Arion Bank hf. - Financial Statement Release

Arion Bank's financial results for 2013

Arion Bank reported net earnings of ISK 12.7 billion in 2013, compared with ISK
17.1 billion in 2012. Return on equity was 9.2%, compared with 13.8% in 2012.
Return on equity from core operations was 10.5% in 2013, compared with 11.4% in
2012. Total assets amounted to ISK 938.9 billion, compared with ISK 900.7
billion at the end of 2012. New loans increased by 60% between years to almost
ISK 120 billion. Total loans to customers grew by 12%, particularly as a result
of new loans related to the settlement of the Drómi bond, and totalled ISK 636
billion, compared with ISK 567 billion at the end of 2012. Arion Bank has now
reduced operational risk by securing long term funding and by increasing the
proportion of retail loans, which represented 49% of total loans to customers
at the end of the year. The Consolidated Financial Statements of Arion Bank
have been audited by the Bank's auditor, Ernst & Young ehf. 

Earnings during the fourth quarter amounted to ISK 2.5 billion, the same as in
the fourth quarter of 2012. Return on equity in the fourth quarter was 7.4%,
compared with 8.2% in the same period of 2012. Return on equity based on core
operations was 7.7%, compared with 7.9% in the same period of 2012. 

The capital ratio at the end of 2013 was 23.6%, compared to 24.3% at the end of
2012. 


Highlights of the annual financial statement:

  -- Net earnings of ISK 12.7 billion, compared with ISK 17.1 billion in 2012.
  -- Earnings in the fourth quarter of ISK 2.5 billion, the same as in the
     fourth quarter of 2012.
  -- Earnings from core activities of ISK 11.5 billion, compared with ISK 13.5
     billion in 2012.
  -- Net operating income decreased to ISK 44.3 billion in 2013, compared with
     ISK 49.5 billion in 2012. The main reasons are a lower interest-rate
     differential and exchange rate losses owing to the appreciation of the
     Icelandic króna. Other income is lower on account of lower valuation
     changes on assets.
  -- Net interest income of ISK 23.8 billion, slightly lower than in 2012 due to
     the higher funding cost and lower inflation.
  -- Net valuation change negative by ISK 680 million. Net valuation change on
     loans positive by ISK 159 million. This is offset by an expense of ISK 839
     million relating to intangible assets.
  -- Return on equity was 9.2%, compared with 13.8% in 2012. Return on equity
     from core operations was 10.5%, compared with 11.4% in 2012.
  -- The interest-rate differential as a percentage of the average
     interest-bearing assets was 2.9%, compared with 3.4% in 2012.
  -- The cost-to-income ratio was 57.3%, compared with 49.8% in 2012. The high
     ratio is primarily explained by a decrease in operating income,
     particularly net interest income. The cost-to-income ratio in core
     operations was 61.2%, compared with 55.5% in 2012.
  -- Income and bank taxes totalled ISK 6.0 billion, compared with ISK 4.7
     billion in 2012. This represents an increase of ISK 1.3 billion despite the
     fact that the group's earnings were lower in 2013.
  -- Loans to customers of ISK 635.8 billion at the end of 2013, an increase of
     12% from the end of 2012, particularly as a result of new loans taken over
     by the Bank in relation to an agreement between Arion Bank and ESÍ ehf. on
     the settlement of a bond issued by Drómi hf. in 2009 in connection with the
     transfer of deposits from SPRON to Arion Bank.
  -- Total assets of ISK 938.9 billion, compared with ISK 900.7 billion at the
     end of 2012.
  -- Total equity at the end of 2013 of ISK 144.9 billion, compared with ISK
     130.9 billion at the end of 2012.


Höskuldur H. Ólafsson, CEO of Arion Bank:

Arion Bank's core operations were stable, solid and in line with our
projections in 2013. Return on equity is 9.2% which is satisfactory given the
huge increase in the bank tax, and the capital ratio is strong at 23.6%. We
have seen a surge in demand for the Bank's basic services. New loans increased
by 60% in 2013 from the previous year and totalled ISK 120 billion. 

We have now managed to structure the balance sheet as we intended. Systematic
efforts to raise the proportion of loans to individuals have led to significant
growth in this area. In 2010, loans to individuals represented 25% of total
loans. This figure is now around 50%. Key steps in this process were the
acquisition of Kaupthing's mortgage portfolio in 2011, and then at the end of
2013 the acquisition of the retail loan portfolio from ESÍ (the holding company
of the Central Bank of Iceland), including the so-called Drómi portfolio. At
the same time the Bank has significantly increased its share of new loans on
the mortgage market, a market where the Bank has played a leading role.  Our
objective has been to have a balanced loan portfolio with a low level of risk -
a good mix of retail and corporate loans. This change is reflected in the lower
interest margin, which measured 2.9% in 2013. 

Although they have decreased, one-off events and valuation changes on assets
still have a considerable effect on the Bank's operations. Return on equity
from core operations is slightly higher than return on equity after taking into
account such factors, or around 10.5%. The underlying business is performing
well but we aim to do even better. 

The huge increase in public levies left its mark on the financial results.
Arion Bank paid ISK 6.6 billion in tax in 2013, of which almost ISK 2.9 billion
was a bank tax, a separate tax levied on financial companies. At the end of
2013 the government raised the tax rate sharply in order to fund a debt relief
programme for indexed mortgages. The bank tax is calculated on the liabilities
of financial institutions, which are mainly retail and corporate deposits.
Actions which place such a heavy burden on financial institutions are bound to
have an effect on their operations and services. It is largely a tax on
deposits and as such will have a negative effect on the terms and services
which financial institutions can offer their customers. 

We will continue to seek opportunities to streamline the business and to
strengthen the Bank's ability to compete for new customers. We are focusing on
the interfaces between the Bank and our customers who require basic services:
our branches, the online bank and the app.  Changes will be made in response to
the wishes and needs of our customers. We will increase the number of available
options, improve efficiency, charge reasonable fees and develop long-term
business relationships.  The opening of a new service centre at Borgartún 18,
Reykjavik in mid-2014 will be an integral part of this development. 

A great deal has been achieved in terms of building up the Bank in recent
years, achievements we are proud of and which have not gone unnoticed. In 2013
Arion Bank became the first Icelandic bank since 2007 to raise funding on the
international markets. Around 60 investors from several countries bought bonds
issued by the Bank denominated in Norwegian kroner. Recently Arion Bank became
the first bank in Iceland for more than five years to be rated by the
international ratings agency Standard & Poor's.  The Bank is rated BB+, which
is only one level below the rating assigned to the Republic of Iceland. Another
pleasing development during the year was when the Banker magazine, which is
published by The Financial Times, named Arion Bank as the bank of the year in
Iceland for 2013. This was the first time since 2007 that the magazine had
given an award to an Icelandic bank. All of us who work at Arion Bank are proud
of this recognition. 



Conference call in English

Arion Bank will be hosting a conference call in English tomorrow, Thursday 27
February at 13:00 GMT (14:00 CET), where Stefán Pétursson, CFO, will present
the annual results. 

Those who would like to participate in the conference call can send an e-mail
to ir@arionbanki.is and will then receive instructions with dial in details. 


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

Attachments:

Arion Bank Consolidated Financial Statements 31122013.pdf

Arion Bank 2013 Annual Results.pdf

Arion Bank Financial Statements 2013 Investor Presentation.pdf