In October Standard & Poor’s upgraded Arion Bank’s credit rating from BBB to BBB+ with a stable outlook. An important step was taken during the year when the remainder of the bond issued to Kaupthing in 2016 was prepaid.
Funding
Over the past few years the Bank has taken significant steps towards diversifying its funding, with measures including issuing bonds in euros and other currencies. On the Icelandic market the Bank has continued to issue covered bonds and bills.EMTN issues
The Bank completed two bond issues in euros in 2017, in January and June.
In January Arion Bank issued an additional €200 million tap of the euro benchmark bond issued in December 2016. The bonds are 5-year instruments bearing a 1.55% margin over interbank rates. The Bank had previously issued €300 million in December 2016, bringing the total to €500 million.
In June the Bank issued a new 3-year bond in euros for a total of €300 million. The total demand for the issue was more than €600 million. The bonds were sold at 0.88% over interbank rates. At the same time the Bank repurchased €100 million of a €300 million issue maturing in 2018.
The Bank held smaller bond issues in NOK and SEK under the Bank’s EMTN programme in transactions amounting to approximately ISK 19 billion.
During the year Arion Bank bought back the outstanding amount of notes held by Kaupthing as part of the arrangements for the liberalization of capital controls in Iceland. The notes amounted to $747 million when they were issued at the beginning of 2016. The buyback means that the Bank is now fully market funded.
Credit rating upgraded
Standard & Poor’s (S&P) upgraded Arion Bank’s credit rating from BBB to BBB+ with a stable outlook. The upgrade reflects the improving conditions in the Icelandic economy, the deleveraging of Icelandic households and corporations and the positive impact of the liberalization of capital controls. S&P also took into account Arion Bank’s improved access to international funding markets and its strong capital position.
S&P credit rating of Arion Bank and Iceland
| Category | Arion Bank |
The Republic of Iceland* |
|---|---|---|
| Long-term | BBB+ | A |
| Short-term | A-2 | A-1 |
| Outlook | Stable | Stable |
| Last rating action | 25 October 2017 | 17 March 2017 |
| S&P rating report | 15 December 2017 |
* Foreign currency obligations. Please visit www.cb.is for further information.
Issues of covered bonds and bills
Arion Bank continued to issue covered bonds which are secured in accordance with the Covered Bond Act No. 11/2008. The Bank issued covered bonds amounting to ISK 29,920 million in 2017. Fixed rate series ARION CB 1 and ARION CB 4 were repaid during the year, a total of ISK 23 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.
The Bank has continued to issue bills on the domestic market and this has further diversified the Bank’s funding. Bills amounting to ISK 20,4 billion was issued in 2017. Outstanding bills at the end of 2017 amounted to ISK 10,9 billion.
LIQUIDITY AND LIQUIDITY RISK
Arion Bank is partly 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) which is calculated according to rules issued by the Central Bank of Iceland. LCR builds on European liquidity regulations based on the Basel III standard and addresses risk factors relating to the stickiness of deposits and the maturity mismatch of assets and liabilities. At the end of 2017 the Bank's LCR was 221% and the ratio for foreign currencies was 323%, well above the minimum requirement stipulated by the Central Bank of Iceland.
The Bank’s net stable funding ratio, NSFR, was 125% at the end of 2017 and 181% in foreign currency. 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 ratios indicate that the Bank has stable funding.