Second quarter results 2020 Investor presentation 29 July 2020 - PowerPoint PPT Presentation

Second quarter results 2020 Investor presentation 29 July 2020

Highlights of the quarter Arion Bank delivered strong results in Q2 with ROE at 10.5%, core revenues up 1.8% and operating expenses down 3% year-on-year GDP is expected to contract and unemployment has increased despite strong economic stimulus and support from both the Central Bank and the Government Arion Bank remains committed to supporting its customers through the challenging economic conditions brought on by the Covid-19 pandemic Arion Bank is uniquely positioned and well equipped to support its customers due to its strong capital position and efficient digital solutions Iceland has coped very effectively with Covid-19 and the country has been open for tourism since June 16 which is of great importance for the economy 2

Response to Covid-19 in Iceland has been a success Number of active infections and number of recovered Tests per 1000 population (June 30) • On June 16th Iceland welcomed the first international travelers again to Iceland Luxembourg 285 – 2,000 Travelers from EU and Schengen can 1,800 Iceland 191 now travel to Iceland 1,600 – Testing is performed at Keflavik airport Denmark 181 1,400 – Travelers from certain “safe” countries 1,200 United States 96 1,000 can now enter the country without 800 being tested Italy 88 600 • No hospitalization in Iceland for 3 months 400 United Kingdom 86 relating to Covid-19 200 0 • Very few new cases reported in the past Norway 59 28.02.20 06.03.20 13.03.20 20.03.20 27.03.20 03.04.20 10.04.20 17.04.20 24.04.20 01.05.20 08.05.20 15.05.20 22.05.20 29.05.20 05.06.20 12.06.20 few weeks and most of them are old Finland infections resulting from border testing 45 • Iceland has been able to succeed with the 0 100 200 300 Active infections Recovered participation of the general public and very limited social restrictions compared with many other countries Infections as a percentage of tests conducted Number of active infections, recovered and deaths by age (cumulative) 400 0.4 350 0.35 300 0.3 250 0.25 200 0.2 150 0.15 100 0.1 50 0.05 0 0 28.02.20 06.03.20 13.03.20 20.03.20 27.03.20 03.04.20 10.04.20 17.04.20 24.04.20 01.05.20 08.05.20 15.05.20 22.05.20 29.05.20 05.06.20 12.06.20 Active infections Recovered Deaths 3 Sources: WWW.COVID.IS, OECD

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 1.00% 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  Deferral of tax payments of companies affected by Covid-19 Government assistance to  Early withdrawal of voluntary pension schemes companies and households  Increased and expanded reimbursement of value-added tax on labor  Special child benefits introduced  NEW in May: Government guarantees for up to 70% of new operating loans to companies fulfilling certain conditions  NEW in July: Business support loans introduced for small and medium sized companies

Digital services are changing customer behavior The Bank was able to fully operate and service its customers with all branches closed and 85% of staff working from home Active online bank users 1 • Active Arion App users 1 Fewer branches with key focus on professional +4% +22% services instead of simple transactions 000s 000s +26% +5% (3)% 0% 3% (4)% +6% • Number of traditional branches decreased by +4% +31% 40% since 2013 +44% 86 83 68 • +29% 78 Total branch space decreased by more than 76 76 75 74 73 54 67 69 +64% 41 half since 2014 29 22 13 • Visits to traditional branches continue to trend 2013 2014 2015 2016 2017 2018 2019 1H 2013 2014 2015 2016 2017 2018 2019 1H down - decreased by 46% since 2013 2020 2020 • A new branch focusing only on SMEs opened in Number of visits to branches 2 Number of calls to the call centre April 2020 000s 000s (8)% +38% (18)% • (3)% (9)% +17% New digital branches continue to drive increased (14)% (9)% +4% 441 customer usage (7)% (5)% 185 804 • The growth in active Arion Bank app users was 742 611 593 541 381 22% in 2019 and continues in 2020 328 447 431 319 323 298 284 49 173 92 • More calls to call center in 1H 2020 due to Covid-19 2013 2014 2015 2016 2017 2018 2019 1H 2014 2015 2016 2017 2018 2019 1H 2020 2020 • The experience from Covid-19 will expedite further Traditional branch Digital branch developments in the Banks operations Number of branches 2 1 3 3 1 3 25 24 24 23 23 18 17 15 2013 2014 2015 2016 2017 2018 2019 1H 2020 Traditional branch Digital branch SME branch Source: Company information 5 1. 90 day active online users/individuals and 90 day active app users, 2. Data: Qmatic ticketing system for traditional branches and Mobotix camera counting system for digital branches. Two different methods.

Macroeconomic environment

Iceland and Covid-19 – Expectation for a V-shaped recovery The spread of Covid-19 and subsequent travel and assembly bans have had a negative effect on the Icelandic economy GDP growth Estimated GDP per capita in 2020 (2011 international dollar, thous . IMF’s estimates) • 6.6% The coronavirus crisis will heavily impact the 4.7% 4.5% Icelandic economy due to its dependency on 47 3.8% 4.8% 45 1.9% tourism 2.1% • According to IMF’s April forecast Iceland’s 34 GDP could shrink by 7.2% in 2020, followed by a strong rebound in 2021. Domestic analysts are more pessimistic, with the consensus at 8.6% contraction. Despite larger contraction than in other Nordics, -8.6% GDP per capita will remain high • At the same time countries have taken 2014 2015 2016 2017 2018 2019 2020E 2021E tentative steps to open their borders anew, some have observed a resurgence in new Iceland Other Nordics Other Nordics Iceland Euro area Euro area* Consensus forecasts** Covid-19 cases. Prolonged travel restrictions of some sort coupled with obligatory Tourist arrivals via KEF airport (millions, Arion Bank’s Tourism contribution to exports (Arion Bank estimates) quarantine and social distancing have thus estimates) become more likely, dampening economic 2.3 39% 42% 39% 2.2 recovery 35% 2.0 31% 1.8 • Even though Iceland is opening up and 26% 29% easing travel restrictions it’s clear that tourist 1.4 24% 1.3 19% 20% arrivals will drop dramatically. Arion Bank’s 1.0 1.0 base case assumes that Iceland will 15% 0.8 0.6 welcome half a million tourists in 2020, 0.5 0.5 0.5 which equals a 70% drop between years 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 7 Sources: IMF, Icelandic Tourist Board, Statistics Iceland, Arion Bank. * IMF’s latest forecast. ** Based on domestic analysts, both in the public and private sector.

Tale of two worlds While unemployment continues to climb wages are on the rise. Nominal wage increases coupled with relatively low inflation have pushed real wages higher in the past couple of months The ISK against major trade currencies Inflation and inflation target • With the largest export sectors struggling, 4.0% 170 it’s no surprise that the ISK has depreciated. 160 The CBI has intervened in the FX market on the most volatile days 3.0% 150 • Inflation has risen in the past months due to 140 the pass-through from the ISK depreciation. Arion Bank’s Economic Outlook expects 2.0% 130 inflation to continue to inch upwards in the 120 coming months but staying within tolerance 1.0% levels 110 • The travel and assembly bans, in addition to 100 mandatory closing, quickly translated into 0.0% 90 higher unemployment rate. However, 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 Jan-17 Jan-18 Jan-19 Jan-20 according to forecasts the worst is yet to USD EUR come as unemployment is expected to peak in the autumn once periods of notice expire Unemployment rate (Arion Bank’s estimates) Total payment card turnover • Even though unemployment is reaching new 10% 20% heights, purchasing power as measured by 9% the wage index is on the rise, creating stark 10% 8% contrasts on the labor market. Payment card 7% turnover reflects the wage development and 0% 6% indicates that private consumption might 5% bounce back quicker than many anticipated -10% 4% 3% -20% 2% 1% -30% 0% 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 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 8 Sources: CBI, Statistics Iceland, Arion Bank.