First quarter results 2020 Investor presentation 6 May 2020 - PowerPoint PPT Presentation

First quarter results 2020 Investor presentation 6 May 2020

Highlights of the quarter Covid-19 has had a severe impact on the Icelandic economy and society The authorities and the health care system have responded extremely well and the pandemic is on the decline in Iceland GDP is expected to contract and unemployment will increase despite strong economic stimulus from both the Central Bank and the Government Arion Bank is supporting its customers, both corporate and individuals Core trends positive in the Bank’s operations but Covid -19 has a fundamental effect on results The Bank with its very strong capital and liquidity, is well equipped to support its customers and the economy as a whole 2

Development of COVID-19 in Iceland The pandemic is on the decline as Iceland has responded robustly Number of active infections and number of recovered Tests per 1000 population (May 5 2020) • Testing was started early Iceland 150 • Tracing of infected individuals was 2,000 1,800 extensive Luxemburg 79 1,600 • At the peak up to 10% of the population Denmark 44 1,400 was in quarantine 1,200 Italy 37 • The country has had limited lock-down 1,000 Norway 35 800 compared with many other countries 600 • Germany Number of infections has been in steep 30 400 decline for the last weeks 200 United States 22 • 0 Very few new cases reported in the last Finland 19 few days United Kingdom 12 • Iceland has been easing social restrictions considerably and it is 0 50 100 150 200 Active infections Recovered expected to continue to do so in the near term Number of active infections, recovered and deaths by Infections as a percentage of tests conducted age (cumulative) 400 40.00% 350 35.00% 300 30.00% 250 25.00% 200 20.00% 150 15.00% 100 10.00% 50 5.00% 0 0.00% 3 Recovered Active infections Deaths Sources: WWW.COVID.IS, OECD

Macroeconomic environment

The development of GDP looks bleak in the short term The spread of Covid-19 and subsequent bans on travel and public gatherings have a very negative effect on the Icelandic economy GDP growth Estimated GDP per capita in 2020 (2011 international dollar, thous.) • In a short time the world has changed. It’s 6.6% 6.0% 4.7% likely that the world economy will experience 4.5% 47 3.8% 45 its worst recession since the Great 2.1% 1.9% Depression. The Great Lockdown, as 36 named by the IMF, will heavily impact the Icelandic economy due to its dependency on tourism • According to the IMF’s latest forecast Iceland’s GDP could shrink by 7.2% in 2020, followed by a strong rebound in 2021. Despite a larger contraction than in other -7.2% Nordics GDP per capita will remain high 2014 2015 2016 2017 2018 2019 2020E 2021E • There is great uncertainty surrounding all Iceland Other Nordics Euro area Other Nordics Iceland Euro area economic forecasts at this time and it is *IMF forecast impossible to quantify the effects as of yet. As stated by the IMF “ much worse growth Tourism contribution to GDP (Arion Bank estimates)* Tourist arrivals via KEF airport (millions and YoY growth) outcomes are possible and maybe even 2.5 5% 9% 9% 10% likely ” 24% 9% 8% 9% -14% • As the Chief Epidemiologist has hinted that 8% 2 8% 7% 40% some sort of travel restrictions will remain in 7% 6% 5% force throughout the year it’s clear that 6% 1.5 5% 4% 30% 5% tourist arrivals will drop dramatically. By how 24% 4% much is impossible to tell but Arion Bank’s 1 -60% 3% base case assumes roughly a 60% drop 2% 0.5 1% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 2014 2015 2016 2017 2018 2019 2020E *2020 forecast not available 5 Sources: IMF, Icelandic Tourist Board, Statistics Iceland, Arion Bank.

Unprecedented times Unemployment has reached new heights while inflation is expected to remain close to target The ISK against major trade currencies Inflation and inflation target • With the largest export sectors struggling, 170 4.0% especially tourism where the source of 3.5% 160 income has disappeared for the time being, 3.0% 150 it’s no surprise to see the ISK depreciate. 2.5% • 140 Inflation is expected to remain subdued throughout the year, given that tumbling oil 2.0% 130 prices, low airfares and depressed demand 1.5% 120 offset the ISK depreciation. 1.0% 110 • Bans on travel and public gatherings, in 0.5% 100 addition to mandatory closures, have 0.0% 90 already translated into a higher Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 unemployment rate. The directorate of labour expects the unemployment rate to be 17% in April. USD EUR • Payment card turnover decreased by 13.5% YoY in March, the largest drop since 2009. Total payment card turnover (YoY change) The composition of registered unemployment A stricter ban on public gatherings was 18% 20% implemented at the end of March, meaning 16% 15% that the April figures will show the full effects 14% of the Government’s measures. 10% 12% 10.1% 5% 10% 8% 0% 3.5% 6% -5% 4% 6.8% 5.7% -10% 4.8% 5.0% 2% 4.3% 4.1% 3.8% 0% -15% -20% Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Unemployment rate Reduced employment ratio 6 Sources: CBI, Statistics Iceland, Directorate of Labour, Arion Bank

Better equipped to handle the recession than most Both fiscal and monetary policy have the ammunition to support the economy • Central government debt (% of GDP) Before the pandemic hit the CBI, unlike Household and corporate debt (% of GDP) many central banks, still had the firepower to 100% 400% support the economy. Even after taking 90% 350% drastic measures that include reductions in 80% 300% interest rates, minimum reserve 70% requirements and countercyclical capital 60% 250% 50% buffers as well as launching a QE program, 200% 40% interest rates remain high in international 150% 30% comparison, creating scope for further rate 100% 20% cuts. Furthermore, the CBI has hefty FX 50% 10% reserves at its disposal 0% 0% • The CBI’s FX reserves, well balanced 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 external trade, despite everything, and the Denmark Finland positive NIIP of the economy mean that Norway Sweden Households Companies United Kingdom Iceland balance of payments worries are limited • More importantly, both the public and private CBI’s FX reserves (bn. EUR) Key interest rates (seven-day term deposit rate) sectors used the last upswing to deleverage, 7.0% 8 pushing debt levels to historic lows 7 • 6.0% The Treasury is in a strong position to 6 support businesses and stimulate the 5 5.0% 4 economy anew through infrastructure 3 4.0% investment when the pandemic is on the 2 decrease 3.0% 1 • So far the scope of the Government’s 0 2.0% -1 measures amount to roughly 10% of GDP. -2 1.0% Further measures are expected 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 • Accumulated national savings for the last 0.0% Total FX reserves Net FX reserves Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 seven years are approx. 60% of GDP (2019) 7 Sources: CBI, Statistics Iceland, Arion Bank

Regulatory and Government response to Covid-19 The Government and the Central Bank of Iceland have introduced numerous measures to deal with the expected impact of the pandemic  Increased liquidity available for banks from the Central Bank  Covered bonds now eligible as collateral in transactions with the Central Bank  Reserve requirements lowered Eased requirements on  Reduced capital requirements the banking system  The countercyclical buffer reduced from 2% to zero  Bank capital preserved. No dividend payments or share buybacks for the time being  The bank levy has been lowered from 0.318% to 0.145% in one step  The Central Bank lowered its key interest rate to a historical low of 1.75% from 3.00% at the beginning of the year  Government to pay up to 75% of wages to employees of companies impacted by Covid-19  Also applicable during notice periods if companies need to lay off staff  Government guarantees for up to 100% of new operating loans to companies fulfilling certain conditions Government assistance to  Deferral of tax payments of companies affected by Covid-19 companies and households  Early withdrawal of voluntary pension schemes  Increased and expanded reimbursement of value-added tax on labor  Special child benefits introduced