seafood companies have been investing heavily in the sector in recent years, and in 2017 the Bank helped to finance the development of fish processing, the acquisition and building of fishing vessels and fishing quotas. Corporate Banking has for some time collaborated with international banks on the funding of several projects, often lowering our clients’ funding costs. 

Projects in the real estate sector were prominent just as in the previous year. These tasks included the construction of large apartment complexes, the expansion of clients’ property portfolios and future engagements linked to hotel development in the Reykjavík area. The real estate and energy team continued to work on several long-term projects during the year, including infrastructure development in various areas, energy-intense industry and energy production. The team has collaborated closely with Investment Banking on delivering customized solutions in extensive engagements for our clients, benefitting from the Bank’s financial strength and diverse products.

The trade and services team provides services to major clients in a variety of sectors, including manufacturing, tourism, imports, retail, IT, investment and insurance. During the year the team was involved in a wide range of engagements designed to support clients' growth and it welcomed new clients on board. We continued our focus on services, other than loans, and this was reflected by the growth in commission in the division and the Bank as a whole.

Social responsibility

Informed discussion and responsible decision-making is of central importance to our business. Our employees were active participants in conferences on the tourist industry, real estate, the seafood industry, lean management and also contributed to the Bank's sustainability policy, provided backing for Iceland Geothermal and organized a seminar on the allocation of fishing quotas. In 2018 Corporate Banking will define more clearly its role in the Bank’s sustainable banking strategy. We will also continue to develop and support the Bank’s strategy on responsible investment and lending.

Activities during the year

Interest-bearing assets amounted to ISK 271 billion at the end of 2017, of which loans to customers amounted to ISK 261 billion*, or 31% of total loans to customers and 54% of corporate loans. New loans were substantial, particularly loans in foreign currencies. Corporate Banking participated in a wide range of projects with our clients and developed new business relationships. Approximately 6% of loans were made to new clients of the Bank.

*At parent company.

The division’s loan portfolio broadly spans the Icelandic business sector and this is in line with the division’s strategy. The largest sectors in Corporate Banking’s loan portfolio are real estate and related business (34%), seafood (22%), and trade and services (15%). In recent years the tourist industry has grown massively in Iceland, whether as a percentage of GDP, in terms of export income, as a contributor to economic growth, job creation or investment. The sector has now become one of Iceland's leading industries. As tourism is a growth industry, Corporate Banking has taken cautious steps in increasing loans to tourism and the sector accounts for 9.6% of the division's interest-bearing assets and 6.5% of the Bank's total loans to legal entities.

The year ahead

The Icelandic business sector performed strongly in 2017, and the outlook for 2018 is good. Most economic indicators are positive and the mood in the business sector is upbeat. Demand for credit continues to be strong although there are signs that the economic cycle has peaked. This year we expect to remain active in the energy sector and continue our investments in the seafood industry. Investment in residential and commercial property will remain substantial but we will have to be discerning in our choice of which projects to participate in. Tourism has undergone rapid growth and a degree of crowding-out effect and potential growing pains are likely to be felt in the business sector. Many collective wage agreements are up for renegotiation this year and it is important that this goes well. It will also be interesting to see how international investment contributes to the development of the business sector. Investment in infrastructure is clearly needed and there needs to be a constructive dialogue on the private funding of public works.

In such circumstances it is important to make considered decisions on loans, be prudent in choosing which projects we want to be involved in for the benefit of our clients and the Bank. Many of the projects decided on this year will not be fully realized for several years when the economic climate may be different from what it is today. It is therefore important that we take the long-term view and assess the impact of these projects on the economy and the business sector. Our current clients will remain the focal point at Corporate Banking when we are choosing which engagements we wish to pursue and the products we wish to offer.

INVESTMENT BANKING 

The main role of Investment Banking at Arion Bank is to bring together buyers and sellers on the financial market and to advise companies and investors on how to develop their business. The main services provided by Investment Banking are securities and FX brokerage, corporate finance and research. The managing director since October 2017 is Lýdur Thór Thorgeirsson who took over the position from Ida Brá Benediktsdóttir.

Corporate Finance provides M&A advisory services and is a leading arranger of stock market listings on Nasdaq Iceland. Corporate Finance’s clients include some of the largest companies and major investors in Iceland. Our team has extensive experience with a variety of educational and professional backgrounds and a proven track record of success.

Corporate Finance undertook a wide range of engagements in 2017. At the beginning of June it was announced that N1 intended to acquire the entire share capital of Festi and a purchase agreement was completed at the beginning of October. Corporate Finance advised N1 on the deal and they are now working to ensure that all conditions of the agreement are met, which should be completed during the second quarter of 2018. Corporate Finance also advised Reginn on its acquisition of property owned by Fast-1. The parties are currently finalizing the purchase agreement and ensuring all conditions are met prior to the completion of the acquisition. The parties hope to complete this transaction in 2018. In September 2017 Corporate Finance arranged the listing of Klappir Green Solutions on Nasdaq First North. The division also arranged regular bond issues by the real estate company Reitir and the energy utility company OR. 

The economic outlook is bright and we aim to consolidate our position as a leading adviser to corporates and investors and thereby to support the ongoing development of the Icelandic business sector and financial markets.

The economic outlook is bright and we aim to consolidate our position as a leading adviser to corporates and investors and thereby to support the ongoing development of the Icelandic business sector and financial markets. Over the past few years the Bank has made a strong contribution to the development of the securities market by arranging the IPOs of eight of the 13 companies listed on the main list of Nasdaq Iceland. Corporate Finance has also advised on the corporate bond market. In 2018 we will adopt the same approach and contribute to the Icelandic business sector by continuing to provide top quality services to our clients.

Capital Markets brokers financial instruments for the Bank’s international and Icelandic clients. The rising number of listings on Nasdaq Iceland has added to the diversity and depth to the Icelandic stock market. Arion Bank occupies a strong position in terms of securities turnover on the main market of Nasdaq Iceland and had the highest share of market participants on the equities market in 2017. Fixed Income Trading was involved in the primary sale of bonds for the municipality of Gardabær, the energy utility company OR and the real estate company Reitir. Fixed Income Trading is also responsible for the primary sale of Arion Bank covered bonds. There has been an upturn in trading on the foreign exchange market and the focus is on offering clients products to hedge risk. 

The main aim of Capital Markets has been to provide its growing client base with good services and access to expertise and state-of-the-art systems. The focus in the medium term will continue to be on product development to be able to offer our clients further opportunities to invest and distribute risk. For example last year a new solution was introduced which provided individual clients with direct access to the Icelandic equities market without the use of traditional brokers. 

The lifting of the capital controls has fuelled an increase in transactions with international equities and our team of professionals can advise on and broker transactions with listed securities on all the world's major securities markets.

Capital Market has maintained strong links with international equities brokers. The lifting of the capital controls has fuelled an increase in transactions with international equities and our team of professionals can advise on and broker transactions with listed securities on all the world's major securities markets.

Arion Research publishes macro research on the Icelandic economy, as well as research on individual sectors and companies.

Arion Research publishes reports and presentations, participates in meetings and answers queries posed to the Bank. Material published by Arion Research is intended for the general public, selected clients or the Bank’s employees and is always based on publicly available information. Arion Research works closely with other divisions to provide services to Arion Bank’s customers.

One of the objectives of Arion Research is to encourage and advance public discussion of the Icelandic economy. Arion Research is staffed by a team of experts who have the requisite education, dedication and experience to provide in-depth analysis of economic issues, getting to the heart of what really matters and being able to present their material in an accessible manner. Arion Research is independent of the other divisions of the Bank. 

In 2017 the department organized six seminars and conferences for the public and investors at the Bank’s headquarters at which topics such as the real estate market and the tourist sector were analyzed and Arion Research’s economic forecasts were presented. The department’s specialists also presented their research at numerous meetings with Arion Bank’s clients across the country. During the year Arion Research published 80 Economic Updates and 112 research reports and comments on listed companies.

Outlook

Investment Banking has played an important role in the growth of the Icelandic financial market in recent years. It has been one of the leading contributors to the regeneration of the Icelandic securities market and has helped many of Iceland's largest companies restructure their finances. The debt of Icelandic companies as a percentage of GDP has not been at such a low level for many years. Household debt has followed the same pattern and government debt has been reduced massively since the estates of the failed banks were settled, combined with strong GDP growth. 

The focus on reducing debt has gone hand in hand with cautious investment. While there are signs that investment is picking up, particularly in the business sector, it is abundantly clear that there is pent-up need for new investment, not least in infrastructure. In the next few years investment is likely to take off. The public and private sectors can be expected to take advantage of favourable conditions on the securities market. We should look to our neighbouring countries for inspiration and build on our own experience. 

The fact that the positive financial environment for companies and investors coincides with pent-up investment need is excellent news for the securities market.

The fact that the positive financial environment for companies and investors coincides with pent-up investment need is excellent news for the securities market. The Icelandic equities market is small by international standards and the corporate bond market is even smaller, despite the broad similarity in structure, and thus there is good growth potential. 

The significant steps taken towards the lifting of the capital controls present an opportunity for Icelandic companies to expand their business overseas and enable companies and investors to distribute and reduce risk. At the same time increasing numbers of international investors are seeking opportunities to invest in Icelandic business and infrastructure despite the restrictions which remain in place. 

Contributing to the development of the Icelandic financial market has long been integral to Arion Bank’s strategy. Our strong position, with a solid market share and diverse product offering, depends on this strategy and the qualified and experienced team we have at Arion Bank. Investment Banking is built on strong foundations and fully intends to maintain its key position on the market.

Retail Banking

Retail Banking provides a wide range of high quality financial service to retail customers and companies through our branch network across Iceland. The Bank operates 24 branches and a call centre and our digital channels enable our customers to do their banking wherever and whenever it suits them best. The managing director is Ida Brá Benediktsdóttir.

Our main focus over the past years has been on adding to the range of digital solutions in order to make banking more convenient and efficient for our customers. The voice of our customers is a key motivation at every stage of designing and developing our new goods and services. 

The division has been aiming to improve efficiency by scaling back the superstructure and reducing the number of square metres used in the branch network. Many customers are making increasing use of self-service banking options instead of visiting the branch or contacting the call centre.

Convenient banking

The advent of new digital solutions has resulted in a major change in customer behaviour over the past few years. Nowadays, the vast majority of contact with customers is via digital channels such as the app, the internet, online banking and ATMs. Our ability to offer outstanding digital services is one of Arion Bank’s key strategies. We achieved a great deal in this respect in 2017, with innovations including automatic credit assessments, a new method for onboarding customers, credit card payment plans in the app and online banking and new ways to open accounts and get cards online. The Bank is also making increasing use of web chat and other media in order to provide its services.

The public response to our digital solutions has exceeded all expectations.

The public response to our digital solutions has exceeded all expectations. Most credit assessments are performed digitally, the majority of mortgages applications are digital, payments plans are set up almost entirely by using the app, as are a host of other functions. This kind of result can only be achieved with a concerted team effort, high quality solutions and by listening to what our customers really want. The Arion app was named the best banking app in Iceland in a survey by MMR and we are determined to remain in first place. 

Our larger branches employ hosts to ensure that our customers get the service they are looking for and receive guidance on our digital services. Good employee training is integral to the goal of further enhancing services at our branches. We have brought in a new design and look at our branches which is aimed at supporting our focus on value-added service and rapid service channels such as ATMs and online banking. Uniforms have been introduced again to ensure that our employees are visible at our branches. At the same time we are taking measures to rationalize the branch structure, for example by reducing square metres and prioritizing self-service channels. In order to reduce the Bank’s ecological footprint, all marketing and promotional material in the branches is now in digital format.

The branch is designed to meet the needs of customers and to support rapid technological developments in banking and evolving customer behaviour.

On 21 September 2017, the Bank opened an experimental branch,  “the future branch” at Kringlan Shopping Mall. The branch is designed to meet the needs of customers and to support rapid technological developments in banking and evolving customer behaviour. New tech solutions are tested here, e.g. video conferencing, and those solutions which prove popular among customers are introduced to other branches. Meeting and conference rooms at the branch can be used to host various events. For example, the facilities can be used to hold meetings on financial matters, the economy or any other topics the customer may be interested in. The branch at Kringlan also has the longest opening hours of any bank in Iceland.

In mid-2017 a new sales centre was opened, whose role is to sell and advise on insurance from Vördur, Arion Bank's subsidiary, and pension savings. Highly experienced advisers from Vördur assisted on the project to ensure the quality of the service being provided. This collaboration with Vördur is part of the effort to improve Arion employees' expertise on the products and services offered by Vördur and also adds to the spectrum of products and services available from Arion Bank.

Changing environments calls for organizational changes

A rapidly evolving environment requires new focuses and ways of doing things. The organization of Retail Banking has been reviewed and focuses have been changed. In 2017 a new team called products, pricing and digital future was set up and the objective is to build on the success enjoyed by the Bank's digital channels. A further priority has been the effective management of products in Retail Banking and we now have five product managers who are authorized to manage prices and interest rates on the products they are responsible for. 

The branches in the Reykjavík area have been merged into a single region instead of the previous two. This change makes it easier to coordinate services and to combine employees’ expertise in order to meet customers’ demands. This change also reduces the overall costs of running the branch network and boosts efficiency.

A new department was launched called corporate business, whose goal is to lay the foundations for growth on this market.

Expanding on the corporate market

In the last few years Arion Bank has stepped up its service to small and medium-sized enterprises. The front line has gained greater autonomy and decision-making powers.

The unit corporate in Retail Banking is responsible for loans, sales and quality management to SMEs. The unit is divided into three departments, corporate business, corporate solutions and vehicle & equipment financing. There is a strong emphasis on developing specialized knowledge, e.g. sector expertise, digital corporate solutions and vehicle financing.

Vehicle and equipment financing was set up five years ago and serves individual and corporate customers alike. It has a team with great experience and expertise in financing investments in vehicles and equipment. It has performed excellently since it was founded and loans to customers have increased by 44% since 2015 and the loan portfolio at the end of 2017 amounted to ISK 17.5 billion.

In line with the Bank's digital strategy a new method for onboarding corporate customers was introduced during the year.

In line with the Bank's digital strategy a new method for onboarding corporate customers was introduced during the year. The process is now fully digitalized and takes just a few minutes for public and private limited companies to become customers of Arion Bank. This innovation has been warmly welcomed by customers and total of 326 companies joined the customer this year via this new channel.

Loans to SMEs have increased by 108% since 2013 and grew by 9% in 2017. The loan portfolio is well diversified and the main sectors represented are property management and construction, seafood, and retail and wholesale. The Bank also has a significant market share in agriculture.

The future is digital

It is clear that major changes lie ahead in the banking services industry and Arion Bank clearly aims to be at the forefront of those changes. A whole range of digital innovations have given Arion Bank a competitive advantage in making life easier for our customers. The positive response clearly shows that our customers appreciate the enhanced service and convenience offered by the Bank. We will continue on the same path in 2018 with the aim of consolidating our lead in this field.