2016 – Investing for the future
The year 2016 differed from previous years in many respects for Arion Bank, not least to 2015 which was characterized by the divestment of acquired assets and which was one of the most profitable in the Bank's history, a true landmark year. By selling the Bank’s largest remaining assets in unrelated businesses, the Bank drew a line under the chapter relating to its legacy assets.
The year 2016 on the other hand was all about optimism for the future and investments in the tasks which matter most to the future development of the Bank as a universal financial institution. Arion Bank’s acquisition of the insurance company Vördur, one of Iceland’s most popular insurers, was completed during the year. The company has around 12% of the market share in non-life insurance in Iceland and will be an excellent addition to Arion Bank’s range of products. In the spring of 2016 Arion Bank opened a new branch at Keflavík International Airport and is the only bank with a presence at the airport. We see this as a great opportunity to provide first-class services to the huge number of tourists passing through Iceland. The Bank also invested heavily in digital solutions and it’s fair to say that Arion Bank is at the forefront in this field in Iceland. Our subsidiary Valitor also continues to invest in its Danish and UK operations. The future is full of promise.
Leading the way in digital banking
Approximately 70% of Arion Bank customers use online banking services and 35% are active users of the Arion app. The number of app users increased by close to 30% in 2016. Digital channels play a key role in Arion Bank’s future vision and we invested heavily in digital solutions during the year. It is fair to say that Arion Bank is at the forefront of fintech solutions in Iceland. We launched five new solutions in 2016 and continued in the same vein at the beginning of 2017.
Digital channels play a key role in Arion Bank’s future vision and we invested heavily in digital solutions during the year
Innovations launched include payment plans for credit cards which can be set up in just a few seconds using the app. Customers can also get a confirmed credit appraisal for buying a house in just a few minutes online and can also finalize an application to get a mortgage. All the necessary documentation is obtained digitally and signatures are made using eID. Our goal is to make our services even better and more convenient for our customers. We can see that these innovations are proving popular, with more than twice as many customers obtaining a credit appraisal in February 2017 than in February 2016.
Better terms for Arion Bank on the international credit markets
In recent years Arion Bank has led the way in Iceland by actively seeking funding on the international credit markets and 2016 was no exception. The Bank issued bonds in euros to a broad group of investors on two occasions during the year. At the beginning of 2017 the Bank tapped the second issue, bringing the issue to €500 million. The Bank’s terms on international credit markets have improved markedly recently, clear testament to the growing confidence of bond investors in the Bank and the Icelandic economy. The progress made by the Bank and the improved performance of the Icelandic economy, as well as the vital steps towards lifting the capital controls all have a lot to say in this regard. These factors led Standard & Poor’s to upgrade the Bank’s credit rating from BBB-/A-3 to BBB/A-2 during the year, with positive outlook.
The Bank’s terms on international credit markets have improved markedly recently, clear testament to the growing confidence of bond investors in the Bank and the Icelandic economy
In 2016 the Board of Directors of Arion Bank adopted a new policy on sustainable banking. One of the objectives of the new strategy is to increase the number of goals we set and the number of key performance indicators. The strategy also calls for more prominence to sustainability in the Bank’s reporting. The first steps in this direction are being taken in this annual report. This is a response to the UN Global Compact and also the guidelines made by the World Federation of Exchanges which set out which information listed companies should highlight in their reporting. Arion Bank has collaborated closely on this with the Icelandic innovation company Klappir. In 2017 the Bank will continue to implement its new strategy on sustainability.
Doing the right thing and doing it right
In recent years the Bank’s infrastructure and internal controls have been reinforced and the Bank has been recognized for good corporate governance. The Bank holds training programmes for employees to ensure that people are familiar with the legislation and regulations which apply to our business. In 2016 a special campaign was launched at the Bank, raising employees’ awareness of their roles in risk management and internal controls at the Bank. This effort will continue in 2017. Each and every employee has an important role to play in this respect, no less than the board and the management. It is imperative that we do the right things and that we do them right.
In recent years the Bank’s infrastructure and internal controls have been reinforced and the Bank has been recognized for good corporate governance
Investment banking is a vital component of our service offering
A central component of Arion Bank's strategy and business model is to offer its customers a wide range of financial services - to be a universal bank. Crucial in this respect is to offer investment banking services. There is still talk in Iceland of separating retail and investment banking. The type of investment activity which we saw conducted by the banks in the years leading up to the financial crisis means that investment banking is considered a risk-seeking industry in Iceland. It is important to remember that the situation with regard to the giant international European and US banks is hardly applicable to Icelandic banks which are small in comparison. It is also crucial to consider that since the financial crisis, sweeping changes have been made to legislation and supervision in Iceland, which renders the need for separation essentially unnecessary. The main concerns have been addressed and the risks averted. Any debate on the separation of activities has to be measured, informed, free of prejudice and based on the available facts.
Bank levy is detrimental to competition and terms of business for our customers
It was clear in 2016 that the banks would still be expected to pay a tax which is not imposed on other Icelandic sectors or international banks. I am referring here to the so-called bank levy, which is charged on the liabilities of financial institutions. This is a specific tax which makes it difficult for banks to compete, both on the domestic mortgage market and with international banks when funding Iceland’s largest companies. Naturally the banks have to fund the bank levy by having a higher interest margin, higher commission income or reducing expenses. As a result the bank levy unfortunately increases costs for customers of the banks and it pushes up interest rates in Iceland. The effects have been limited so far since the levy was only supposed to be a temporary measure. The arguments for extending the bank levy are weak. It is important that this form of taxation be reviewed. The first step could possibly be to scrap the tax on bonds issued by the Bank to fund mortgages.
The arguments for extending the bank levy are weak
Ownership of Arion Bank at a crossroads
Arion Bank has two shareholders: Kaupthing ehf, which owns 87% through its subsidiary Kaupskil ehf; and the Icelandic government, which owns the remaining 13% through Icelandic State Financial Investments. As stated in the announcement from Kaupthing and Arion Bank in June 2016, the possibilities regarding Kaupthing's ownership of Arion Bank are being appraised. An IPO is one of the options on the table, although it should be stressed that no decision has been taken on timing or how this would be carried out.
It has been clear from the outset that the current ownership structure was not a long-term arrangement and it will be interesting to see how things develop in 2017. It is clearly very important that this is done successfully, not only for the Bank but also for the Icelandic financial system as a whole.
Arion Bank in a strong position
Over the last few years Arion Bank has adhered to the strategy adopted by the Board of Directors in 2010. This strategy builds on the relationship banking model and the desire to offer customers comprehensive financial services. Our subsidiaries play a vital role in this regard. These include Iceland’s foremost payment services and asset management companies, as well as the insurance company Vördur that is a key addition to the Bank's product offering.
We have successfully created a bank which today is both financially robust and which occupies a strong position on its chosen markets. The year 2016 was a positive year in which important steps were taken towards consolidating the Bank's future. I would like to thank the management and our employees for their outstanding contribution to what we have accomplished.