Arion Bank hf.: Arion Bank: Measures due to COVID-19 and financial update

Below is an overview of Arion Bank's position with respect to COVID-19 as well as information about recent developments. The overview includes measures the Bank has taken to ensure business continuity and to support its customers, information on the Bank's financial position and key measures introduced by the Authorities.

Measures taken to ensure business continuity

• The Bank operates in accordance with an action plan aimed to ensure business continuity and to safeguard the welfare of employees and customers. The Bank's security committee meets on a daily basis.
• In order to prevent infection and slow the spread of COVID-19, the Bank has been split into smaller units which are not allowed to engage face-to-face with other units. Furthermore, most employees are now working from home. All processes are continuing as normal without any impact on the Bank's operations and services.
• All branches have been closed temporarily with service provided by telephone, app or e-mail correspondence. When necessary customers can book meetings with branch employees.

Impact of the pandemic is still very uncertain but Arion Bank's financial position is robust

The group's capital and liquidity positions remain strong with significant buffers on top of regulatory requirements.

• • The Bank's pro-forma total capital ratio is 27.8% and CET1 ratio is 22.9%, determined by applying the following adjustments to the year-end 2019 ratios:
    • Foreseeable dividend of ISK 10 billion no longer deducted
    • Additional Tier 1 issuance in February 2020 included
    • Using risk-weighted exposure amount with SME supporting factor, which came into force in 2020.
  • The corresponding leverage ratio is 16.3%.
  • The Bank's total regulatory capital requirement is reduced from 20.3% to 18.4% as a result of the reduction of the countercyclical capital buffer. The Bank's corresponding capital benchmark is 19.4%-20.4%, with the management buffer taken into account.
  • The Bank's Liquidity Coverage Ratio (LCR) has been maintained above 230% from 15 March 2020, which is considerably higher than the year-end ratio of 188%. The Central Bank's reduction of special reserve requirements resulted in increased liquidity. The Bank's Net Stable Funding Ratio (NSFR) is at a healthy level (116%) and well above the regulatory requirements.
    
    
• No significant maturity of long term debt until December 2021 and, no need for international funding in 2020.
• Decision on dividend payment has been postponed for two months by request of shareholders and the Bank will not buy back shares until uncertainty is reduced due to the pandemic. This is in line with the suggestion of the Central Bank of Iceland that financial institutions reconsider their proposals on capital distributions in light of the economic uncertainty.
• The Bank expects an increase in impairments in 2020, but it is difficult to estimate the magnitude at this stage. This will depend on a range of factors, including the extent and duration of the pandemic.
• At this stage we do not expect that the group's medium term financial targets will be affected by the current development.
• At Arion Bank's Annual General Meeting, which was held on 17 March, Benedikt Gíslason, CEO of Arion Bank presented in detail the Bank's loan portfolio, collateral position, tourism's share of the Bank's credit risk and the development of the portfolio over the last few years. His presentation can be found here (https://wwwv2.arionbanki.is/library/skrar/English/About-the-Bank/Investor-Relations/Shareholders-meetings/Adalfundur-17.03.2020/Arion%20Bank%20AGM%2017%20March%202020_CEO.pdf).
• For further information on Arion Bank's financial position we refer to the Bank's latest Financial Statements (https://wwwv2.arionbanki.is/english/about-us/investor-relations/financial-information/financial-reporting/?), which are for the full year 2019, as well as the Bank's 2019 Pillar III Report (https://wwwv2.arionbanki.is/english/about-us/investor-relations/financial-information/financial-reporting/?) and 2019 Annual and Sustainability Report (https://arsskyrsla2019.arionbanki.is/english).
• Valitor has decided to disclose its credit exposure to tourism, please see here (https://www.valitor.is/frettir/2020/vegna-covid-19-skuldbinding-valitor-vegna-ferdathjonustu/).

Key measures introduced by the Authorities

The Government and the Central Bank of Iceland have introduced numerous measures to deal with the expected impact of the pandemic. This includes:

• The Central Bank has lowered its key interest rate to 1.75% which is a historical low.
• The Central Bank has lowered the countercyclical buffer to zero.
• The Central Bank has reduced its liquidity reserve requirements by half from 2% to 1%.
• The authorities will issue guarantees for up to 50% of new operating loans to companies fulfilling certain conditions. The Treasury's total exposure to risk from these loans could be up to ISK 35 billion.
• The Central Bank of Iceland is to purchase up to ISK 150 billion of ISK government bonds in the local market.
• The bank levy has been reduced to 14.5 basis points from 31.8 basis points.
• Partial unemployment benefits are offered on a temporary basis where corporates can reduce an employee's employment percentage by up to 75% while employees are compensated through benefits. This will enable companies to maintain the employment relationship during the most difficult months.
• It has been ensured that quarantined individuals will receive pay while they are in quarantine.
• Special child benefits introduced.
• Individuals will have access to their third-pillar pension savings (private pension savings).
• Increased and expanded reimbursement of value-added tax on labor.
• Employers experiencing temporary operational difficulties due to a reduction in revenues are authorized to request deferral of up to three payments of PAYE tax and payroll tax.
• See also the website of the Government of Iceland (https://www.government.is/default.aspx?pageid=5781e635-46bb-4c79-8218-03d44073071e).

Arion Bank is working on all fronts to help its customers through the financial effects of the pandemic. This includes:

For Individuals:

• Mortgage holiday: Customers will be allowed to take payment holidays for up to three months to help them deal with any potential difficulties.
• Short term consumer loans.
• Distributing credit-card balance due over a number of months.
  
  

For Corporates:

• Payment holiday for companies meeting certain criteria, in line with an agreement signed by all relevant financial institutions in Iceland.
• New lending to companies meeting certain criteria with government guarantee for up to 50% (see measures introduced by the authorities).

For further information please contact Theodór Fridbertsson, Head of Arion Bank's Investor Relations, at [e-mail], tel. [phone] or Haraldur Gudni Eidsson, Head of Corporate Communications, 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.