Dynamic economy – rising demand for credit
The Icelandic economy is prospering and we can see evidence of this all around. Demand for corporate loans is up but even though the economy is thriving we still need to show restraint. It’s precisely in times of economic prosperity that we should proceed cautiously, especially in the financial sector.
We have increased lending but are doing so methodically and responsibly. We are especially pleased to see how close collaboration across different divisions at the Bank has resulted in a diverse range of funding and advisory engagements. This demonstrates the strength in depth of our goods and services. Competition for mortgages has been substantial this year after the pension funds entered the market, but Arion Bank has been able to defend its position.
Strong core operations
The Bank’s core operations continue to gain strength and net interest income grew in 2016, partly as a result of an increase in interest-bearing assets, following the Bank's sale of shares in companies in unrelated areas of business, and effective liquidity management. One focus in recent years has been to increase commission income and this effort has met with success.
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HÖSKULDUR H. ÓLAFSSON.
CEO
One focus in recent years has been to increase commission income and this effort has met with success
Commission income has grown steadily in recent years but did decrease year-on-year this time. Nevertheless 2016 turned out to be the Bank’s second best year ever in terms of commission income. The performance of the markets have had a negative impact on results as the Bank still retains significant holdings in listed and private equity. This primarily involves legacy shareholdings which the Bank largely sold before 2016 and made a concerted effort to divest further during the year. We will continue to pursue this strategy.
The changing face of financial services
Demand for banking services is changing. Customers are increasingly using digital services, such as online banking and the Arion app. We have also introduced a new generation of ATMs in our branches where customers can perform self-service transactions, make deposits and withdrawals, pay bills and transfer money. This shift in behaviour inevitably affects the services which the Bank can provide in its branches. In order to adjust to this new type of demand a raft of measures have been taken. For example, 46 employees were made redundant in the autumn. Action such as this is always difficult but it was a necessary response to the changes which are occurring in financial services.
Digital future
Over the last two years we have reviewed IT issues at the Bank. We have looked into collaboration with both Icelandic and international service providers. We are satisfied with how IT is organized and it provides a strong platform to tackle future engagements. In January 2017 we made a decision to enter into an agreement to outsource certain services to Nýherji. Nýherji is one of Iceland’s leading IT companies and is now responsible for operating the Bank’s IT systems. Nýherji has vast experience in this area and the Bank shares these services with other companies which is clearly a more efficient use of resources.
We retain a dedicated team in the Bank's IT division, the majority of whom are engaged with software development, and Arion Bank introduced a range of new digital solutions for its customers during the year. For example, customers can now obtain a confirmed credit appraisal via the Bank’s website in just a few minutes and complete an application for a mortgage online. We will continue in this direction since our customers want to be able to take care of their finances whenever and wherever it suits them. We will make every effort to meet our customers’ wishes and to develop news ways for them to do their banking as conveniently as possible.
Customers can now obtain a confirmed credit appraisal via the Bank’s website in just a few minutes and complete an application for a mortgage online
Broad service offering – non-life insurance added to the Bank’s product offering
A key element of Arion Bank’s strategy is to provide our customers with comprehensive financial services. At the branches we offer professional financial advice on the major decisions in life, such as buying a house, savings and insurance. We also provide services to small and medium-sized enterprises and each branch has the authority to grant substantial loans to its customers.
Arion Bank’s acquisition of the insurance company Vördur, which was finalized last year, represents another key addition to our product offering, with non-life insurance now available to our customers. The two companies will join forces to sell insurance through our branches.
New branch at Keflavík International Airport – reduced costs in the branch network
During the spring Arion Bank opened a branch at Keflavík International Airport and thereby took over all financial services at the airport, one of Iceland’s largest market places. Tourism has undergone enormous growth in Iceland and this represents an exciting opportunity for us. The positive effect on commission income in Retail Banking from the opening of the airport branch was already felt in 2016.
The branch at Keflavík International Airport is the first new branch opened by Arion Bank without closing other branches or merging them at a new location. Since 2009 the Bank has reduced the number of branches by 45% and substantially cut costs in the branch network. This work continued in 2016, with the focus on cutting square metres without reducing the number of branches. Consequently, several branches moved to new and smaller premises which are better suited to the Bank's current activities. Just as we are seeking to share resources when it comes to IT, we have been trying to share business premises with others where possible. The new branches are all designed with financial advisory services and new digital channels in mind. We will continue along this path.
Since 2009 the Bank has reduced the number of branches by 45% and substantially cut costs in the branch network
Despite the creation of various income generating projects during the year, such as the new airport branch, the number of employees at the Bank has remained virtually unchanged.
Investment bank of the year according to Euromoney
Euromoney named Arion Bank as the best investment bank in Iceland in 2016. This accolade is well deserved and apart from occupying a strong position in securities brokerage, especially equities where the Bank was the market leader in 2016, Arion Bank arranged the only IPO on the Icelandic stock market during the year. Arion Bank has led the way in this area in recent years, arranging more than 60% of IPOs in that period.
Key subsidiaries – Valitor expanding overseas
Our subsidiaries are integral to the Bank's strategy and product offering. Key subsidiaries besides Vördur are Iceland’s largest fund management company Stefnir and the payment services company Valitor which is experiencing strong growth in Denmark and the United Kingdom. Income from Valitor’s international operation grew by 50% in 2016 and now represents more than 60% of total revenue. The company has had a presence on these markets for many years and is now firmly establishing itself. By acquiring Vördur and investing in Valitor’s overseas business Arion Bank is laying stronger foundations for the Group and preparing for the future.
Income from Valitor’s international operation grew by 50% in 2016 and now represents more than 60% of total revenue
Sustainable banking
At Arion Bank we have always sought to work responsibly and to support our customers and the Icelandic economy as a whole. In 2016 a new policy on sustainable banking was introduced and it will serve as a guide for us in all we do. One of our tasks in 2017 will be to implement the policy. Each division will consider how it can best operate responsibly with respect to different stakeholders, that is to say employees, customers, investors and society as a whole. We are excited to see what we can achieve.
In recent years Arion Bank has placed a special emphasis on financial education and innovation in Iceland, and 2016 was no exception. A substantial number of talks were held for customers and we continued to support the Institute for Financial Literacy. Arion Bank provides backing to innovation at both primary and secondary schools in Iceland. We have also played a key role in the creation and development of business accelerators in this country. These include Startup Reykjavík and Startup Energy Reykjavík. Startup Reykjavík was once again named the best business accelerator in Iceland in 2016 at the Nordic Startup Awards. Arion Bank invested in 17 start-ups through the business accelerators in 2016 and has now invested in more than 70 companies since 2012.
Arion Bank invested in 17 start-ups through the business accelerators in 2016 and has now invested in more than 70 companies since 2012
Uneven field of competition
It is disappointing that the authorities have decided to extend the bank levy, which was supposed to be a temporary measure but is now a component of the fiscal policy in the long term. The bank levy is a 0.376% tax on total debt, excluding tax liabilities, in excess of 50 billion. It is therefore a tax on the Bank's funding, which is to a large extent in the form of customer deposits. This makes it primarily a tax on the deposits of the general public and the corporate sector. The bank levy effectively raises the cost of international funding by almost 20%. Other sectors in Iceland or international banks with operations in Iceland and which lend to Icelandic companies are not subject to such tax. This is a separate tax which makes it difficult for banks to be competitive, both on the domestic mortgage market and also with international financial institutions on the Icelandic market. Banks are competing domestically with pension funds to provide mortgages yet pension funds do not pay income tax, financial sector tax or the bank levy. It is clear that there is not a level playing field on this market with the government intervening as it does. In 2016 Arion Bank paid a total of ISK 5 billion in tax which companies in other sectors are not required to pay and such taxation obviously has significant undesirable effects.
An exciting year in prospect
The year 2016 was a good year and we accomplished a great deal in many areas. I would like to thank our customers for the trust they have shown by working with us. I would also like to extend my gratitude to our employees for their contribution to our success this year.
Arion Bank is in a good place and we are optimistic about what 2017 will bring us.