Arion Bank's Q1 2011 financial results
Arion Bank reported net earnings of ISK 3.0 billion for the first quarter of 2011, compared with ISK 3.4 billion during the same period in 2010. Return on equity was 11.3% on an annualised basis.
The Bank’s capital ratio increased to 19.7% at the end of the period, well above the minimum stipulated by the FME. The interim financial statement has not been audited.
Highlights of the interim financial statement:
Net earnings of ISK 3.0 billion in Q1 2011, compared with ISK 3.4 billion in Q1 2010.
- Net operating income of ISK 9.5 billion in Q1 2011, compared with ISK 8.2 billion in Q1 2010.
- Net interest income of ISK 5.9 billion in Q1 2011, compared with ISK 5.6 billion in Q1 2010.
- Net commission income of ISK 2.5 billion in Q1 2011, compared with ISK 1.5 billion in Q1 2010. This increase is largely attributable to new subsidiaries.
- Return on equity was 11.3% in Q1 2011, compared with 17.2% in Q1 2010.
- The interest-rate differential as a percentage of the average interest-bearing assets was 3.4% in Q1 2011, compared with 3.1% in Q1 2010.
- Deferred income tax of ISK 1.0 billion in Q1 2011, compared with ISK 0.7 billion for the same period of 2010. There was a special bank tax of ISK 67 million during the period.
- The Bank’s cost-to-income ratio was 51.8% in Q1 2011, compared with 43.7% in Q1 2010. This increase is largely attributable to irregular cost items.
- The Bank’s capital ratio was 19.7% at the end of the quarter, compared with 19% at the end of 2010. The FME requires a minimum 16% capital ratio.
- The Bank’s liquidity ratio was 36.0%, which is well over the 20% minimum stipulated by the FME.
- The Bank’s cash ratio was 16.0%. The FME requires a minimum cash ratio of 5%.
- Loans to customers totalled ISK 432.5 billion at the end of the period, compared with ISK 451.2 billion at the end of 2010.
- Deposits totalled ISK 472.4 billion at the end of the period, compared with ISK 457.9 billion at the end of 2010.
- Total assets amounted to ISK 802.7 billion at the end of the period, compared with ISK 812.6 billion at the end of 2010.
- Shareholders’ equity at the end of Q1 2011 amounted to ISK 112.7 billion, compared with ISK 109.5 billion at the end of 2010.
- At the end of the period there were 1,273 full-time equivalent positions at the Bank, compared with 1,260 at the end of 2010. At the end of the period 965 of these positions were at Arion Bank, compared with ISK 981 at the end of 2010.
Höskuldur H. Ólafsson, CEO of Arion Bank:
“The first quarter results are in line with our projections. In recent months we have continued to reinforce the Bank's foundations and the capital ratio is now almost 20%, thus underlining the Bank's strong financial credentials.
We have focused heavily on resolving our customers’ debt problems and this work is making excellent progress and will reach a conclusion this year. We have also been striving to sell companies taken over by the Bank. Three companies are currently in the process of being sold, most notably Hagar, and this process is expected to be completed later in the year with the listing of the company on the Icelandic stock market. We have noted considerable interest in these companies, indicating the vast potential within the economy. Furthermore the Bank has the capacity to lend capital but demand remains limited. It is vital to economic progress in Iceland that the current administrative and legal uncertainty be eliminated and that the vast investment potential and investment need in the Icelandic economy and the lending potential in the banking system are utilised to the full.”
Other highlights
Arion Bank's services
Following the extensive strategic planning that was undertaken in 2010, a great deal of effort went into implementing the new strategy during the first quarter of 2011. This involves all divisions of the Bank and the common goal is to improve services to the Bank’s customers.
Organisational changes have been made in the Retail Banking division; executive power has been transferred from the headquarters to the branches and thus closer to the customers themselves. The goal of these changes is to make the employees better placed to recognise and meet their customers’ requirements; and to work with customers towards goals which matter to them.
In collaboration with Bifröst University, Arion Bank employees have attended tailor-made courses designed to improve skills and augment the quality of service and advice available from the Bank.
A broader spectrum of new services is also now available from the branches. Customers can get advice on pensions and investments in securities direct from their local branch.
In early 2011 planning got under way on new types of competitive indexed-linked mortgages and the loans were launched at the beginning of May. There are two types of loan: firstly, loans of up to 60% of the loan-to-value ratio of the property which bear fixed interest of 4.30% with loan terms of 25 years or 40 years. Secondly, additional loans of 60% to 80% of the loan-to-value ratio of the property which bear fixed interest of 5.40% and a loan term of up to 25 years.
Three of Arion Bank’s branches in Reykjavík were merged into a single state-of-the-art branch which was opened on 23 March. This merger signalled the end of a key phase in the consolidation of the Bank’s branch network. The Bank has reduced the number of branches by 15 and Arion Bank now operates 24 branches throughout Iceland.
Stefnir added three new funds which the Bank now offers its customers the first quarter in response to customers' evolving needs. These funds are Stefnir – Eignaval erlent, Stefnir Liquidity Fund and Stefnir – Government Bonds Short Term.
Several Stefnir funds are rated by the international fund ratings agencies Morningstar and Lipper. The fund KMS BRIC was recently awarded four out of a possible five stars by Morningstar. Lipper also gave KMS Global Equity four out of five.
Recalculating foreign loans complete
A major task at the beginning of the year was the recalculation of foreign mortgage loans to personal customers. By the end of February Arion Bank had published recalculations of 98% of the loans entitled to be re-evaluated. Our customers have welcomed this and chosen the best option available to them. Approximately 73% of the Bank’s customers have accepted the recalculated loan figure.
Resolving customer debt
Work on resolving the debt problems of personal customers made good progress during the period and a total of 14,000 customers have taken advantage of the solutions on offer. Arion Bank’s customer advisory service, which was launched in 2010, is responsible for dealing with the debt problems of personal customers.
Work on resolving corporate debt problems has also progressed well and is expected to be completed later this year.
Of the 470 companies eligible for the financial sector’s “Beina Braut” debt solution programme, approximately 330 had received a proposal from Arion Bank by the end of the first quarter. More than 200 of these cases had been completed. By the beginning of May around 420 companies, approximately 90%, had received proposals under the Beina Braut programme from the Bank.
In total this makes approximately 1,000 of the Bank’s corporate clients which require financial restructuring. Final decisions have been made in more than 700 cases.
The sale of acquired companies and other assets
Important milestones were reached during the first quarter with respect to the sale of companies and other assets acquired by the Bank. The sale of the Hekla car dealership was completed and the first stage of the sale process of Hagar was also concluded with the sale of a 34% strategic holding in the company. The intention is to list the company on the stock market later this year. The retail chain 10-11 is in the process of being sold and at the end of March BM Vallá was put up for sale.
Community projects
Arion Bank places great importance on being an active participant in the national debate. Arion Research issued an economic forecast which attracted attention and the Bank has hosted meetings on the economic outlook in light of the capital controls, Icesave III, the regeneration of the Icelandic stock market, the visual arts and the interplay between volcanoes and business, just to name a few examples.
In recent months the Bank has provided financial support to a number of non-profit organisations and community projects.
Outlook
When Arion Bank completes the debt solution process later this year, it will represent an important milestone for both the Bank and its customers as they will be able to channel their energy into rebuilding for the future. Traditional banking activities will become more prominent as the year progresses, as indicated by Arion Bank’s new mortgage loans.
Widespread uncertainty remains in the economy and this has an impact on financial institutions in Iceland and undermines investment, which is now at a historical low. Investment is a prerequisite for economic growth as it creates jobs and stimulates demand.
The bond market has been the only active market in recent years. However, the Icelandic stock market is being rebuilt and the listing of Hagar will be a key part of that process. It is hoped that more companies will follow suit over the next few years.
There is cause for long-term optimism. Iceland compares favourably with other European countries in a number of areas. There is a tight grip on fiscal policy, foreign trade is in balance and the national debt appears to be manageable. Nevertheless various challenges remain and it is important to approach things in the right way, so that the opportunities ahead can be taken advantage of.