Arion Bank hf. - Company Announcement

Annual General Meeting of Arion Bank 2014

The 2014 Annual General Meeting of Arion Bank was held today, Thursday 20
March, at the Bank's headquarters in Borgartún, Reykjavík. The agenda of the
meeting contained normal AGM business and the Bank's annual financial statement
was approved. The meeting approved changes to the Board's salary, and the
remuneration policy of Arion Bank was approved. It was also decided that Ernst& Young hf. would continue as the Bank's auditors. 

The following people were elected on to the Board of Directors at the meeting:
Benedikt Olgeirsson, Björgvin Skúli Sigurdsson, Gudrún Johnsen, Kirstín Th.
Flygenring, Måns Höglund, Monica Caneman and Thóra Hallgrímsdóttir. The
majority of Directors, or four out of seven, are now women. Kirstín is the
representative of Icelandic State Financial Investments on the Board, and the
others were nominated by Kaupskil. 

Björg Arnardóttir, Sigurlaug Ásta Jónsdóttir and Ólafur Örn Svansson were
elected as Alternates. 

The Board's proposal that a dividend of 60% of the Bank's earnings, or ISK 7.8
billion, be paid out for 2013 was passed. 



The report of the Board of Directors for 2013

Monica Caneman, Chairman of the Board of Directors of Arion Bank, read out the
report of the Board of Directors. Monica discussed the various milestones which
had been achieved at the Bank during the year. This including gaining access to
the international credit markets. In early 2013 the Bank secured foreign
funding through a successful unsecured bond offering in Norwegian kroner. By
doing so, Arion Bank became the first Icelandic bank to raise foreign funding
since 2007. Monica said that the issue was part of the Bank's strategy to
diversify the Bank's funding and at the same time it was an important step to
make the Bank better positioned to serve our customers. The Bank has also
issued covered bonds in Iceland, both indexed and non-indexed instruments.
Monica went on to discuss the credit rating which Arion Bank obtained at the
beginning of 2014 from the international ratings agency Standard & Poor's. The
credit rating BB+ with a stable outlook further opens the way for the Bank on
the international credit markets. 

She also discussed what she thought were the most pressing tasks for the
authorities today. These tasks are to increase investment, both from within
Iceland and from abroad, and to lift the capital controls. In her opinion too
little progress has been made in this respect in the last year. Monica went on
to say: “many of the words and actions of the authorities recently have not
been enough to increase the confidence of Icelandic and foreign investors in
the Icelandic economy. The operating environment of Icelandic companies,
especially financial institutions, remains too volatile. The legal environment
for financial institutions has undergone enormous change and the recent steep
increase in the bank levy is a clear example of that. This represents a massive
rise in taxes which are not calculated on revenue or earnings but on
liabilities. If the authorities want Iceland to be home to robust financial
institutions which are capable of supporting the Icelandic business sector,
then they need to create greater stability in their operating environment.” 

Monica said that it was positive that she had detected the good will of the
current government and its willingness for cooperation and partnership, a
willingness to provide strong support to the Icelandic business sector. With
regard to the legal environment she underlined the importance of looking at
Iceland's neighbours and the EU and to build on their experience, stating that
a separate Icelandic regulatory framework was to be avoided as it distorts the
competitiveness of Icelandic financial institutions and the business sector.
Monica noted that in this respect the Icelandic banks appear to be subject to
greater restrictions than similar companies in the Nordic region in terms of
cooperation, for example when it comes to infrastructure. “By doing this we are
missing an opportunity to reduce the costs of the entire financial system
without compromising the necessary competition between companies.  Such
restrictions are a cause for concern because reducing the costs is a critical
task for Icelandic banks and it is in everybody's interests that they manage to
do so,” said Monica. 

Finally, Monica mentioned the recognition given the Bank by The Banker
magazine, which is published by The Financial Times. Towards the end of 2013
the magazine named Arion Bank as bank of the year in Iceland for 2013. Monica
pointed out that it was the first time since 2007 that an Icelandic bank had
received such recognition. This is testament to what has been achieved in
Iceland in developing the financial system. Monica said that Arion Bank was
chosen for its solid results in recent years and also for its leading role in
Iceland in terms of funding, its range of mortgages, debt recovery work and
innovative service offering. She particularly thanked the employees of the Bank
for what had been accomplished in the last few years. 



Goals reached

Höskuldur H. Ólafsson, CEO, discussed the Bank's 2013 financial results.
Höskuldur said the results were satisfactory and broadly in line with
estimates. He made special mention of the stability in the Bank's core
operations. He said that 9.2% return on equity was adequate, particularly in
light of the huge increase in the bank tax, and said that the Bank was
financially robust with a capital ratio of 23.6%. 

Höskuldur said that it was positive that new loans in 2013 amounted to ISK 120
billion, a 60% increase over the previous year. 

Although there were several one-off events and valuation changes during the
year, their effect on the Bank's results were decreasing. The net effect of
such factors on the annual results was negative and return on equity on regular
operations was 10.5%, 1.3 percentage points higher than annual return on
equity. 

Höskuldur also mentioned changes to Arion Bank's loan portfolio which will
reduce risk in the Bank's operations. At the end of 2013 retail loans
represented 49% of loans to customers, a satisfactory figure and something that
the Bank has worked on in the last few years. In 2010 the ratio of retail loans
was only 25% of total loans to customers. The key milestones in this respect
were the takeover of the loan portfolios from Drómi, Frjálsi and Hilda at the
end of 2013 and the Bank's acquisition of the Kaupthing mortgage portfolio in
2011. Höskuldur said that the aim had been to achieve a balance in the Bank's
loan portfolio as retail loans tend to be well secured and represent less of a
risk to the Bank. The mortgage market is an important market for Arion Bank and
a key focus in recent years has been new products and the ability to offer
customers good terms and interesting loan options. 

Höskuldur also talked about the changes to the Bank's funding during the year.
The Bank has diversified and improved the quality of its funding by issuing
news bonds in Iceland and abroad and also by lengthening the term of the Bank's
deposits. Höskuldur said that although there was no immediate funding need, it
was nevertheless important to make these changes in order to strengthen the
Bank's funding base for the future. These changes are designed to reduce risk
at the Bank. The lower risk achieved by raising the proportion of retail loans
and the increased quality of the funding is reflected by the lower net interest
margin, which was 2.9% in 2013. 

Höskuldur also brought up the sharp increase in public levies which left its
mark on the Bank's 2013 financial results. Arion Bank will pay ISK 6.6 billion
in tax for 2013, of which almost ISK 2.9 billion was a bank tax, a special tax
levied on financial companies. At the end of 2013 the government raised the tax
rate sharply. The bank tax is calculated on the liabilities of financial
institutions, which are mainly customer deposits. At the end of 2013 customer
deposits at Arion Bank totalled almost ISK 472 billion or 60% of the Bank's
liabilities. 

Höskuldur said that during the year there had been a keen emphasis on cost
control and that the Bank's targets had been reached. Operating expenses would
continue to be a focus in order to improve operating efficiency. 



For further information please contact Haraldur Gudni Eidsson, Head of
Communications division at Arion Bank, tel: +354 856 7108,
haraldur.eidsson@arionbanki.is

Attachments:

Arion Banks Annual Report 2013.pdf

Chairmans speech.pdf