Arion Banki Hf · OMXICE:ARION
Arion Banki Hf — Debt Investor Presentation (February 2020)
53 slides from Arion Banki Hf's debt investor presentation, Feb 14, 2020
Slide 1: AT1 roadshow
AT1 roadshow 14-18 February 2020
Slide 2: Table of contents
Table of contents 1. About Arion Bank 2. Macroecomic Enviroment 3. Financials 4. Capital Position 5. Proposed AT1 Transacion 6. Appendix
Slide 3: Highlights of the year 2019
Highlights of the year 2019 Arion Bank is on a new trajectory after having undergone significant management and organizational changes and improvement measures in Q3 Earnings from continuing operations are ISK 14 billion and improve significantly. ROE from continuing operations improves YoY from 4.3
Slide 4: New organizational structure
New organizational structure Introduced in Q3 2019 Board of Directors Internal Audit Sigrídur Gudmundsdóttir CEO Benedikt Gíslason Deputy CEO Ásgeir H. Reykfjörd Gylfason CEO’s Office HR / Communications and IR / Chief Economist / Corporate Development / General Counsel Compliance Hákon Már Pétursso
Slide 5: Arion Bank Group
Arion Bank Group Diversified business model and strong market position Retail Banking CIB Markets Insurance • Digital leader in the retail • Corporate banking and • Largest asset manager in the • The Bank’s subsidiary Vördur market strategic advisory Icelandic market is the largest life insurance •
Slide 6: World leader in digital sales
World leader in digital sales Digital sales as % of total sales - Arion Bank compared to international digital leaders Arion Bank 59% Digital leaders 50% Arion Bank Digital leaders 43% 43% Digital leaders 33% Arion Bank 22% 2017 2018 2019 Finalta reports 2017, 2018 and 2019
Slide 7: Building long-term shareholder value
Building long-term shareholder value Customer focus with efficient use of capital Reduce cost of capital Increase cash flows Enhance equity story • Share buy-back program • Enhance product / client ownership and • Strengthen and build on existing responsibility and improve cost competitive advantage
Slide 8: Arion Bank is committed to its medium-term targets
Arion Bank is committed to its medium-term targets New revenue target introduced and loan growth target amended Return on Equity Exceed 10% Revenues / RWA’s Exceed 6.5% Cost to Income Ratio Reduce to circa 50% Loan growth The loan book will grow in line with economic growth. However, the corporate l
Slide 9: The road to sustainable +10% ROE
The road to sustainable +10% ROE 1 Release of CET1 plays a fundamental role >10.0% ROE • Cost to income to reach target • Increased of < 50% revenues from – Structural RWAs changes to – New target of support more 6.5% for the efficient Bank, an operation and • Capital release increase from continued
Slide 10: A well diversified ownership
A well diversified ownership More than 6,500 shareholders Ownership distribution by country Top 10 largest shareholders Ownership distribution by type 1.65% 1.98% Taconic Capital Advisors UK LLP 23.5% 1.91% 2.01% Sculptor Capital Management 9.5% 3.36% 7.90% Gildi Pension Fund 8.8% 17.88% 32.24% 48.3
Slide 11: Macroeconomic environment
a Macroeconomic environment
Slide 12: Iceland is focused on sustainability
Iceland is focused on sustainability - Committed to being carbon neutral by 2040 • Iceland ranks at the forefront when it comes Iceland: Share of Renewables in Primary Energy 1946 to share of renewables in energy Use 1940-2018 Member of United Nations consumption, mostly through hydro and 100% geoth
Slide 13: Soft landing, slow takeoff
Soft landing, slow takeoff GDP growth measured 0.2% in the first nine months of 2019, indicating milder slowdown than expected GDP growth GDP per capita in 2018 (USD thousands) • Despite falling exports the contribution of 6.6% 75 foreign trade to GDP growth is positive due to an even larger drop in
Slide 14: Unemployment expected to peak in 2020
Unemployment expected to peak in 2020 Economic adjustment through the labor market, not the price level The ISK against major trade currencies Unemployment– seasonally adjusted trend • Much larger drop in imports than anticipated 150 8% and slower outflow into foreign assets 7% supported the ISK in
Slide 15: Strong foundations
Strong foundations The export sectors, especially tourism, have proved to be resilient in the face of adversity Consumption per tourist - YoY %-change Net international investment position - % of GDP • Since WOW air’s bankruptcy, spending per 30% 30% tourist has increased significantly, both in 25%
Slide 16: Arion Bank focuses on sustainable and responsible banking
Arion Bank focuses on sustainable and responsible banking International and domestic Arion Bank’s Environment Gender Equality Corporate Governance commitments and Climate Policy • A founding signatory of the UN PRB • Set in December 2019 • First bank in Iceland to gain the equal • Center for Corpora
Slide 17: Financials
Financials
Slide 18: Highlights of the fourth quarter 2019
Highlights of the fourth quarter 2019 Arion Bank’s revised strategy and organizational changes are already showing results as earnings from continuing operations continue to improve, yielding 10.8% ROE in Q4 ‒ NIM improves to 3% ‒ OPEX trends lower on the back of actions in Q3 ‒ Revenues/RWA’s at 6.
Slide 19: Income statement 2019
Income statement 2019 The positive effect of the Bank’s revised strategy in Q3 is not fully reflected in the full year numbers • Strong growth in net interest income despite 2019 2018 Diff Diff% lower inflation mostly due to higher (average) Net interest income 30,317 29,319 998 3% interest bearing
Slide 20: Net interest income
Net interest income Revised strategy reflected in positive development in NIM as well as ratio of net interest income to credit risk Net interest income Credit risk • Net interest margin increses to 3% in Q4 in line with revised strategy of increased 8.0 7.8 7.7 694 focus on returns rather than loan
Slide 21: Net fee and commission and net insurance income
Net fee and commission and net insurance income Stable net commission income with scope for improvement - net insurance income continues to trend positively Net insurance income Net fee and commission income 1.1 2.7 2.6 2.6 0.3 2.5 2.2 0.5 0.3 0.8 0.4 0.4 0.3 0.7 0.7 0.3 0.4 0.4 0.6 0.3 109.6% 0.3 0
Slide 22: Net financial income
Net financial income Decrease in bond holdings as the Bank is managing liquidity and tax at year end Bond holdings Net financial income • Net financial income in Q4 was positively affected by: 115.4 – Equity holdings measured at fair value as markets were favorable 94.6 1.0 31.1 81.0 during the quar
Slide 23: Total operating expenses
Total operating expenses Cost-to-income is trending towards target Cost-to-income ratio (%) Total operating expenses • Number of FTE’s reduced by 13.5% at the parent company from Q4 2018, mostly due to organizational changes at the end of Q3 with cost savings 6.6 6.9 6.6 6.9 6.5 materializing in Q4
Slide 24: Balance sheet - Assets
Balance sheet - Assets Balance sheet brought down in line with strategy as both loans and liquidity decrease • The Balance sheet decreases by 10.8% 31.12.2019 30.09.2019 31.12.2018 from 30.09.2019 ISK 1,082 billion ISK 1,213 billion ISK 1,164 billion • Loans to customers decrease by 4.7% from 30.09.
Slide 25: Loans to customers
Loans to customers Focus on profitability results in the loan book trending lower thus releasing RWA’s Loans to customers Loans to customers by sector (%) • Loans to customers reduce by 7.2% during 2019 • The loan book continues to be well Individuals balanced between individuals and corporates 13 R
Slide 26: Balance sheet – Liabilities and equity
Balance sheet – Liabilities and equity Deposits are increasing in the funding mix • Strong equity position and a very high 31.12.2019 30.09.2019 31.12.2018 leverage ratio despite capital release ISK 1,082 billion ISK 1,213 billion ISK 1,164 billion – Dividend payments of ISK 9.1 billion in Q1 2019 –
Slide 27: Deposits
Deposits Continued focus on deposits both from individuals and corporates Deposits and due to credit institutions and Central Bank Maturity of deposits (%) • Deposits represent 46% of the Bank’s funding • Deposits from individuals have grown On demand significantly over the last few years 5 9 − 4.8%
Slide 28: Borrowings
Borrowings Reduced wholesale activity in line with changed focus on the asset side Borrowings by type Maturities of borrowings (%) • Continued emphasis on reduction of funding cost both through prepayments, buy-backs or other activities • Reduced borrowings driven by 79.9 prepayments and buy backs 4
Slide 29: Capital Position
Capital Position
Slide 30: Own funds
Own funds Capital ratio remains very strong despite dividends, buy-back of own shares and impairment of held for sale assets Capital ratio (%) Leverage ratio (%) • Solid level of capital due to strong profit generation over recent years − Capital adequacy ratio increased by 200 bps from YE 2018 − Ar
Slide 31: Capital adequacy
Capital adequacy The Bank’s management buffer now communicated as a range from 100 to 200bps Own funds and capital requirements (%) • The Bank’s total capital adequacy ratio was 24.0% as at 31 December 2019 foreseeable equity reduction of ISK 14.2 bn. is accounted for in the ratio • The net increase
Slide 32: Comfortable buffer to MDA
Comfortable buffer to MDA High combined buffer requirement coupled with a strong MDA buffer 21.2% • Arion Bank’s CET1 capital position is comfortably in excess of MDA requirements MDA Buffer 5.8% • MDA buffer is 5.8% equivalent to ISK 16.4% – 17.4% 41.7 bn. Target 15.4% MDA buffer 100-200bps • Arion
Slide 33: Distribution capacity
Distribution capacity Available Distributable Items (ADI) to cover discretionary distributions • Arion Bank has a very comfortable ADI position, with an estimated circa 150x coverage ratio • It is Arion Bank’s current intention that, whenever exercising discretion to propose any distribution in resp
Slide 34: Significant distance to Conversion Trigger
Significant distance to Conversion Trigger CET1 distance to conversion trigger 16.1% at group level 23.5% • Conversion Trigger is set at 5.125% • Based on FY 2019 RWAs of ISK 21.2% 719,755 bn and CET1 capital of ISK 152,691 bn, Arion Bank’s CET1 capital position is comfortably in excess of the conve
Slide 35: Capital requirements are high
Capital requirements are high Icelandic banks apply the standardized approach to RWAs and capital buffers are fully implemented since February 2020 *Q3 19 numbers Source: Bloomberg and annual reports 35 12 February 2020
Slide 36: Proposed AT1 transaction
Proposed AT1 transaction
Slide 37: Transaction highlights
Transaction highlights • Arion Bank has total capital and leverage ratios comfortably in excess of regulatory requirements with an internal management buffer of 1-2% over requirements • Solid level of capital due to strong profit generation over recent years • CET1 ratio of 21.2% and leverage ratio
Slide 38: AT1 Summary Terms and Conditions
AT1 Summary Terms and Conditions Issuer Arion Bank hf. (the “Bank”) Issue Rating [BB] by S&P (expected) Instrument Fixed Rate Reset Perpetual Additional Tier 1 Convertible Notes (the “Notes”) [Size] / Maturity [U.S.$] [●] / Perpetual Non-Call [●] 2025 The Notes constitute direct, unsecured and subor
Slide 39: AT1 Structural Comparison
AT1 Structural Comparison Skandinaviska Enskilda Svenska Issuing Entity Arion Bank hf DNB Bank ASA Banken AB Swedbank AB Jyske Bank A/S Nordea Bank Oyj Handelsbanken AB Danske Bank A/S Sydbank A/S Issue Date [] 05 Nov 2019 29 Oct 2019 23 August 2019 29 Mar 2019 19 Mar 2019 14 Feb 2019 20 Jun 2018 2
Slide 40: Additional Details on the Non-Viability Event Clause
Additional Details on the Non-Viability Event Clause Trigger Event and Loss Absorption Mechanics The Notes will, on the date specified by the FME(1), be converted into Conversion Shares at the then prevailing Conversion Price (subject to a floor) if any of the following occurs: a. The FME determines
Slide 41: Appendix
6 x Appendix
Slide 42: Asset Quality
Asset Quality Loans to customers Risk Classification IFRS 9 stages – Loans to customers Gross carrying amount Gross carrying amount • The Bank uses internal credit rating models 839 839 809 826 832 822 and external credit ratings if available to 826 839 839 832 788 22 21 20 783 809 822 24 25 21 moni
Slide 43: Significant held for sale assets
Significant held for sale assets Assets in an active sale process but with a highly negative impact on net earnings Valitor Holding is an international payments platform, with operations primarily in Iceland, the UK and the Nordic countries, and comprizes both card acquiring services and card issuin
Slide 44: Going forward
Going forward Continued emphasis on measures to reach financial targets The macroeconomic developments are of concern both locally and globally Sales process of Valitor continues but is taking more time than originally anticipated The Bank aims to issue AT1 in Q1 44
Slide 45: Key financial indicators - annual
Key financial indicators - annual Return on equity (%) Cost-to-income ratio (%) Net interest margin (%) 28.1 56.0 56.9 56.0 48.9 3.0 3.1 2.9 2.8 2.8 32.4 10.5 6.6 3.7 0.6 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 CPI imbalance (ISK billion) Operating income / RWA (%)
Slide 46: Key financial indicators - quarterly
Key financial indicators - quarterly Return on equity (%) Cost-to-income ratio (%) Net interest margin (%) 60.3 53.0 54.9 7.3 3.2 2.7 2.9 3.0 (5.8) Q4-17 Q4-18 Q4-19 Q4-17 Q4-18 Q4-19 Q4-17 Q4-18 Q4-19 Loans-to-deposits ratio (%) Capital ratio (%) Operating income / RWA (%) (without loans financed b
Slide 47: Net earnings from continuing operations Q4’18 vs. Q4’19
Net earnings from continuing operations Q4’18 vs. Q4’19 (81) 1,582 (946) 1,150 157 357 5,209 1,489 (613) 644 (662) 2,132 Net earnings Inflation Funding Loans to Equities OPEX Bank levy Change stage Impairment Sale of Other Net earnings Q4'18 customers 1&2 Mortgage Q4'19 portfolio 47 12 February 2020
Slide 48: Income statement Q4 2019
Income statement Q4 2019 Net earnings from continued operations improve markedly but discontinued operations have significant negative effect • Net interest income decreases slightly as Q4 2019 Q4 2018 Diff% Q3 2019 Diff% inflation is low and loan book is reduced in Net interest income 7,693 7,969 (
Slide 49: Key figures
Key figures Operations 2019 2018 2017 2016 2015 Q4 2019 Q3 2019 Q2 2019 Q1 2019 Q4 2018 Net interest income 30,328 29,319 28,920 29,900 26,992 7,704 7,382 7,808 7,434 7,969 Net commission income 9,955 10,349 10,211 13,978 14,485 2,620 2,639 2,478 2,218 2,746 Operating income 47,942 46,169 46,863 54,
Slide 50: Highlights of the year 2019
Highlights of the year 2019 Arion Bank is on a new trajectory after having undergone significant management and organizational changes and improvement measures in Q3 Earnings from continuing operations are ISK 14 billion and improve significantly. ROE from continuing operations improves YoY from 4.3
Slide 51: Digital services are changing customer behavior
Digital services are changing customer behavior The Bank’s digital journey has increased revenues and reduced costs Active online bank users1 Active Arion App users1 • The growth in active Arion Bank app users was +22% 000s 000s 22% in 2019 +26% +5% (3)% 0% (4)% +6% +31% • Visits to traditional bran
Slide 52: Arion Bank focuses on sustainable and responsible banking
Arion Bank focuses on sustainable and responsible banking International and domestic Arion Bank’s Environment Gender Equality Corporate Governance commitments and Climate Policy • A founding signatory of the UN PRB • Set in December 2019 • First bank in Iceland to gain the equal • Center for Corpora
Slide 53: Disclaimer
Disclaimer • This document has been prepared for information purposes only and should not be relied upon, or form the basis of any action or decision, by any person. Nothing in this document is, nor shall be relied on as, a promise or representation as to the future. In supplying this document, Ario
Arion Banki hf. — Debt Investor Presentation (February 2020) on 6ix