The financial results for 2017 were satisfactory, although one-off events did leave their mark on the overall picture. Core revenues grew, the revenue base is strong and the Bank is financially robust. Net earnings amounted to ISK 14.4 billion and return on equity was 6.6%. The capital ratio at year-end was 24%, compared with 26.7% at the end of 2016. The reduction in the capital ratio is primarily due to the ISK 25 billion dividend and share buyback which was approved at a shareholders' meeting on 12 February 2018. On 26 February Arion Bank bought back shares from Kaupskil amounting to ISK 17 billion and the Bank will pay a dividend to shareholders of approximately ISK 8 billion. The Bank nevertheless maintains a strong capital position which far exceeds the regulatory minimum. The change is in line with the Bank’s objective to optimize its capital ratio so that it is more similar to the ratios of international banks and other Icelandic banks. It is also part of the process of selling the Bank which we expect to be one of the main events of the year.
Comprehensive financial services
A central element of Arion Bank’s strategy is to provide our customers with comprehensive financial services. The business is organized into four core activities: Asset Management, Investment Banking, Corporate Banking and Retail Banking, and we occupy a strong position on all our key markets.
The economy is currently performing well and the Bank is reaping the benefits, as are our customers. The Bank’s target is for loan growth to outpace economic growth, and we achieved this objective in 2017 when loans to customers grew by more than 7% during the year. Loans to corporates grew by approximately 7% while loans to individuals were up more than 8%. There is a healthy balance between retail and corporate loans in the Bank's loan book. The quality of the loan book is steadily improving and at the end of 2017 the ratio of problem loans was only 1.0%.
Synergy with our subsidiaries
The Bank’s subsidiaries are integral to the Bank's product offering. The insurance company Vördur is a new addition to Arion Bank Group, having been acquired in 2016. The company’s insurance products are now sold through our branches and we have high hopes for this partnership. Stefnir, Iceland’s largest fund manager, is an important partner of Arion Bank’s Asset Management division, the main distributor of Stefnir funds. The focus of Arion Bank and these two subsidiaries is almost entirely on the Icelandic market.
The third subsidiary of Arion Bank, the payment services company Valitor, sets itself apart in the Group in that it generates the majority of its revenues internationally. In 2017 approximately 70% of Valitor’s revenue came from its international business. The company has grown substantially abroad, both through strategic acquisitions of fintech companies and organic growth.
An exciting time for financial services
At Arion Bank we welcome these developments and we aim to become the leading provider of innovation in financial and digital services in Iceland.
These are exciting times for the financial services sector which is experiencing huge change at the moment. Fintech companies are entering the market, bringing greater accessibility and speed to financial services. Changes to the regulatory framework, such as PSD II, impose additional obligations on banks and even provide a boost to new companies trying to get established in the financial services market.
At Arion Bank we welcome these developments and we aim to become the leading provider of innovation in financial and digital services in Iceland. We started laying the groundwork back in 2012 when we began to introduce lean management to the Bank. By the end of 2017 all of our employees had received training and instruction in lean management. This approach has taught us the skills to tackle change. We are well positioned to evolve in response to our environment and to be the driver of change on the Icelandic financial market.
Convenient banking is our priority
In 2016 a new team was set up at Arion Bank in the spirit of lean management and the business accelerators which the Bank has run since 2012, Startup Reykjavík and Startup Energy Reykjavík. The role of the new team is to redesign the Bank's key products and services from scratch and to deliver new solutions which are digital from start to finish.
The response has exceeded all our expectations and Arion Bank has taken a decisive lead in offering innovative products in the retail banking market.
This effort has quickly paid off and the Bank has in that time launched close to 20 new digital products. The response has exceeded all our expectations and Arion Bank has taken a decisive lead in offering innovative products in the retail banking market. A recent survey confirmed this, revealing that 36% of respondents consider Arion Bank to be the leading bank in Iceland in terms of digital solutions. The bank that came in second place only scored 25%. New solutions result in better service, higher revenues, added efficiency and greater customer satisfaction. These factors played a part when the magazine Euromoney named Arion Bank as bank of the year in Iceland for 2017.
The most popular new product among customers has been the digital credit assessment and mortgage application process. This has made the whole process far quicker and more user friendly than before. The Bank’s market share in new mortgages increased substantially in face of fierce competition and this is primarily down to the popularity of our new digital products. With mortgages representing more than 40% of the Bank's loan portfolio, the mortgage market is of utmost importance to us.
New way of thinking extends to our branches
Our new branch at the Kringlan Shopping Mall was opened in 2017 following extensive refurbishments. The new branch provides a good insight into how we envisage the branch of the future. The focus is on digital banking, and traditional cashier services are not available at this branch. Employees assist our customers with self-service transactions in the new ATMs, via their online bank accounts or other digital channels. Customers can also receive financial advice via video link and this has proven a highly popular addition to our service offering. The branch has longer opening hours than any other branch in Iceland and is open when other services at Kringlan are open. We will continue to develop our branch services and build on our experience of the new layout at Kringlan and the feedback from customers.
One-off events leave their mark on the financial results
The most significant one-off event during the year were the operational difficulties and eventual bankruptcy of the United Silicon plant at Helguvík. Impairments on loans and investments in the company amounted to ISK 4 billion after tax. Impairments represented 2% of Arion Bank's equity and 0.5% of the loan portfolio.
The Bank never intended to become a shareholder in United Silicon, but as operational difficulties mounted the Bank simply had to step in and inject additional capital. Arion Bank has reached an agreement with the administrator of the bankrupt estate and foreclosed on the Bank's collateral in the company. Our objective is to make the necessary improvements to the plant and to sell it as quickly as is practicable. On the positive side we have detected strong interest in the plant from international investors in the silicon industry.
Working responsibly in harmony with the community
At Arion Bank we strive to work responsibly and to support our customers and the Icelandic economy. In 2017 we implemented the Bank’s new strategy on sustainability which was approved by the Board at the end of 2016. In rolling out the policy we have tried to ensure that our employees know where their responsibilities lie and how each one of us can make a contribution with the interests of our different stakeholders – employees, customers, investors and society as a whole – at heart.
One of our priorities in recent years has been to pass on our expertise in innovation and financial education. In 2017 we held numerous seminars for customers on topics as diverse as savings, pensions and buying your first home. The business accelerator Startup Reykjavík was held for the sixth time and Arion Bank has now invested in 80 start-ups since 2012.
For the second year in a row the 2017 annual report contains in-depth coverage of sustainability and non-financial performance indicators. Arion Bank enjoys close collaboration with the innovation company Klappir Green Solutions, which provides environment solutions. The companies have cooperated in many areas. For example, Arion Bank advised on the listing of the company on the First North market, the only new stock market listing in 2017.
An important year ahead
We welcome the fact that the shareholder base of Arion Bank is evolving and becoming broader and that Icelandic investors are coming on board.
In 2017 the first steps towards selling Arion Bank were taken when Kaupskil, a subsidiary of Kaupthing, sold a 30% stake in the Bank to three international investment funds and the investment bank Goldman Sachs. The next phase began early 2018 when 24 Icelandic funds managed by four fund management companies came on board as shareholders and two existing shareholders added to their holdings when approximately 5% of the Bank was sold. We welcome the fact that the shareholder base of Arion Bank is evolving and becoming broader and that Icelandic investors are coming on board.The investment in the Bank underlines the confidence in the work and progress that has taken place at the Bank. Further developments may take place in 2018 and floating the Bank on the stock market remains one of the options on the table.
The outlook is promising, both for the Bank and the Icelandic economy, which is performing strongly. Arion Bank will continue to develop its services with the aim of making banking more convenient for our customers and the Bank is in a great position to fully engage with the tasks ahead – strengthening the infrastructure and working side by side with our customers on their future projects.