Financial Statements 2017 Investor presentation 14 February 2018 - PowerPoint PPT Presentation

Financial Statements 2017 Investor presentation 14 February 2018

2017 Highlights Operating environment strong and capital controls were lifted First step in the sale of Arion Bank, largest equity portfolio investment by foreign parties in Icelandic history Improvement in core revenues – 7% increase in loans to customers Kaupthing facility repaid and Arion Bank is now fully market funded Impairments and provisioning relating to United Silicon affect financial performance of the year

Success in digitalization of services The Bank’s mortgage application process is now fully digitalized – best banking app in Iceland* Convenient Banking Digital services change behaviour (increase in 2017) Digital credit assessment and mortgage application – quick and straightforward New pension portal opened allowing a range of pension related functions 85% Easy to start new services such as new bank accounts or credit cards 55% The app allows you to close a payment card quickly and easily – and reopen it 20% The Einkaklúbbur discount app released – highly popular and been downloaded over 40,000 times New Bank Accounts Credit Assessments Credit Card Plans *According to a survey done in June 2017 by MMR 3

Accessible services and open communication 120,000 560,000 70,000 customers branch visits e-mails from customers 330,000 2,500 696 phone calls from customers conversations on publications by Arion Facebook and webchat Research 4

Strong position in key markets Continued market success Digital focus in retail services Number 1 in equities trading on Renovated branch at Kringlan Mall the stock exchange was opened – an experimental branch with focus on digital services Arion Bank advised on the Klappir Green Solutions listing on the First 10 new digital solutions introduced North market – only listing in Iceland in 2007 – continued focus on in 2017 convenient banking S&P raised Arion Bank’s long Partnership with insurance company term credit rating to BBB+ with Vördur on selling insurance to stable outlook customers of Arion Bank 5

Bank of the year in Iceland Managerial and board of directors changes • Eva Cederbalk took over as chairman of the Board of Directors in June • Euromoney named Arion Bank bank of the year Steinunn Kristin Thordardottir elected to the in Iceland Board of Directors in November Global Finance named Arion Bank as investment • Ida Bra Benediktsdottir appointed managing bank of the year in Iceland director of Retail Banking in June Investment Pension Europe named Frjálsi • Lydur Thorgeirsson appointed managing director of Pension Fund as best fund in European countries Investment Banking in October with fewer than one million inhabitants 6

Sustainability for the Future Innovation and Financial Literacy Active in the Community Startup Reykjavik held for the sixth year in Sponsorship of DesignMarch row and the Bank has now invested in 80 plus special events startups through its business accelerators A range of seminars on finance, including Sponsor and participant in topics such as saving for your first home Plastic Free September Arion Research’s macroeconomic Continued support and forecast and a report on the residential cooperation with the Icelandic property market were presented Handball Association 7

Macroeconomic Environment

The economy continues to grow but at a slightly slower pace Pressure in the economy has begun to ease, resulting in a diminishing output gap • GDP growth in Q3 Growth contribution of GDP components 15% 2017 measured 3.1%. Despite slower growth 10% than previous quarters 5% the economy is still developing well 0% • Private consumption -5% is, and will be, the main driver behind economic -10% 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 growth, while Private consumption Public consumption Investment Changes in inventory External trade GDP investment and service exports will play a role Exports growth Investment components to a lesser extent - YoY - % YoY growth in the first 9M 40% 30% • Significantly slower growth in tourism and 20% 20% other export sectors, as 10% well as an increasing 0% trade deficit has 0% reduced the current account surplus -10% -20% 2016 1Q 2016 2Q 2016 3Q 2016 4Q 2017 1Q 2017 2Q 2017 3Q 2013 2014 2015 2016 2017 Goods Services Business Housing Public 9 Sources: Statistics Iceland, Arion Research

Tourism growth is slowing down The ISK has been relatively steady following the summer depreciation FX market and the ISK • After a volatile summer - EUR millions 400 130 that was characterized by an 125 exchange rate depreciation, 300 the ISK has become more 120 stable 200 115 • The CBI has gradually 100 reduced its interventions in 110 the FX market and now only 0 105 steps in with aim of stopping jan feb mar apr maí jún júl ágú sep okt nóv des spiral formation CBI sells EUR (l.axis) CBI buys EUR (l.axis) EURISK (r.axis) • More and more evidence Foreign travelers in Iceland Foreign payment card turnover per visitor suggests that the tourism - adj. for "airlines effect“, Y-o-y change - YoY %-growth 30% 80% industry has passed the 70% 20% greatest growth period. As 60% an example growth in foreign 10% 50% payment card turnover and 40% 0% the number of visitors has 30% -10% Floating exchange rate 20% been slowing down. 10% Constant exchange rate However, analysts expect -20% 0% continued growth in tourism -30% Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Sources: Central Bank of Iceland, The Icelandic Tourist Board, The Centre for Retail 10 Studies, Arion Research

Inflationary pressures on the rise Hurdle on the path to lower interest rates • Currently housing prices are still Housing price index for the capital area CBI's key interest rates -YoY % 8.0% the main factor behind inflation 30% while imported goods partly offset 7.0% the pressure. However, these two 20% subcomponents are converging, as 6.0% house price increases are slowing down and the exchange rate effects 5.0% 10% are ebbing out 4.0% • High frequency indicators suggest Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 0% Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 that house price increases in the capital area have peaked, at least Overnight CBI rates Housing prices total Apartments for the time being, and prices will 7 day collateralised lending rate Single family dwellings 7 day term deposits rise slower in the coming quarters Inflation - 12 month CPI change 6% • GDP growth in Q3 exceeded the CBI‘s expectations, wage 4% agreements are on the horizon and 2% fiscal slack in 2017 was more than previously expected. The interplay 0% between these three factors has -2% curbed expectations of continued interest rate cuts -4% 01.16 07.16 01.17 07.17 01.18 Housing Public service Other service Alcohol and tobacco Imported goods Domestic goods Inflation 11 Sources: Registers Iceland, Statistics Iceland, Arion Research

2017 Headline Figures Net earnings Cost-to-income ratio CET 1 Gross impairment / gross loans ISK 14.4 bn. 23.6% 56.1% 1.6% 31.12.2016: 2016: 2016: 31.12.2016: 56.0% 26.1% ISK 21.7 bn. 3.2% Return on equity Leverage ratio Number of employees Mortgages/Total loans 6.6% 15.4% 1,284 40.6% 2016: 31.12.2016: 31.12.2016: 31.12.2016: 10.5% 17.8% 39.2% 1,239

Income statement

Income statement All amounts in ISK million Improvements in core operations • Net interest income at the same level as in 2016 2017 2016 Diff Diff% • Increase in interest bearing Net interest income 29,835 29,899 (64) (0%) assets offset by low inflation and Net commission income 15,357 13,978 1,379 10% cost of pre-financing Net financial income 4,091 5,162 (1,071) (21%) • Increase in net commission Net insurance income 2,093 1,396 697 50% income mainly due to new Share of profit of associates (925) 908 (1,833) - subsidiaries at Valitor and Other operating income 2,927 3,203 (276) (9%) increased lending activity Operating income 53,378 54,546 (1,168) (2%) • Acquisition of Vördur in late Salaries and related expense (17,189) (16,659) (530) 3% 2016 transforms net insurance Other operating expenses (12,772) (13,881) 1,109 (8%) income Bank levy (3,172) (2,872) (300) 10% • Salaries are stable despite Net impairment 186 7,236 (7,050) - the Vördur acquisition and new Net earnings before taxes 20,431 28,370 (7,939) (28%) Valitor subsidiaries Income tax expense (5,806) (6,631) 825 (12%) • Other OPEX decreases Discontinued operations, net of tax (206) 0 (206) - mainly due to revised Net earnings 14,419 21,739 (7,320) (34%) Depositors’ and Investors’ Guarantee Fund provision • United Silicon has a negative effect on several line items 14