Arion Bank hf.: Arion Bank's Q3 2018 financial results

Stable underlying operations

Arion Bank reported net earnings of ISK 1.1 billion for the third quarter of 2018, compared with a loss of ISK 0.1 billion for the same period of 2017. Return on equity was 2.3% for the third quarter of 2018, compared with a negative return of 0.2% for the same period in 2017. During the first nine months of 2018 net earnings were ISK 6.2 billion and return on equity 3.9% compared with ISK 10.4 billion net earnings and 6.3% return on equity during the first nine months of 2017. Net earnings for the quarter and the first nine months are affected by impairments relating to Primera.

Total assets amounted to ISK 1,219.5 billion at the end of September 2018, compared with ISK 1,147.8 billion at the end of 2017. Shareholders' equity totalled ISK 199.3 billion, compared with ISK 225.6 billion at the end of 2017. Arion Bank paid dividend of ISK 10 billion at the end of September 2018.

The Bank's capital ratio at the end of September was 21.7%, compared with 24.0% at the end of 2017. The CET1 ratio was 21.6% at the end of September, compared with 23.6% at the end of 2017.

Highlights of the income statement and key income related performance indicators:

In ISK millions	Q3 2018	Q3 2017	% diff.	9M 2018	9M 2017	% diff.
Net interest income	7,445	7,250	3%	21,966	22,570	(3%)
Net commission income	4,246	3,865	10%	12,280	10,703	15%
Net financial income	582	(734)	-	2,849	2,471	15%
Net insurance income	984	716	37%	1,885	1,769	7%
Share of profit of associates and impairment	34	17	100%	18	(917)	-
Other operating income	431	483	(11%)	1,310	2,858	(54%)
Operating income	13,722	11,597	18%	40,308	39,454	2%
Salaries and related expenses	(4,168)	(3,841)	9%	(13,815)	(12,624)	9%
Other operating expenses	(3,817)	(3,699)	3%	(11,777)	(8,756)	35%
Operating expenses	(7,985)	(7,540)	6%	25,592	21,380	20%
Bank levy	(937)	(814)	15%	(2,621)	(2,388)	10%
Net impairment	(2,678)	(2,551)	5%	(2,969)	(1,262)	135%
Net earnings before taxes	2,122	692	207%	9,126	14,424	(37%)
Income tax expense	(973)	(805)	21%	(3,078)	(4,071)	(24%)
Discontinued operations, net of tax	-	-	-	112	-	-
Net earnings	1,149	(113)	-	6,160	10,353	(41%)
KPI's
Return on equity	2.3%	(0.2%)		3.9%	6.3%
Earnings per share (in ISK)	0.63	(0.06)		3.00	5.17
Cost to income ratio	58.2%	65.0%		63.5%	54.2%

Highlights of the balance sheet and key performance indicators:

In ISK million	30.09.2018	31.12.2017	Diff.	% diff.
Loans to customers	819,965	765,101	54,864	7%
Other assets	399,565	382,653	16,912	4%
Liabilities	1,019,474	922,021	97,453	11%
Equity	200,056	225,733	(25,677)	(11%)
Loans to Deposits ratio	169.2%	165.5%
RWA / Total assets	66.2%	66.8%
CET 1 ratio	21.6%	23.6%

For detailed information on the accounts please refer to Arion Bank's Consolidated Interim Financial Statements for the third quarter and the first nine months of 2018 on the Bank's website, www.arionbanki.is.

Höskuldur H. Ólafsson, CEO of Arion Bank
The third quarter financial results were below expectations, with the bankruptcy of Primera Air being a key factor as the Bank needed to impair assets as a result. However, the Bank's underlying business remains strong. We see solid year-on-year growth in both commission income and income from insurance activities. At the same time the net interest margin is stable in a highly competitive environment. It is clear, however, in the near term that the Bank will be focusing more on the profitability of its loan portfolio, even at the expense of loan growth.

The Bank has a strong capital position despite substantial dividends and share buybacks totalling ISK 33 billion during the year. In September Arion Bank paid out a dividend of ISK 10 billon in accordance with the Bank's policy on reducing its capital. At the same time the Bank remains focused on achieving its stated targets on for example capital, cost-to-income ratio and profitability.

Arion Bank has been focused on cost control in an ever more complex operating environment. Managing costs is essential for returns going forward and the Bank is undertaking certain cost cutting initiatives. In recent years the Bank has successfully managed to adapt services to our customers' ever changing needs. Our key focus has been on digital solutions, developing the Arion Bank app, online banking and other online services to enable our customers to take care of their finances whenever and wherever it suits them. We have also continued to modify and adapt our branch network. This means both enhancing our core branches, which offer diverse banking and advisory services, and also redesigning our smaller branches, many of which have moved into commercial centres frequently visited by our customers. The latest example of this is the branch in the supermarket Hagkaup in Gardabaer. By merging and moving branches we have streamlined the branch structure, for example by substantially reducing the amount of office space we occupy.

Equality issues have been a key concern at the Bank for many years and we have achieved a great deal in this area. Arion Bank was recently the first bank and one of the largest companies in Iceland to receive permission to use the Ministry of Welfare's equal pay symbol. Arion Bank first introduced an equal pay management system in 2015 and subsequently received equal pay certification from the labour union VR. The equal pay management system is an important management tool and helps to ensure that people performing jobs of equal value are not discriminated against in terms of salary. We have also endeavoured to attain gender balance in the Bank's management team. Now that the Bank has been listed on the stock exchange in Stockholm, it is pleasing to see that we are at the forefront in this area compared with other listed companies in Sweden. On a list recently published by AllBright, a Swedish non-profit foundation working for equality and meritocracy in the business community, Arion Bank is in the 17th place out of 329 companies listed in Stockholm in terms of gender diversity in the management team. We will continue on this path with the aim of further improving gender equality at the Bank.

The cost-to-income ratio developed positively during the quarter. We are making systematic efforts to streamline the business and increase efficiency. The strategic journey we have embarked on with digital services and the evolving branch network is critical in this respect, as in the long term it will yield reduced costs and higher income. The Bank is also looking to outsource certain tasks and find strategic partners in order to share employees, materials and premises.

Valitor continues to expand internationally and offers its customers in the Nordic region and the United Kingdom diverse solutions in payment services. Strategic planning on the future ownership of the subsidiary has now been completed and Arion Bank is currently in the process of engaging an investment bank for the divestment of Valitor, either as a whole or in part. A decision on the next steps will be announced in the near future.

Conference call in English
Arion Bank will be hosting a meeting / webcast on Thursday 1 November at 8:30 GMT / 9:30 CET where CEO Höskuldur H. Ólafsson and CFO Stefán Pétursson will present the results and answer questions from participants. The meeting will take place in English at the Bank's headquarters, Borgartún 19, and will be streamed live.

Those attending the meeting in Borgartún 19 need to register here. To participate in the webcast via telephone and to submit questions please call in using the relevant number indicated below before the start of the webcast:
IS: 800 7417
SE: [phone]
UK: [phone]

The webcast will be accessible live on financialhearings.comand a link will also be made available on the Bank's website under Investor Relations.

For further information please contact Sture Stolen, head of Arion Bank's Investor Relations at [e-mail] Theódór Fridbertsson at Investor Relations at [e-mail], tel. [phone].

This is information that Arion Bank hf. is obliged to make public pursuant to the EU Market Abuse Regulation. The information was submitted for publication, through the agency of the contact persons set out above.

Attachments

• Arion Bank - Interim Consolidated Financial Statements 30 September 2018 (https://prlibrary-eu.nasdaq.com/Resource/Download/39e0ce9f-da58-4dfe-8367-a9322ac67313)
• Press release Arion Bank Q3 2018 (https://prlibrary-eu.nasdaq.com/Resource/Download/018ef789-d6d0-4f65-8df6-f12753bbc79e)
• Investor presentation Arion Bank Q3 2018 (https://prlibrary-eu.nasdaq.com/Resource/Download/2dabdd3c-12ca-4f55-ad2a-5871f477559d)