Financial Statements 31 March 2018 Investor presentation 2 May 2018
Q1 2018 Highlights Mortgages and corporate loans continue to grow at a healthy pace with good asset quality Large liquidity buffer and repricing of loans put pressure on Net Interest Income but Commission and Financial Income develop well Valitor continues its growth strategy with good top line revenue growth but at increased costs Release of surplus capital initiated in March with a share buy back and dividend payment The Bank’s capital base continues to be strong with continued dividend capacity going forward
Changes in Arion Bank’s ownership structure Arion Bank now 100% privately owned - Icelandic government exits the shareholders group Board authorized to propose dividend Icelandic funds invest in Arion Bank Arion Bank issued 5-year bond in 24 funds managed by four Icelandic amount of € 300 million fund management companies acquired total stake of 2.54% 2018 AGM authorized the board Arion Bank now 100% privately to submit proposal on dividend or owned after Icelandic government other disbursement of equity up sold its 13% holding until the next AGM Trinity Investments (Attestor Capital Arion Bank bought back 9.5% LLP) and Goldman Sachs increased of its own shares stake by a further 2.8% 2
– … New digital services launched Short-term loans introduced which can be applied for online Convenient banking Every day banking made easier: Regular savings and short-cuts to pay bills, transfer money and pay off credit card bills Enhanced start-up page in Online Banking – clearer overview of balance, transactions, savings and due repayments Short-term loans – new type of loan, max. ISK 2 million, applied for online Bills can be spread out for up to 12 months in Arion app New and convenient way to buy a car – completely digital process 4
Changes in the branch network announced 96 % of the Bank’s contact with customers now through digital solutions Changes to branch network announced Changes at board and regional management The goal is to better meet customers’ needs as 96 % Herdís Dröfn Fjeldsted elected on to the board of of the Bank’s contact with customers is through directors at the AGM digital solutions such as app, online bank and ATM´s Ingi Steinar Ellertsson new regional manager for Northern and Eastern Iceland Branches in Garðabær and Hafnarfjörður partly merging with service centre at Smáratorg, while Kristbjörg Héðinsdóttir new regional manager in new branch will open locally the Reykjavík area (April) Mosfellsbær branch will merge with Bank‘s service centre at Bildshöfði in Reykjavík Branches in Akureyri, Blönduós, Hella and Vík will soon all be moving into new premises 4
Arion Bank recognized for excellence in corporate governance Detailed reporting on environmental issues and non-financial performance indicators in annual report Startup Reykjavík held for seventh time Corporate governance and reporting Arion Bank recognized as company 238 applications received for Startup which has achieved excellence in Reykjavík 2018, which will be held for corporate governance seventh time this summer Startup Reykjavík held seminar about Arion Bank published its shareholders’ agreements and stock annual report and pillar 3 risk options in startups disclosures digitally for the 4th year in succession Detailed reporting on Startup Reykjavík, Young Professional environmental issues and non- Women in Iceland and Women Tech financial performance indicators Iceland organized event Women in in Bank’s annual report Innovation #NoObstacles 6
Macroeconomic environment
Continued economic growth at 3.6% in 2017 The output gap has narrowed after peaking in late-2016 • Economic growth in Growth contribution of GDP components 10% 2017 measured 3.6%. Growth was driven by private consumption 5% while investment and service exports also played a role 0% • Domestic demand remains strong and -5% shows no sign of easing. 2010 2011 2012 2013 2014 2015 2016 2017 Rising housing Private consumption Public consumption Investment Changes in inventory External trade GDP investment and public Current account balance, % of GDP Household debt 15% 300% investment offset slower growth in 10% business investment 200% 5% • Slower growth in 0% tourism and other 100% -5% export sectors, coupled with growing goods -10% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 trade deficit has 2011 2012 2013 2014 2015 2016 2017 Balance on goods Balance on services reduced current account Secondary income, net Balance on primary income % of GDP % of disposable income surplus Current account balance 8 Sources: CBI, Statistics Iceland, Arion Research
Tourism growth is rapidly slowing down Forecasted to grow 6% yoy Foreign payment card turnover The ISK against major trade currencies • The krona has been YoY, constant exchange rate, excl. flights 150 relatively stable recently and 100% the CBI has frequently 80% mentioned a good balance on 60% 140 the FX market 40% • The CBI has almost 20% completely stopped its FX 130 0% market interventions and -20% according to the Bank it will Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 only intervene in order to stop 120 excessive volatility Payment card turnover per tourist Total foreign payment card turnover • There is increasing Tourist arrivals 110 evidence that suggests that YoY %-growth 80% the tourism industry is over the peak of its growth spur. 60% 100 For example, growth in both 40% foreign card turnover and 20% tourist arrivals has 90 decelerated rapidly. However, Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 0% analysts still expect continued 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-18 growth over the next years USD GBP EUR Sources: Central Bank of Iceland, The Icelandic Tourist Board, The Centre for Retail 9 Studies, Arion Research
Inflation peaks above the inflation target Further policy rate cuts look unlikely Unit labour costs and productivity • Inflation continues to be driven Housing price index for the capital area CBI's forecast by rising house prices while being 10% YoY % 30% somewhat offset by lower import 8% prices due to the strong krona. 6% However, house price increases 20% 4% have been slowing down recently 2% while the effects of the strong 10% exchange rate are tapering off 0% -2% • There are indications that house 0% prices in the capital area have Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 -4% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 peaked, at least for now, and there the outlook for slower price Housing prices total Apartments Unit labour costs Productivity Single family dwellings increases outside the capital area in Inflation the coming quarters 12 month CPI change 6% • Whether or not the collective 4% wage settlement framework holds throughout the forthcoming wage 2% negotiations this year there is 0% increased uncertainty about wage levels going forward. The CBI’s -2% forecast assumes that the wage -4% settlement framework will hold 01.16 07.16 01.17 07.17 01.18 Housing Public service Other service Alcohol and tobacco Imported goods Domestic goods Inflation 10 Sources: Registers Iceland, Statistics Iceland, Arion Research
Q1 2018 Headline Figures Share of stage 3 loans, gross Net earnings Cost-to-income ratio CET 1 ISK 1.9 bn. 23.6% 70.8% 3.2% 31.12.2017: Q1 2017: Q1 2017: 31.12.2017: 63.5% ISK 3.4 bn. 23.6% Not available Return on equity Leverage ratio Number of employees Mortgages/Total loans 3.6% 15.4% 1,299 40.9% Q1 2017: 31.12.2017: 31.12.2017: 31.12.2017: 6.3% 15.4% 40.6% 1,284
Income statement
Income statement All amounts in ISK million A slightly more challenging quarter • 4% decrease in net interest income from Q1 2017 mainly Q1 2018 Q1 2017 Diff Diff% due to high liquidity buffer and Net interest income 6,908 7,160 (252) (4%) competitive market environ- ment Net commission income 3,542 3,331 211 6% Net financial income 1,340 1,230 110 9% • Positive increase in net Net insurance income 143 446 (303) (68%) commission income driven by Share of profit of associates (18) (35) 17 - Valitor Other operating income 269 564 (295) (52%) • Net insurance income Operating income 12,184 12,696 (512) (4%) decreases due to unusually Salaries and related expense (4,636) (4,222) (414) 10% adverse seasonal factors Other operating expenses (3,996) (3,834) (162) 4% • Increase in salaries mostly Bank levy (804) (797) (7) 1% due to increase of FTE’s at Net impairment (99) 880 (979) - Valitor which continues to Net earnings before taxes 2,649 4,723 (2,074) (44%) pursue an ambitious growth Income tax expense (818) (1,371) 553 (40%) strategy Discontinued operations, net of tax 118 - 118 - • Net impairment normalizing Net earnings 1,949 3,352 (1,403) (42%) from a high positive number in Q1 2017 • Bank levy has negative effect on effective income tax rate as it is not tax deductible 13
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