Consolidated
Financial Statements
2021
Arion Bank Consolidated Financial Statements 2021
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Contents
5-year overview .......................................................................................................................................................................................
Appendix (unaudited) ...............................................................................................................................................................................
Independent Auditor's report ...................................................................................................................................................................
Arion Bank in brief ...................................................................................................................................................................................
Endorsement and Statement by the Board of Directors and the CEO ......................................................................................................
Consolidated Statement of Changes in Equity .........................................................................................................................................
Consolidated Statement of Cash Flows ...................................................................................................................................................
Consolidated Income Statement ..............................................................................................................................................................
Consolidated Statement of Comprehensive Income ................................................................................................................................
Consolidated Statement of Financial Position ..........................................................................................................................................
Notes to the Consolidated Financial Statements ......................................................................................................................................
2
Arion Bank
• Arion Bank provides services to households, corporates and
investors. The Bank has three business segments: Retail Banking,
Corporate & Investment Banking, and Markets. The service offer-
ing is further augmented by the subsidiaries Stefnir and Vördur.
Stefnir is an Icelandic fund management company, and Vördur is
an insurance company providing non-life and life insurance.
• Arion Bank plays an important role in the community through
financing of progressive and sustainable initiatives in the
community and sustainability is an integral part of the Bank‘s day-
to-day activities, its decision-making and processes
• The diverse service offering at Arion Bank means that the revenue
base is broad and the loan portfolio is well diversified between
retail and corporate customers. The high percentage of mortgages
and the healthy distribution of loans across different sectors
reduces credit risk
• The Bank is a market leader in digital solutions and innovation.
Numerous new digital solutions have been launched in the past
few years, enhancing service to customers and making the Bank's
operations more efficient, which in the long term reduces operating
expenses across the Bank
• The Bank is emphazising customer experience in all aspects of the
Bank by centralizing shared services to increase cost efficiency
and effectiveness. This includes incorporating Vordur insurance
into both Retail and CIB
• At year-end 2021 Arion Bank has ISK 21 billion in excess capital
and expects to pay dividend and/or buy-back own shares in addit-
tion to already foreseeable dividend and buy-back of ISK 26.7
billion included in equity calculation to reach the 17% CET1 target
14.7%
Return on equity
44.4%
Cost-to-income
19.6%
CET1 ratio
Rating from S&P
Long term: BBB
Short term: A-2
Outlook: Stable
Equal Pay
Certification
Arion Bank in brief
31.12.2021
Q4 19
Key figures 2021 2020
(ISK million)
Net earnings 28,615 12,469
ROE 14.7% 6.5%
Net interest margin 2.8% 2.9%
Cost to income ratio 44.4% 48.1%
Operating income / REA 7.6% 7.0%
31.12.2021 31.12.2020
Total assets 1,313,864 1,172,706
Loans to customers 936,237 822,941
Deposits 655,476 568,424
Borrowings 356,637 298,947
Stage 3 gross 1.9% 2.6%
Leverage ratio 12.6% 15.1%
Number of employees 751 776
EUR/ISK 147.60 156.10
Arion Bank Consolidated Financial Statements 2021
About Arion Bank
Operations during the year
Balance Sheet
Assets held for sale and discontinued operations
Stakksberg ehf. manages all the assets of the silicon plant in Helguvík. Stakksberg has been working to reduce uncertainty regarding the
recommissioning of the plant, but the sale of the company has fallen behind the original schedule for a number of external reasons. In January
2022 a letter of intent was signed with a potential buyer for this asset, and due diligence is in progress which is expected to be completed by mid-
year. The result of the due diligence is as yet unknown. Stakksberg had a negative impact of ISK 0.2 billion in 2021 due to the impairment of the
silicon plant. At year-end the book value of Stakksberg was ISK 1.5 billion.
The operating results of the subsidiaries Valitor hf., Stakksberg ehf. and Sólbjarg ehf. are presented as discontinued operations as they are all
classified as held for sale.
Valitor hf. is a market leader in Iceland in acquiring services and payment solutions and also operates in the United Kingdom. The operating
results of Valitor had a positive effect of ISK 0.9 billion on the consolidated financial results of Arion Bank in 2021. At year-end the net book value
of Valitor was ISK 8.6 billion.
The Bank's balance sheet grew by 12.0% from year-end 2020. Loans to customers increased by 13.8%, primarily mortgage lending, whereas
loans to corporates increased slightly. The majority of loans are now to individuals, 50% in the form of mortgages and 6% other loans. Liquid
assets increased despite share buybacks and dividend payments during the year, a total of ISK 31.5 billion. On the liability side deposits increased
by 13.6%, and deposits play an increasingly significant role in the Bank’s funding mix, which is reflected by the fact that the ratio of loans to
deposits has decreased from 145% to 143% between years. The Bank issued two international bonds for a total of €600 million during the year.
The first issue was under the Green Financing Framework in July, and the second in September was a covered bond issue in euros, the first such
transaction by an Icelandic issuer. Total equity amounted to ISK 194,598 billion at the end of the year. The Group's capital ratio, as calculated
under the Financial Undertakings Act No. 161/2002, was 23.8% at year-end and the CET1 ratio was 19.6%, assuming ISK 22.5 billion dividend
payment and ISK 4.3 billion buyback of own shares, which is the remainder of the current buyback program that had received permission from the
Financial Supervisory Authority of the Central Bank of Iceland (FSA). These ratios comfortably exceed the requirements made by the FSA and
Icelandic law. The liquidity position was also strong at year-end and well above the regulatory minimum.
Endorsement and statement
by the Board of Directors and the CEO
The Consolidated Financial Statements of Arion Bank for the year ended 31 December 2021 include the Consolidated Financial Statements of
Arion Bank ("the Bank") and its subsidiaries, together referred to as "the Group".
On 1 July 2021 Arion Bank and Rapyd entered into a definitive agreement regarding the sale of Valitor hf. for a purchase price of USD 100 million.
The transaction is subject to regulatory approval and the parties have agreed on a deadline for obtaining this approval of 1 May 2022. Should the
sale not be finalized due to failure to obtain regulatory approval, the risk shall be borne by the buyer, valid for two years. The sale agreement for
Valitor hf. does not affect the Consolidated Financial Statements for the period, in accordance with IFRS. Arion Bank expects to recognize a net
profit of approximately ISK 3.5 billion from the sale when all conditions precedent have been met.
Income Statement
Arion Bank and its subsidiaries provide comprehensive financial services to the Icelandic society. The Bank’s strategy is to excel by offering smart
and reliable financial solutions which create future value for our customers, shareholders and society as a whole. Arion Bank places great
importance on developing long-term relationships with its clients and is a market leader as a provider of cutting-edge and modern banking
services. In partnership with our customers the Bank stimulates shared growth and progress in Icelandic society.
Arion Bank provides services to households, corporates, institutes and investors in three business segments: Retail Banking, Corporate &
Investment Banking, and Markets. The service offering is further augmented by the subsidiaries Stefnir and Vördur. Stefnir is one of the largest
fund management companies in Iceland, and Vördur is the fastest growing insurance company in Iceland, providing non-life and life insurance.
The diverse service offering at Arion Bank means that the revenue base is broad and the loan portfolio is well diversified between retail and
corporate customers. The high percentage of mortgage loans and the healthy distribution of loans across different sectors reduces credit risk.
The Bank is a market leader in terms of digital solutions and innovation. Numerous new digital solutions have been launched in the past few years,
enhancing service to customers and making the Bank's operations more efficient, which in the long term reduces operating expenses across the
Bank. The Bank’s structure has been simplified and the branch network and business premises have been streamlined.
Arion Bank is a financially robust bank which places great importance on operating responsibly in harmony with society and the environment. The
Bank places importance on paying competitive dividends to shareholders. The Bank is listed on the main lists of Nasdaq Iceland and Nasdaq
Stockholm.
Arion Bank is an Icelandic bank which operates in Iceland and also provides services to companies in the seafood and seafood related sectors in
Europe and North America.
Net earnings amounted to ISK 28,615 million and return on equity was 14.7%. Earnings per share was ISK 17.96. Core revenues, defined as net
interest income, net commission income and net insurance income, increased by 9.4% YoY, which indicates that the strategic changes introduced
in the autumn of 2019 have largely proven successful despite the challenging conditions posed by the global pandemic over the last two years. The
solid performance of the securities markets, the reversal of loan impairments on the back of a better performing economy and the positive impact
of assets held for sale have helped to deliver strong and better than expected annual financial results. However, operating expenses have
increased somewhat, particularly salary expenses, mainly due to the expected incentive scheme due to the strong financial results in 2021.
4
Arion Bank Consolidated Financial Statements 2021
Endorsement and statement
by the Board of Directors and the CEO
Economic outlook
Outlook for the Bank
In December Arion Bank announced new financial targets following the updating of its 5-year business plan. The main changes were that the ROE
target has been increased from 10% to 13% and the ratio of operating income to risk-weighted assets was increased from 6.7% to 7.3%. A new
target was added which is that premiums earned will outgrow the growth rate on the Icelandic insurance market by 3 percentage points. The other
targets remain largely unchanged.
Building on this strong foundation, over the past couple of years, the Group’s strategy has been renewed to reinforce this further and align the
direction with the evolving operational environment and building on our core competitive strengths. A key project has been the realignment of our
Corporate and Investment Bank (CIB), which is now an important contributor to the Group’s earnings. Importantly, all key business areas of the
Group are now delivering above target returns which supports strategic flexibility going forward. Another key initiative was the alignment of the
employee incentive scheme with the operational performance and shareholder returns. The scheme was incorporated during the year where every
employee of the Bank is incentivized with the same overall targets and for key employees’ payments, which are capped at 25% of salaries, are in
the form of shares which vest over three years. The overarching KPI is for the Group to deliver ROE in excess of key competitors. This was an
important step to relieve pressure on fixed pay and to focus employees on enhancing longer term shareholder value.
The past year has been a successful milestone in the strategic journey of the Group. The operational results are a testament to this positive
momentum and the Bank has exceeded all operational targets during the year.
This progress is firstly supported by the robust foundations of the Group, built over decades of experience of the Bank and its predecessors. This
is characterized by a solid infrastructure, diverse and mature business units, best in class digital offering, and an excellent talent pool.
Medium term targets
Sólbjarg ehf. administered the Bank’s shareholding in travel companies in Scandinavia and Iceland which previously belonged to TravelCo. The
company sold Bravo Tours in Denmark during the year and the sale of Heimsferðir is awaiting the approval of the Icelandic Competition Authority.
Sólbjarg had a positive impact of ISK 0.7 billion in 2021 and the main reason for this is the sale of the company’s underlying assets. At year-end
the net book value of Sólbjarg was ISK 0.3 billion.
The Icelandic economy is quickly recovering from one of the biggest economic contractions in its history. After a difficult start to 2021, the economy
turned over a new leaf and GDP grew by 6% YoY in the third quarter. Economic growth in 2021 is expected to be around 4%, a much stronger
recovery than was forecast at the beginning of the year.
After the vaccination programme had been rolled out, all domestic public health measures were temporarily lifted and travel restrictions eased,
measures that acted as a booster shot for the economy. Tourists began to flock to the country, leading to almost 700,000 tourists visiting the
country in 2021. With tourism gaining momentum and the government establishing measures to support the labour market, e.g. employment
subsidies, unemployment began to fall sharply and halved in just a few months. By the end of the third quarter, jobs had increased by more than
10,000 across all sectors, and unemployment had reached pre-pandemic levels. Unemployment is expected to continue to fall, reaching
equilibrium unemployment much earlier than previously thought.
Better employment prospects, high consumer confidence and rapid asset growth in the housing market laid the foundations for strong private
consumption, especially in the second half of the year. Thus, total payment card turnover in Iceland increased by 18% YoY in the fourth quarter,
reaching record breaking heights in December. Due to soaring private consumption, as well as growing business investment, imports rapidly
increased. Despite flourishing exports of goods and the recovery of tourism, the contribution of foreign trade to GDP was negative. Most analysts
expect the opposite to hold true this year, thanks to a bright outlook for the country’s main export sectors, especially tourism and the seafood
industry.
Even though the economy is recovering, uncertainty remains. Covid-19 still has a strong hold over the global economy, inflation in Iceland and
around the world remains well above inflation targets and productions chains are in disrepair. At the same time as social distancing measures are
in place, negatively affecting public finances, central banks around the world are forced to raise interest rates and tighten their monetary policy.
The Central Bank of Iceland has raised its key interest rates by 1.25 percentage points since May, with most expecting further rate hikes in the
near future. Although the long-term economic outlook is bright, and Iceland in an ideal position to emerge successfully through this turbulent
period, short-term economic uncertainty has increased.
5
Arion Bank Consolidated Financial Statements 2021
Endorsement and statement
by the Board of Directors and the CEO
Employees
Funding and liquidity
In terms of funding and liquidity management the year was characterized by the Bank’s strong liquidity position and strong deposit growth. The
Bank’s liquidity position was well above the regulatory minimum of 100% all year, with a liquidity coverage ratio of 203% at the end of 2021. The
strong liquidity position is due to successful bond transactions and the growth of customer deposits, increasing 15% from ISK 568 billion to ISK
655 billion, while lending growth was similar to deposit growth.
Arion Bank also held its inaugural green bond issues. In July the Bank issued its first green bond to international investors for a total of €300
million. The bonds were sold at rates corresponding to a 0.80% margin over interbank rates. In December 2021 Arion Bank held its inaugural
green bond in ISK. The new series amounting to ISK 3.6 billion was Arion Bank’s first unsecured issue in ISK. The bonds were issued under the
Bank’s Green Financing Framework. The Framework sets out clearly and transparently the conditions which the Bank’s loans need to meet in
order to be considered green.
The Group had 751 full-time equivalent positions at the end of the year, compared with 776 at the end of 2020. A total of 619 of these positions
were at Arion Bank, compared with 648 at the end of 2020.
The key aim for the new year is to utilize the strong operational position to strengthen the longer term competitive position of the Group. A revised
business plan therefore aims to invest in two key strategic initiatives during 2022: IT infrastructure and customer experience. These investments
will impact operating expenses during the year but strengthen efficiencies and sustainable returns over the medium-term. The Bank’s ambitious
business plan, supported by a positive view of the market outlook, is reflected in the updated operational targets of the Group presented in the
fourth quarter.
The current position of the Group is enviable, and while there continue to be some headwinds in the external environment, there is strong overall
optimism. Operations have turned a corner and allowed for a focused investment plan which will strengthen the long-term position of the Group.
The lending and advisory pipeline is robust and allows for profitable growth plans in the near term, supporting the recovery of the economy. A key
focus for the year will be to manage these growth opportunities with the capital release plans to optimize shareholder returns.
In December 2020 the Board of Directors of Arion Bank and Vördur approved a revised incentive scheme which came into effect in 2021 for
employees of Arion Bank and Vördur. The scheme is in compliance with the FSA’s rules on incentive schemes to employees of financial
institutions. The scheme is split into two parts. Firstly, employees can receive up to 10% of their fixed salary for 2021 in the form of a cash
payment. Secondly, a limited group can receive up to 25% of their fixed salary as a payment in the form of shares in the Bank which will be subject
to three-year lock-up period. The criterion used to determine whether something will be paid for 2021, in part or in full, is whether the Bank’s return
on equity in 2021 is higher than the weighted ROE of the Bank’s main competitors. The Board of Directors of Arion Bank also approved a new
share option plan for all employees of the Bank, which is important for aligning the interests of employees with the long-term interests of the Bank.
The share option plan is for five years and employees are entitled to buy shares for up to ISK 600,000 each year. The purchase price is
determined by the Bank’s average share price 10 days before the share option agreement was signed, which was 3 February 2021.
The Bank did not have any significant bond or long-term funding maturities in 2021. The €500 million issue maturing in December 2021 had to a
large extent been refinanced at year-end 2020.
Banks play a key part in the community through financing of progressive and sustainable initiatives. Arion Bank has reached key milestones this
year through the establishment of a green financing framework, followed by successful green bond issues in EUR and ISK. In 2022, we will
continue to focus on sustainability with our customers and will set a policy for sectors that have the most impact on our lending in terms of climate
and environmental considerations. We will also start estimating the carbon footprint of the Bank's overall loan portfolio according to the
methodology of the Partnership for Carbon Accounting Financials (PCAF). See further information about Arion Bank‘s sustainability journey in the
chapter “Sustainability and non-financial reporting”.
Strengthened by these investments, the next phase of the Group’s progression focuses on holistic customer journey optimization. With a broad
offering of mature products and services combined with a competitive edge in our digital distribution channels, there are considerable strategic
opportunities in this area. A key part of this vision is bringing Vördur insurance company closer to the Bank for a more focused bancassurance
offering. Bringing together Arion Bank’s digital distribution channels and infrastructure with Vördur’s growth potential and earnings strength is a key
opportunity for the Group. The Group also sees opportunities to utilize this strong position to actively participate in the emergence of the growth
and importance of the Arctic in the global economy. This is a longer-term vision which will be a driver for medium-term strategic plans.
Capital optimization continues to be a focus for the Group and significant milestones are being achieved in this area. Shareholder distributions
since the start of 2021 have amounted to ISK 31.5 billion through buybacks and dividend payment. The proposed dividend for the year 2021, which
will be subject to the approval of the annual general meeting on 16 March, corresponds to ISK 15 per share or around ISK 22.5 billion, net of own
shares. Additionally, it is anticipated that the approximate ISK 12 billion proceeds from the sale of Valitor, expected to be completed later in the
year, will also be distributed as an extraordinary dividend. Share buy-backs will also continue to be explored later in the year. The medium-term
target remains to bring CET1 ratio to the optimized 17% area.
In September 2021 Arion Bank became the first Icelandic financial institution to issue covered bonds in euros, issuing €300 million. The bonds
were sold at rates corresponding to a 0.27% margin over interbank rates, which are the best rates which an Icelandic issuer, including the
Icelandic government, has obtained on the international credit markets since Arion Bank was founded 13 years ago.
6
Arion Bank Consolidated Financial Statements 2021
Endorsement and statement
by the Board of Directors and the CEO
Group ownership
Capital adequacy and dividends
Risk management
Governance
There are four Board sub-committees: The Board Audit Committee, the Board Risk Committee, the Board Credit Committee and the Board
Remuneration Committee. One of the committee members on the Board Audit Committee is not a Board member and is independent of the Bank
and its shareholders. In late 2020 the Board set up a temporary sub-committee, the Board Tech Committee, to advise the Board and senior
management on the Bank's near to medium-term development of the Bank’s IT enterprise architecture.
Arion Bank’s dividend policy states that the Bank shall pay 50% of net earnings in dividends and that additional dividends or share buybacks can
be considered when the Bank’s capital levels exceed the minimum regulatory requirements together with the Bank’s management buffer. The
Bank has the objective to maintain a 17% Common Equity Tier 1 ratio. The corresponding capital requirement is 13.5% of total risk-weighted
exposure amount. The Bank has released equity through dividend payments and purchase of own shares to meet this objective. In March 2021,
the Bank paid dividend of ISK 2.9 billion and in 2021 the Bank has purchased a total of ISK 28.6 billion of own shares.
The Group’s capital adequacy ratio on 31 December 2021 was 23.8% and the CET1 ratio 19.6%. The ratios account for a deduction due to
foreseeable dividend that represents an expected dividend payment of ISK 22.5 billion in the first quarter of 2022 and ISK 4.3 billion in share
buyback due to the completion of the programme announced in October 2021. The capital position of Arion Bank will remain very strong and the
planned equity release to shareholders will not impact the Bank’s ability to support its customers and the Icelandic economy.
The Bank’s total risk-weighted exposure amount (REA) increased by ISK 67 billion in 2021, primarily due to an increase to loans to customers of
ISK 113 billion. In June 2021, changes to the European capital requirements (CRD V / CRR II) were adopted in Iceland which resulted in further
capital relief for SME exposures, a lower threshold for large exposures and a new methodology for calculating capital requirements for
counterparty credit risk.
As part of the Icelandic government’s economic measures in response to Covid-19, the Financial Stability Committee decided to vacate the 2%
countercyclical capital buffer in March 2020, thereby reducing the Group’s total requirement from 20.3% to 18.4%. In September 2021, the
Committee announced that the countercyclical capital buffer would again be set at 2% as of 29 September 2022. Both of these measures had a
limited impact on Arion Bank, however, given its strong capital position throughout the pandemic.
The Board of Directors proposes that the Bank pay dividends of ISK 22.5 billion in 2022, net of own shares. This dividend calculates as ISK 15 per
share. The Board of Directors has the authority to propose that the Bank pay dividends or other disbursement of equity and may convene a special
shareholders' meeting later in the year to propose a payment.
The main venue at which the Board and the Bank report information to the shareholders and propose decisions is at legally convened
shareholders’ meetings. The Bank provides an effective and accessible arrangement for communications between shareholders and the Board of
Directors between those meetings. Any information sensitive to the market will be released through a MAR press release. Arion Bank also
arranges quarterly meetings where the CEO, CFO and Investor Relations present the interim financial results. The Bank has also held its capital
markets day on two occasions, in November 2019 and 2021, where the management team discussed the progress in the Banks operations and
key focus areas going forward. The next capital markets day is scheduled to be held in 2023.
At the end of 2021 Lífeyrissjódur starfsmanna ríkisins was the largest shareholder in Arion Bank with a shareholding of 9.10%. Arion Bank owned
8.54% of its own shares at the end of 2021. The AGM on 16 March 2021 approved the cancellation of 70 million of the Bank's own shares, totalling
ISK 70 million at nominal value. The reduction took place in April 2021. The float of the Bank’s shares has been substantial during 2021. Icelandic
pension funds, insurance and fund management companies along with numerous private investors have added to their shareholdings, while at the
same time international ownership has decreased. The number of shareholders has grown from around 7,400 at the beginning of the year to
11,300 at the end of the year, and it is encouraging for the Bank to see the increased interest from retail investors. Further information on Arion
Bank's shareholders can be found in Note 36.
The Board of Directors of Arion Bank places great importance on good corporate governance and a corporate culture which fosters open and
honest relations between the Bank, its shareholders, and other stakeholders. The Board of Directors is the supreme authority in the affairs of the
Bank between shareholders’ meetings and tends to those operations of the Bank which are not considered part of the day-to-day business, i.e.,
taking decisions on issues which are unusual or of a significant nature. The Board of Directors appoints a Chief Executive Officer who is
responsible for the day-to-day operations in accordance with a strategy set out by the Board. The CEO hires the Executive Management.
The Group faces various risks arising from its day-to-day operations as a financial institution. Managing risk is therefore a core activity within the
Group. The key to effective risk management is a process of on-going identification of significant risk, quantification of risk exposure, actions to
limit risk and constant monitoring of risk. This process of risk management and the ability to manage and price risk factors is critical to the Group's
continuing profitability as well as ensuring that the Group's exposure to risk remains within acceptable levels. The Board of Directors is ultimately
responsible for the Bank’s risk management framework and ensuring that satisfactory risk policies and governance structure for controlling the
Bank’s risk exposure are in place. The Group’s risk management, its structure and main risk factors are described in the notes and in the Bank’s
unaudited Pillar 3 Risk Disclosures.
At the Bank’s AGM on 16 March 2021, five members were elected to serve on the Board of Directors until the next AGM, two women and three
men. Additionally, two Alternate Directors (one woman and one man) were elected. The five Directors and two Alternates are independent of Arion
Bank, its management and major shareholders. The Board’s composition as regards gender representation complies with statutory requirements,
which stipulate that companies employing more than 50 people must ensure that the gender ratio of the board of directors and alternate board is
no less than 40%.
7
Arion Bank Consolidated Financial Statements 2021
Endorsement and statement
by the Board of Directors and the CEO
Sustainability and non-financial reporting
In November 2021 Arion Bank became a signatory to Partnership for Carbon Accounting Financials (PCAF), a global partnership of financial
institutions that work together to develop and implement a harmonized approach to assess and disclose the greenhouse gas (GHG) emissions
associated with their loans and investments. Arion Bank will apply this methodology in 2022 to estimate the carbon footprint from its loan portfolio.
In order to gain a better overview of the risk related to climate change the Bank has made use of the recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD). The section on sustainability risk in the Bank’s 2021 Pillar 3 Risk Disclosures is partly based on
these guidelines and it also contains an analysis of the Bank’s loan portfolio from the point of view of climate risk. The Bank formally became a
signatory to TCFD in February 2022.
At home the Bank is a member of Festa – Center for Sustainability and is one of the founding members of IcelandSIF, the Iceland Sustainable
Investment Forum. The Bank is also one the founding members of Green by Iceland, a joint business and government forum on climate issues and
green solutions. The Bank has also been a signatory to the City of Reykjavík and Festa’s Declaration on Climate Change since 2015, and signed a
declaration of intent on investment for a sustainable recovery devised by the Prime Minister’s Office, Festa – Center for Sustainability, the
Icelandic Financial Services Association (SFF) and the National Association of Pension Funds (LL) in 2020.
The Human Resources Policy at Arion Bank is designed to create a positive and motivational work environment and to support our employees in
their work and private lives. There is a strong emphasis on attracting and retaining outstanding employees and helping them develop
professionally and personally. The Bank has adopted a clear equality and human rights policy, which was reviewed in 2021, and a 3-year action
plan. The objective of the policy and action plan is to create an environment where people of similar education, work experience and responsibility
have equal opportunities and terms, irrespective of gender, gender identity, sexual orientation, origin, nationality, skin colour, age, disability or
religion or other factor. The Bank’s new action plan place greater emphasis on balancing gender ratios at the Bank, not just at management level
but throughout different job families, committees and business units. Since 2015 the Bank has had an equal pay system and equal pay
certification.
In 2018 became the first Icelandic bank to get the Ministry of Welfare’s equal pay symbol, and a pay equity analysis indicated that the unexplained
gender pay gap was 2.4%. In 2021 the Bank underwent an audit which indicated that the difference for total compensation was 0.1%, and the
Bank’s target is to be below 1%. The Bank’s target is for median total compensation for men compared with the median total compensation for
women to be reduced to below 1.3 over the next three years. This figure was 1.43 in 2021. The main opportunity to balance the median total
compensation is to improve gender equality in different job families.
Arion Bank has adopted an environment and climate policy and targets connected to the policy. The policy spells out the importance of the Bank
minimizing the negative environmental impact of its activities and greenhouse gas emissions. The policy also states that the Bank will turn its focus
onto financing projects which relate to sustainable development and green infrastructure. The Bank issued its first comprehensive green financing
framework during the year and held two green bond issues based on the framework. Green deposits continued to grow in 2021, and there was an
increase in loans to buy vehicles which run on 100% renewables.
The main roles of the Board, as further specified in the rules of procedure of the Board, include approving the Bank's strategy, supervising financial
affairs and accounting, and ensuring that appropriate internal controls are in place. The Board ensures that the Bank has active Internal Audit,
Compliance and Risk Management departments. The Internal Auditor is appointed by the Board of Directors and works independently of other
departments of the Bank in accordance with a charter from the Board. The Internal Auditor provides independent and objective assurance and
advice designed to add value and improve the Bank's operations. The Compliance Officer, who reports directly to the CEO, works independently
within the Bank in accordance with a charter from the Board. The main role of Compliance is to ensure that the Bank has in place proactive
measures to reduce the risk of rules being breached in the course of its activities. Compliance is also responsible for coordinating the Bank’s
measures against money laundering and terrorist financing. The duties of Compliance are carried out under a risk-based compliance plan
approved by the Board of Directors, including a monitoring and training schedule for employees which addresses the laws and rules under which
the Bank operates.
Corporate governance at Arion Bank is described in more detail in the Bank's Corporate Governance Statement which is contained in the
unaudited appendix to the Financial Statement and on the website www.arionbanki.is. The Corporate Governance Statement is based on
legislation, regulations, and recognised guidelines in force when the Bank's annual financial statements are adopted by Board of Directors,
prepared in accordance with the Guidelines on Corporate Governance, 6th edition, issued by the Icelandic Chamber of Commerce, SA – Business
Iceland and Nasdaq Iceland in February 2021. Corporate governance at Arion Bank complies with the guidelines with two exceptions, which are
explained in more detail in the Corporate Governance Statement.
We refer to Arion Bank’s values as cornerstones and they are designed to provide guidance when making decisions and in everything the
employees do. The cornerstones address our role, mentality and conduct and they are: we make a difference, we get things done, we say what we
mean, and we fin solutions. The Bank’s code of conduct has been approved by the Board of Directors and is designed as a guideline for
employees and to support responsible decision making. Arion Bank has selected six UN Sustainable Development Goals which the Bank which it
intends to focus on: goal number 5 on gender equality; number 7 on affordable and clean energy; number 8 on decent work and economic growth;
number 9 on industry, innovation and infrastructure; number 12 on responsible consumption and production; and number 13 on climate action.
Arion Bank is involved in extensive partnerships in the field of sustainability and social responsibility, both in Iceland and abroad, and is a signatory
to numerous treaties and declarations, such as the UN Global Compact, the UN Principles for Responsible Investment, the UN Principles for
Responsible Banking and UN Women.
Arion Bank places great importance on environmental and social issues and good corporate governance in its operations. Arion Bank’s
sustainability policy bears the title Together we make good things happen and signifies that the Bank wants to act as a role model in responsible
and profitable business practices, taking into account the environment, the economy and society. At Arion Bank we aim to ensure that
sustainability is an integral part of the Bank's day-to-day activities, its decision-making and processes.
8
Arion Bank Consolidated Financial Statements 2021
Endorsement and statement
by the Board of Directors and the CEO
Arion Bank’s activities are governed by the provisions of the Annual Accounts Act on non-financial reporting, Article 66 d. Information in the annual
and sustainability report has been prepared and published in accordance with the Global Reporting Initiative standard, GRI Core, which helps
companies and institutions share information on sustainability in a transparent and comparable way. When sharing information on non-financial
factors of the business the ESG reporting guide for the Nasdaq Nordic exchange, the 10 Principles of the UN Global Compact, and UN
Sustainable Development Goals are referred to. For the second time the progress made in implementing the UN Principles for Responsible
Banking is reported on. Deloitte is providing an opinion with limited assurance on non-financial reporting by Arion Bank in 2021 which is presented
in accordance with the Global Reporting Initiative (GRI Core) and the Nasdaq ESG Reporting Guide.
Further information on sustainability and non-financial information can be found in the Annual and Sustainability Report which will be available on
the Bank’s website on 16 February 2022: arsskyrsla2021.arionbanki.is/english
The Bank’s credit policy places special emphasis on sustainability and increasing the percentage of green loans and quantifiable targets have
been set. The Bank’s credit rules also stipulate that environmental, social and governance factors must be considered when assessing loans. At
the end of 2021, 11% of the Bank’s total loans came under the definition of the green financing framework, and the Bank aims to increase this
figure to at least 20% by 2030. This target on the ratio of green loans will be reviewed annually, taking into consideration the opportunities over the
next few years for green financing and introducing the EU taxonomy in Iceland. The Bank hopes that it might grow even more quickly.
Arion Bank will issue its first impact and allocation report for the Bank’s green financing framework for 2021 at the same time as the 2021 annual
and sustainability report. The report specifies the allocation of funds which have been raised through green bond issues and green deposits in
2021, and there is also a section on the positive environment and climate impact of green loans from Arion Bank. Deloitte is providing confirmation
with limited assurance of the allocation of funds to green projects which have been raised through green bond issues and green deposits. The
Bank’s targets in environment and climate issues include reducing carbon emissions and other greenhouse gases from own activities by 55% by
2030, i.e. emissions from the Bank’s business premises and vehicles. At the end of 2021 the Bank had reduced these emissions by 37.6%
compared with the reference year 2015. The Bank has entered into an agreement with the Iceland Carbon Fund on carbon fixation to offset
emissions from the Bank’s activities and other emissions such as flights, taxi journeys, waste and employee journeys to and from work.
In 2021 a sustainability committee was set up and sustainability risk was defined as part of the Bank’s risk management system. The new
committee replaced the Bank’s steering committee on social responsibility. The CEO is the chairman of the sustainability committee, whose role is
to monitor the Bank’s performance in connection with the policy and commitments on sustainability and to ensure that ESG factors are considered
in decisions and plans made by the Bank. A green financing committee and equality committee are sub-committees of this committee. In addition
to the CEO, the sustainability committee comprises the managing director of Retail Banking, Corporate & Investment Banking, Markets, Customer
Experience and Finance. The Chief Risk Officer and Sustainability Officer attend committee meetings but do not have the right to vote. The Bank’s
new sustainability risk policy was approved by the board of directors during the year and will be reviewed annually. This policy states that the Bank
seeks to ensure that its operations and services do not have a negative impact on people or the environment. It also states that the Bank supports
Iceland’s climate action plan whose goal is to meet the obligations of the Paris Climate Agreement and to achieve the ambitious goal of carbon
neutrality by 2040.
At the beginning of 2022 a special risk assessment was performed in connection with ESG factors at the Bank. The main social risks relate to
employee equality and diversity, disclosure and relations with stakeholders. The main environmental risks were insufficient action in environmental
and climate issues in connection with goods and services, employees’ compliance with the Bank’s environment and climate policy and the risk of
greenwashing. The assessment also revealed that the main governance risks were anti-money laundering measures and know-your-customer,
data protection and ESG reporting. The management of these risks at the Bank were rated as adequate or strong.
The Bank has introduced a policy on actions against financial crime, such as money laundering, terrorist financing, bribery and corruption or
market abuse. On the basis of this policy the Bank places great importance on knowing all customers and understanding their business so that the
Bank is able to identify any suspicious transactions. Suspicious transactions are immediately reported to the authorities. Employees are given
regular training on measures against financial crime and how to respond if they have any suspicions. The Bank also re-evaluates its measures
regularly to respond to the main threats at any given time. Further information on actions against financial crime are contained in the Bank’s 2021
Pillar 3 Risk Disclosures.
In recent years Arion Bank has been recognized as a company which has achieved excellence in corporate governance, following a formal
assessment based on guidelines on corporate governance issued by the Icelandic Chamber of Commerce, the Confederation of Icelandic
Employers, and Nasdaq Iceland. Further information on corporate governance can be found in the corporate governance statement.
9
Arion Bank Consolidated Financial Statements 2021
Endorsement and statement
by the Board of Directors and the CEO
Endorsement of the Board of Directors and the Chief Executive Officer
Steinunn Kristín Thórdardóttir
The Consolidated Financial Statements of Arion Bank for the year ended 31 December 2021 have been prepared in accordance with International
Financial Reporting Standards as adopted by the European Union and additional requirements in the Icelandic Financial Statements Act, Financial
Undertakings Act and Rules on Accounting for Credit Institutions.
It is our opinion that the Consolidated Financial Statements give a true and fair view of the financial performance and cash flow of the Group for
the year ended 31 December 2021 and its financial position as at 31 December 2021. Furthermore, in our opinion the Consolidated Financial
Statements and the Endorsement of the Board of Directors and the CEO give a fair view of the development and performance of the Group's
operations and its position and describe the principal risks and uncertainties faced by the Group.
In our opinion, the Consolidated Financial Statements of Arion Bank hf. for the year 2021 with the file name RIL4VBPDB0M7Z3KXSF19-2021-12-
31-en.zip is prepared, in all material respects, in compliance with the ESEF Regulation.
Board of Directors
Brynjólfur Bjarnason, Chairman
The Board of Directors and the CEO have today discussed the Consolidated Financial Statements of Arion Bank for the year ended 31 December
2021 and confirm them by means of their signatures. The Board of Directors and the CEO recommend that the Consolidated Financial Statements
be approved at the Annual General Meeting of Arion Bank.
Reykjavík, 9 February 2022
Paul Richard Horner, Vice Chairman
Chief Executive Officer
Benedikt Gíslason
Gunnar Sturluson
Liv Fiksdahl
10
Arion Bank Consolidated Financial Statements 2021
Opinion
Basis for Opinion
Key Audit Matters
Impairment charges for loans and provisions for guarantees
Independent Auditor's report
How the matter was addressed in the audit
To the Board of Directors and shareholders of Arion Bank.
In our opinion, the accompanying Consolidated Financial Statements give a true and fair view of the consolidated financial position of Arion Bank
hf. as at December 31, 2021, its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with
International Financial Reporting Standards (IFRSs) as adopted by the EU and additional requirements in the Icelandic Financial Statement Act.
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Consolidated Financial
Statements of the current period. These matters were addressed in the context of our audit of the Consolidated Financial Statements as a whole,
and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We have audited the Consolidated Financial Statements of Arion Bank hf. for the year ended December 31 2021 which comprise the
Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position,
Consolidated Statement of Changes in Equity, Consolidated Statement of Cash Flows for the year then ended and the notes to the Consolidated
Financial Statements, including a summary of significant accounting policies.
Key Audit Matters
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further
described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of
Arion Bank hf. in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA
Code) together with the ethical requirements that are relevant to our audit of the financial statements in Iceland, and we have fulfilled our other
ethical responsibilities in accordance with these requirements and the IESBA Code. This includes that, based on the best of our knowledge and
belief, no prohibited services referred to in the EU Audit Regulation 537/2014 Article 5.1 has been provided to the audited company or, where
applicable, its parent company or its controlled companies within the EU. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Our opinion in this report on the consolidated financial statements is consistent with the content of the additional report that has been submitted
to the parent company´s audit committee in accordance with the EU Audit Regulation 537/2014 Article 11.
Loans for the Group amounted to ISK 943,837 million at 31
December 2021, and the total allowance account for the Group
amounted to ISK 8,341 million (including off-balance positions) at 31
December 2021.
The Group valuate it´s impairment on loans based of IFRS 9 resulting
in impairment charges are recognised when losses are expected
based on forecasting models.
Management has provided further information about the accounting
policies for expected credit losses in note 56 and about loan
impairment charges and provisions for guarantees in notes 15 and
42.
Measurement of loan impairment charges for loans and provisions for
guarantees is deemed a key audit matter as the determination of
assumptions for expected credit losses is subjective due to the level
of judgement applied by Management.
The most significant judgements are:
• Assumptions used in the expected credit loss models to assess the
credit risk related to the exposure and the expected future cash flows
of the customer.
• Timely identification of exposures with significant increase in credit
risk and credit impaired exposures.
• Valuation of collateral and assumptions used for manually assessed
credit-impaired exposures.
Based on our risk assessment and industry knowledge, we have
examined the impairment charges for loans and provisions for
guarantees and evaluated the methodology applied as well as the
assumptions made according to the description of the key audit
matter.
As part of our audit, we have examined the Group’s implementation of
IFRS 9. As part of our review of the implementation we performed
substantive procedures on the Group’s impairment models and
reviewed the methodology implemented for expected credit loss
calculations. We used risk modelling specialists as well as IFRS
specialists as part of our audit.
Our examination included the following elements:
• Testing of key controls over key assumptions used in the expected
credit loss models to assess the credit risk related to the exposure
and the expected future cash flows of the customer.
• Substantively testing evidence to support the assumptions used in
the expected credit loss models applied in stage allocation,
assumptions applied to derive lifetime possibility of default and
methods applied to derive loss given default.
• Testing of key controls and substantive testing of timely identification
of exposures with significant increase in credit risk and timely
identification of credit impaired exposures.
• Testing of key controls over models and manual processes for
valuation of collateral used in the expected credit loss calculations.
• Substantively testing evidence to support appropriate determination
of assumptions for loan impairment charges and provisions for
guarantees including valuation of collateral and assumptions of future
cash flows on manually assessed credit impaired exposures.
11
Arion Bank Consolidated Financial Statements 2021
Independent Auditor's report
Revenue recognition
Other information
Responsibilities of the Board of Directors and the CEO for the Consolidated Financial Statements
Auditor's Responsibilities for the Audit of the Consolidated Financial Statements
•
•
•
The Board of Directors and CEO are responsible for the other information. The other information comprises the unaudited appendix to the
Financial Statements, 5-year overview, key figures, unaudited quarterly statements in note 6 and Endorsement and statements by the Board of
Directors and the CEO.
Our opinion on the Consolidated Financial Statements does not cover the other information and we do not and will not express any form of
assurance conclusion thereon, except the confirmation regarding the Endorsement and the statement by the Board of Directors and the CEO as
stated below.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
In connection with our audit of the Consolidated Financial Statements, our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with the Consolidated Financial Statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information; we are required to report that fact. We have nothing to report in this regard.
In accordance with Paragraph 2 article 104 of the Icelandic Financial Statement Act no. 3/2006, we confirm to the best of our knowledge that the
accompanying the Endorsement and statements by the Board of Directors and the CEO includes all information required by the Icelandic
Financial Statement Act that is not disclosed elsewhere in the Consolidated Financial Statements.
The Board of Directors and the CEO are responsible for the preparation and fair presentation of the Consolidated Financial Statements in
accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and additional requirements in the Icelandic
Financial Statement Act, and for such internal control as the Board of Directors and the CEO determines is necessary to enable the preparation
of Consolidated Financial Statements that are free from material misstatement, whether due to fraud or error.
In preparing the Consolidated Financial Statements, the Board of Directors and the CEO are responsible for assessing Arion Bank hf.’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless
management either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the Consolidated Financial Statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these Consolidated Financial Statements.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We
also:
Indentify and assess the risks of material misstatement of the Consolidated Financial Statements, whether due to fraud or error, design
and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis
for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud
may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of Arion Bank hf.'s internal control.
Interest income is a key element to the core business of the Bank.
This is the single largest item of the Consolidated Income Statement.
Interest income is subject to contractual terms and highly reliant on IT
controls and other controls within the Bank’s control environment.
Therefore, we consider the interest income as key audit matter.
The basis for revenue recognition and accounting policies are
presented in note 51 to the consolidated financial statements.
We reviewed the policies, processes and controls surrounding the
revenue recognition. We have tested relevant controls related to
accounting for interest income. We have tested the appropriateness
of the interest calculation in accordance with IFRS.
We tested interest income by select sample of loans and compare the
underlying data to the loans system. In addition, we performed
analytical procedures on interest income. The Banks applications
controls for the IT systems were tested for interest calculation.
Furthermore, we selected sample of loans to ensure that interest is
being accrued correctly.
Key Audit Matters
How the matter was addressed in the audit
12
Arion Bank Consolidated Financial Statements 2021
Independent Auditor's report
•
•
•
Report on other legal and regulatory requirements
Report on European single electronic format (ESEF Regulation)
Management is responsible for preparing the consolidated financial statements in compliance with laws no. 20/2021 disclosure obligation of
issuers of securities and the obligation to flag. This responsibility includes preparing the consolidated financial statements in a XHTML format in
accordance to EU regulation 2019/815 on the European single electronic format (ESEF regulation).
Our responsibility is to obtain reasonable assurance, based on evidence that we have obtained, on whether the consolidated financial
statements is prepared in all material respects, in compliance with the ESEF Regulation, and to issue a report that includes our opinion. The
nature, timing and extent of procedures selected depend on the auditor's judgement, including the assessment of the risks of material
departures from the requirement set out in the ESEF regulation, whether due to fraud or error.
Deloitte was appointed auditor of Arion Bank hf. By the general meeting of shareholders on 16 March 2021. Deloitte have been elected as
auditor of the Group since the general meeting 2015.
In our opinion, the Consolidated Financial Statements of Arion Bank hf. for the year 2021 with the file name RIL4VBPDB0M7Z3KXSF19-2021-12-
31-en.zip is prepared, in all material respects, in compliance with the ESEF Regulation.
Gunnar Thorvardarson
State Authorized Public Accountant
Evaluate the overall presentation, structure and content of the Consolidated Financial Statements, including the disclosures, and
whether the Consolidated Financial Statements represent the underlying transactions and events in a manner that achieves fair
presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to
express an opinion on the consolidated and separate financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with the Board of Directors and the Board Audit Committee regarding, among other matters, the planned scope and timing of
the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the Board of Directors and the Board Audit Committee with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear
on our independence, and where applicable, related safeguards.
From the matters communicated with the Board of Directors and the Board Audit Committee, we determine those matters that were of most
significance in the audit of the Consolidated Financial Statements of the current period and are therefore the key audit matters. We describe
these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.
Deloitte ehf.
Kópavogur, 9 February 2022
In addition to our work as the auditors of Arion Bank hf., Deloitte has provided the Bank with permitted additional services such as review of
interim financial statements and other assurance engagement,. Deloitte has in place internal procedures in order to ensure its independence
before acceptance of additional services. Arion Bank hf. audit committee also has in place internal procedures to approve additional services
before they commence. The audit committee also evaluates the independence of the company’s auditors on yearly basis in order to ensure their
independence and objectivity.
As part of our audit of the Consolidated Financial Statements of Arion Bank hf. we performed procedures to be able to issue an opinion on
whether the Consolidated Financial Statements of Arion Bank hf. for the year 2021 with the file name arionbank-2021-12-31.zip is prepared, in all
material respects, in compliance with laws no. 20/2021 disclosure obligation of issuers of securities and the obligation to flag relating to
requirements regarding European single electronic format regulation EU 2019/815 which include requirements related to the preparation of the
Consolidated Financial Statements in XHTML format and iXBRL markup.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to
the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may
cause the Company to cease to continue as a going concern.
13
Arion Bank Consolidated Financial Statements 2021
Amounts are in ISK millions
Consolidated Income Statement
Notes 2021 2020
53,958 51,730
(21,895) (20,572)
7
32,063 31,158
16,706 13,225
(2,033) (1,583)
8
14,673 11,642
9 3,442 3,071
10 6,220 2,745
26 22 -
11 1,805 2,148
11,489 7,964
58,225 50,764
12 (14,638) (12,332)
13 (11,237) (12,109)
(25,875) (24,441)
14 (1,516) (1,301)
15 3,169 (5,044)
34,003 19,978
16 (6,782) (3,231)
27,221 16,747
17 1,394 (4,278)
28,615 12,469
Attributable to
28,605 12,476
10 (7)
28,615 12,469
Earnings per share 18
17.96 7.24
16.93 7.24
Net financial income ...................................................................................................................................
Other operating income ..............................................................................................................................
Salaries and related expenses ....................................................................................................................
Other operating expenses ..........................................................................................................................
Bank levy ....................................................................................................................................................
Interest income ...........................................................................................................................................
Interest expense .........................................................................................................................................
Fee and commission income ......................................................................................................................
Fee and commission expense ....................................................................................................................
Net insurance income .................................................................................................................................
Net earnings .................................................................................................................................................
Diluted earnings per share attributable to the shareholders of Arion Bank (ISK) .........................................
The accompanying Notes are an integral part of these Consolidated Financial Statements
Basic earnings per share attributable to the shareholders of Arion Bank (ISK) ...........................................
Non-controlling interest ...............................................................................................................................
Net interest income ......................................................................................................................................
Net fee and commission income .................................................................................................................
Other net operating income ........................................................................................................................
Operating income ........................................................................................................................................
Operating expenses .....................................................................................................................................
Earnings before income tax ........................................................................................................................
Net earnings from continuing operations ...................................................................................................
Net earnings .................................................................................................................................................
Net impairment ...........................................................................................................................................
Income tax expense ...................................................................................................................................
Discontinued operations held for sale, net of income tax ............................................................................
Shareholders of Arion Bank hf. ..................................................................................................................
Share of profit of associates .......................................................................................................................
14
Arion Bank Consolidated Financial Statements 2021
Amounts are in ISK millions
Consolidated Statement of Comprehensive Income
Notes 2021 2020
28,615 12,469
(2,131) (164)
10 335 (112)
(1,796) (276)
21 212
(1,775) (64)
26,840 12,405
Attributable to
26,830 12,412
10 (7)
26,840 12,405
Net change in fair value of debt investments carried at fair value through OCI, net of tax ............................
Realized net loss (gain) on debt investments carried at fair value through OCI, ...........................................
The accompanying Notes are an integral part of these Consolidated Financial Statements
Other comprehensive loss that is or may be reclassified
Net earnings .................................................................................................................................................
Changes to reserve for financial instruments at fair value through OCI ..................................................
subsequently to the Income Statement ....................................................................................................
Total comprehensive income ......................................................................................................................
net of tax, transferred to the Income Statement ...........................................................................................
Exchange difference on translating foreign subsidiaries ...............................................................................
Total comprehensive income ......................................................................................................................
Shareholders of Arion Bank .........................................................................................................................
Non-controlling interest ................................................................................................................................
15
Arion Bank Consolidated Financial Statements 2021
Amounts are in ISK millions
Consolidated Statement of Financial Position
Assets Notes 2021 2020
19 69,057 42,136
20 30,272 28,235
21 936,237 822,941
22-24 225,657 227,251
24 6,560 6,132
26 668 891
27 9,463 9,689
28 2 2
29 16,047 16,811
30 19,901 18,618
1,313,864 1,172,706
Liabilities
23 5,000 13,031
23 655,476 568,424
23 5,877 5,240
28 7,102 4,262
29 16,935 16,183
31 37,151 32,714
23.32 356,637 298,947
23.33 35,088 36,060
1,119,266 974,861
Equity 35
22,684 51,331
12,838 11,320
158,403 135,021
193,925 197,672
673 173
194,598 197,845
1,313,864 1,172,706
Total Assets ...........................................................................................................................................
Subordinated liabilities ............................................................................................................................
Liabilities associated with disposal groups held for sale ..........................................................................
The accompanying Notes are an integral part of these Consolidated Financial Statements
Total Equity ............................................................................................................................................
Total Liabilities and Equity ...................................................................................................................
Non-controlling interest ...........................................................................................................................
Other liabilities ........................................................................................................................................
Borrowings ..............................................................................................................................................
Share capital and share premium ............................................................................................................
Other reserves ........................................................................................................................................
Retained earnings ...................................................................................................................................
Total Shareholders' Equity ...................................................................................................................
Total Liabilities ......................................................................................................................................
Cash and balances with Central Bank .....................................................................................................
Loans to credit institutions .......................................................................................................................
Tax liabilities ...........................................................................................................................................
Loans to customers .................................................................................................................................
Financial instruments ..............................................................................................................................
Investment property ................................................................................................................................
Deposits ..................................................................................................................................................
Financial liabilities at fair value ................................................................................................................
Investments in associates .......................................................................................................................
Intangible assets .....................................................................................................................................
Tax assets ..............................................................................................................................................
Other assets ...........................................................................................................................................
Due to credit institutions and Central Bank ..............................................................................................
Assets and disposal groups held for sale ................................................................................................
16
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Debt invest- Foreign
Gain in ments at currency Non-
subs. & Gain in Capitalized fair value trans- cont-
Share Share Share Warrants assoc., securities, develop- thr. OCI, Statutory lation Retained holders' rolling Total
capital premium option reserve unrealized unrealized ment cost unrealized reserve reserve earnings equity interest equity
1,718 49,613 - - 7,421 694 1,054 (141) 1,637 655 135,021 197,672 173 197,845
28,605 28,605 10 28,615
(2,131) (2,131) (2,131)
335 335 335
21 21 21
- - - - - - - (1,796)
-
21 28,605 26,830 10 26,840
(2,857) (2,857) (2,857)
(200) (28,447) (28,647) (28,647)
99 99 99
828 828 828
- 490 490
(176) 2,472 70 (2,365) 1 1
1,518 21,166 99 828 7,245 3,166 1,124 (1,937) 1,637 676 158,403 193,925 673 194,598
The accompanying Notes are an integral part of these Consolidated Financial Statements
Changes in reserves .......................
Equity 31 December 2021 ...............
Restricted reserves
Share option charge for the year .....
Warrants sold ..................................
Dividend paid ..................................
Net change in fair value .....................
Translation difference ........................
Total comprehensive income .........
Purchase of treasury stock ..............
Realized net loss transferred to P/L ...
Increase in non-controlling interest ..
Transactions with owners
Consolidated Statement of Changes in Equity
Total
share-
Net earnings ......................................
Equity 1 January 2021 .....................
17
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Consolidated Statement of Changes in Equity
Debt invest- Foreign
Gain in ments at currency Non-
subs. & Gain in Capitalized fair value trans- cont-
Share Share Share Warrants assoc., securities, develop- thr. OCI, Statutory lation Retained holders' rolling Total
capital premium option reserve unrealized unrealized ment cost unrealized reserve reserve earnings equity interest equity
1,773 53,942 - - 6,127 692 459 135 1,637 443 124,436 189,644 181 189,825
12,476 12,476 (7) 12,469
(164) (164) (164)
(112) (112) (112)
212 212 212
- - - - - - - (276) - 212 12,476 12,412 (7) 12,405
(54) (4,325) (4,379) (4,379)
- (4) (4) (4)
1,294 2 595 (1,891) - -
1,718 49,613 - - 7,421 694 1,054 (141) 1,637 655 135,021 197,672 173 197,845
The accompanying Notes are an integral part of these Consolidated Financial Statements
Net earnings ......................................
Net change in fair value .....................
Realized net gain transferred to P/L ..
Translation difference ........................
Total comprehensive income .........
Changes in treasury stock ...............
Changes in reserves .......................
Equity 31 December 2020 ...............
Transactions with owners
Purchase of treasury stock ..............
Restricted reserves
Total
share-
Equity 1 January 2020 .....................
18
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Operating activities
2021 2020
28,615 12,469
(32,006) (11,888)
3,163 (3,843)
(105,988) (29,810)
4,783 (108,835)
90,642 69,631
54,566 (26,036)
(1,440) 20,000
41,866 47,268
(15,883) (20,271)
95 68
(3,942) (3,361)
64,471 (54,608)
Investing activities
(111) (39)
356 96
(1,005) (2,164)
1,045 1,442
(581) (1,115)
(296) (1,780)
Financing activities
- 12,805
828 -
(28,647) (4,381)
(2,857) -
(30,676) 8,424
33,499 (47,964)
58,284 102,186
(1,105) 4,062
90,678 58,284
Cash and cash equivalents
69,057 42,136
28,156 22,354
(6,535) (6,206)
90,678 58,284
* Interest paid includes interest credited to deposit accounts at the end of the year.
The accompanying Notes are an integral part of these Consolidated Financial Statements
Mandatory reserve deposit with Central Bank ............................................................................................................
Cash and cash equivalents ......................................................................................................................................
Proceeds from sale of property and equipment ..........................................................................................................
Acquisition of property and equipment .......................................................................................................................
Income tax paid ..........................................................................................................................................................
Net cash from (to) operating activities ...................................................................................................................
Acquisition of associates ............................................................................................................................................
Acquisition of intangible assets ..................................................................................................................................
Bank accounts ...........................................................................................................................................................
Net cash to investing activities ...............................................................................................................................
Issued subordinated liabilities ....................................................................................................................................
Purchase of treasury stock .........................................................................................................................................
Dividend paid to shareholders of Arion Bank ..............................................................................................................
Net cash (to) from in financing activities ................................................................................................................
Net increase (decrease) in cash and cash equivalents ...............................................................................................
Cash and cash equivalents at beginning of the year ..................................................................................................
Effect of exchange rate changes on cash and cash equivalents ................................................................................
Cash and cash equivalents ......................................................................................................................................
Cash and balances with Central Bank ........................................................................................................................
Proceeds from issued warrants ..................................................................................................................................
Proceeds from sale of associates ..............................................................................................................................
Other changes in operating assets and liabilities .....................................................................................................
Consolidated Statement of Cash flows
Net earnings ..............................................................................................................................................................
Non-cash items included in net earnings ....................................................................................................................
Changes in operating assets and liabilities
Loans to credit institutions, excluding bank accounts ..............................................................................................
Loans to customers .................................................................................................................................................
Financial instruments and financial liabilities at fair value ........................................................................................
Deposits ..................................................................................................................................................................
Borrowings ..............................................................................................................................................................
Interest received ........................................................................................................................................................
Interest paid ...............................................................................................................................................................
Dividend received ......................................................................................................................................................
19
Arion Bank Consolidated Financial Statements 2021
page page
General information Fair value hierarchy ..........................................................
37
Basis of preparation .......................................................... 21 Offsetting financial assets and financial liabilities .............. 42
Going concern assumption ............................................... 21 Investment in associates ................................................... 42
Significant accounting estimates and judgments Intangible assets ............................................................... 43
in applying accounting policies ....................................... 21 Tax assets and tax liabilities ............................................. 44
The Group ......................................................................... 22 Assets and disposal groups held for sale
and associated liabilities ................................................ 45
Operating segment reporting Other assets ..................................................................... 46
Operating segments .......................................................... 23 Other liabilities .................................................................. 47
Borrowings ........................................................................ 48
Quarterly statements Subordinated liabilities ...................................................... 48
Operations by quarters ...................................................... 24 Pledged assets ................................................................. 49
Equity ................................................................................ 49
Notes to the Consolidated Interim Income Statement
Net interest income ........................................................... 27 Other information
Net fee and commission income ....................................... 28 Shareholders of Arion Bank .............................................. 50
Net insurance income ....................................................... 28 Legal matters .................................................................... 51
Net financial income .......................................................... 29 Events after the reporting period ....................................... 52
Other operating income ..................................................... 29
Personnel and salaries ...................................................... 29 Off Balance sheet information
Other operating expense ................................................... 31 Commitments .................................................................... 52
Bank levy .......................................................................... 32 Assets under management and under custody .................
52
Net impairment ................................................................. 32
Income tax expense .......................................................... 32 Related party
Discontinued operations held for sale, net of income tax ... 33 Related party .................................................................... 52
Earnings per share ............................................................ 33
Risk management disclosures
Notes to the Consolidated Interim Statement of Credit risk ......................................................................... 54
Financial Position Market risk ........................................................................
65
Cash and balances with Central Bank ............................... 34 Liquidity and Funding risk ................................................. 71
Loans to credit institutions ................................................ 34 Capital management ......................................................... 75
Loans to customers .......................................................... 34 Operational risk ................................................................. 77
Financial instruments ........................................................ 34 Sustainability risk .............................................................. 77
Financial assets and financial liabilities .............................
35
Significant accounting policies
78
Notes to the Consolidated Financial Statements
Contents
20
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
General information
1. Basis of preparation
Statement of compliance
Basis of measurement
Functional and presentation currency
2. Changes in accounting policies
3. Significant accounting estimates and judgments in applying accounting policies
Estimates and assumptions
The Consolidated Financial Statements are presented in Icelandic krona (ISK), which is the Parent Company's functional currency, rounded
to the nearest million, unless otherwise stated. At the end of the year the exchange rate of the ISK against USD was 129.75 and 147.60 for
EUR (31.12.2020: USD 127.64 and EUR 156.09).
The Bank has not early adopted any standards, interpretations or amendments that have been issued but are not effective.
The preparation of the Consolidated Financial Statements requires management to make judgments, estimates and assumptions that
affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of
contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the
carrying amount of assets or liabilities affected in future periods.
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below.
The Group based its assumptions and estimates on parameters available when the Consolidated Financial Statement were prepared.
Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances
arising that are beyond the control of the Group. Such changes are reflected in the assumptions when they occur.
Notes to the Consolidated Financial Statements
The same accounting policies, presentation and methods of computation are followed in these Consolidated Financial Statements as were
applied in the Consolidated Financial Statements for the year ended 31 December 2020.
- bonds and debt instruments, shares and equity instruments, short positions in listed bonds and equities and derivatives. For details on the
accounting policy, see Note 56;
Arion Bank hf., the Parent Company, was established on 18 October 2008 and is incorporated and domiciled in Iceland. The registered
office of Arion Bank hf. is located at Borgartún 19, Reykjavík. The Consolidated Financial Statements for the year ended 31 December
2021 comprise the Parent Company and its subsidiaries (together referred to as "the Group").
The Consolidated Financial Statements were approved and authorized for publication by the Board of Directors of Arion Bank on 9
February 2022.
In preparing the Consolidated Financial Statements, the Group has applied the concept of materiality to the presentation and level of
disclosure. Only essential and mandatory information is disclosed which is relevant to an understanding by the reader of the Consolidated
Financial Statements.
The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as
adopted by the European Union and additional requirements in the Icelandic Financial Statements Act, Financial Undertakings Act and
rules on Accounting for Credit Institutions.
The Consolidated Financial Statements have been prepared on a historical cost basis except for the following:
- investment properties are measured at fair value; and
- non-current assets and disposal groups held for sale are stated at the lower of their carrying amounts and fair value, less cost to sell.
21
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
3. Significant accounting estimates and judgements in applying accounting policies, continued
4. The Group
Currency 2021 2020
ISK 100.0% 100.0%
ISK 51.0% 51.0%
ISK 100.0% 100.0%
ISK 100.0% 100.0%
ISK 100.0% 100.0%
ISK 100.0% 100.0%
ISK 100.0% 100.0%
Legal entities acquired exclusively with a view to resale, and discontinued operations held for sale are measured at the lower of carrying
amount and fair value, less cost to sell. For the most part, fair value at the date of classification of these legal entities and discontinued
operations was calculated using valuation models based on discontinued future cash flows that incorporated significant non-market
observable inputs and assumptions. The use of reasonably possible alternative inputs and assumptions to these models, in particular
changes to the discount rate employed (representing the required rate of return on equity), could have an impact on the value of these
disposal groups. For further information on assets and disposal groups held for sale, see Note 29.
Real estates acquired exclusively with a view to resale are measured at the lower of carrying amount and fair value, less cost to sell. Fair
value at the date of classification is based on independent property values or management valuation. As the fair value measurement of
real estates is based on valuation techniques, there is some uncertainty about the actual fair value of assets.
Stefnir hf., Borgartún 19, Reykjavík, Iceland .....................................................
Asset management
Valitor hf., Dalshraun 3, Hafnarfjördur, Iceland .................................................
Payment solutions
VISA Ísland ehf., Borgartún 19, Reykjavík, Iceland ..........................................
Holding company
Vördur tryggingar hf., Borgartún 19, Reykjavík, Iceland ....................................
Insurance
The subsidiaries Eignabjarg ehf. (holding company of Stakksberg ehf. and Sólbjarg ehf.) and Valitor hf. are classified as held for sale in
accordance with IFRS 5, see Note 29 for further information.
SRL slhf. holds a 51% shareholding in its subsidiary Arnarland ehf. and recognizes minority interest accordingly.
Notes to the Consolidated Financial Statements
Equity interest
Operating activity
Shares in the main subsidiaries in which Arion Bank holds a direct interest
Impairment of financial assets
Assets and disposal groups held for sale
Impairment of intangible assets
Revaluation of investment properties
The book value of financial assets which fall under the impairment requirements of IFRS 9 are presented net of expected credit losses in
the statement of financial position. On a monthly basis expected credit losses are recalculated for each asset, the calculations being
derived from PD, LGD and EAD models. In addition to the model outcomes, the assessment of expected credit losses is based on three
key factors: management's assumptions regarding the development of macroeconomic factors over the next three years, how those factors
affect each model and how to estimate a significant increase in credit risk. The assumptions for macroeconomic development are
incorporated into each model for three scenarios: a base case, an optimistic case and a pessimistic case. Management estimates the
probability weight for each scenario used for calculations of the probability weighted expected credit losses. The amount of expected credit
losses to be recognized is dependent on the Bank's definition of significant increase in credit risk, which controls the impairment stage
each asset is allocated to. Management has estimated factors to measure significant increase in credit risk from origination, by comparison
of changes in PD values, annualized lifetime PD values, days past due and watch list. For further information see Note 56.
Macroeconomic outlook
The carrying amounts of goodwill, infrastructure and customer relationship and related agreements are reviewed annually to determine
whether there is any indication of impairment. If any such indication exists the asset's recoverable amount is estimated. An impairment loss
is recognized if the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in the Consolidated
Income Statement. The recoverable amount of an asset is the greater of its value in use and its fair value less cost to sell. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset.
The Group carries its investment properties at fair value, with changes in fair value being recognized in the statement of profit or loss. For
investment properties, either a valuation methodology based on present value calculations is used, as there is a lack of comparable market
data because of the nature of the properties, or the investment properties are valued by reference to transactions involving properties of a
similar nature, location and condition.
The Covid-19 public health crisis has reached a new phase with the emergence of the omicron variant. Case numbers in Iceland have
reached unprecedented levels and restrictions have been toughened to promote social distancing. However, there are several encouraging
signs that the era of stringent public health measures which impact public life and the economy may soon be behind us. The uptake of the
vaccination booster program in Iceland has been exceptionally good. While this may have a limited impact on case numbers, it significantly
reduces the number of severe cases requiring hospital treatment. The Icelandic healthcare system has also mounted an effective response
for treating patients with Covid-19 and new anti-viral medications are being introduced to the market. As regards the economy, the
government has launched economic measures to counteract the effects of the public health measures.
The year 2021 was a year of recovery. For the reasons outlined above and despite the setback caused by the omicron variant, it can be
expected that the recovery will continue strongly in 2022. The unemployment rate is the key macro factor that drives the forward-looking
expectation of defaults. All scenarios forecast that the current unemployment rate will decrease but the speed of the recovery varies
between them.
Eignabjarg ehf., Borgartún 19, Reykjavík, Iceland ............................................
Holding company
SRL slhf., Borgartún 19, Reykjavík, Iceland .....................................................
Real estate
Leiguskjól ehf., Bjargargata 1, Reykjavík, Iceland ............................................
Rental guarantee
22
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
Operating segment reporting
5. Operating segments
Markets & Stefnir
Corporate & Investment Banking
Retail Banking
Treasury
Vördur
Other subsidiaries
Supporting units
Segment information is presented in respect of the Group's operating segments and is based on the Group's management and internal
reporting structure. The business units are segmented according to customers, products and services characteristics. Segment
performance is evaluated based on earnings before tax.
Inter segment pricing is determined on an arm's length basis. Operating segments pay and receive interest to and from Treasury on an
arm's length basis to reflect the allocation of capital, funding cost and relevant risk premium.
Corporate Banking's experienced account managers specialize in key economic sectors such as retail and services, seafood, energy and
real estate. The division serves companies ranging from SMEs to large cap companies and provides a full range of lending products,
including guarantees, deposit accounts, payment solutions and a variety of value-added digital solutions. The Corporate Banking portfolio
includes several larger international transactions, partly in syndicates with other Icelandic banks or international banks.
Arion Bank‘s Corporate Finance works closely with Corporate Banking and provides the Bank’s clients with financial advisory services, with
a key focus on M&A advisory, private placements of equity and IPOs and other offerings of securities.
Retail Banking provides a diverse range of financial services in 15 branches and service points across Iceland and offers digital solutions
both in the Arion app and online banking. These services include deposits and loans, savings, payment cards, pensions, insurance,
securities and funds. In order to improve efficiency the branch network is split into four regions, and smaller branches can therefore benefit
from the strength of larger units within each region. Retail Banking has more than 100,000 customers.
The subsidiary Vördur is the fourth largest insurance company in Iceland, providing non-life and life insurance.
Subsidiaries include the subsidiaries SRL slhf., which holds the main part of investment property of the Group and the holding companies
VISA Ísland ehf. and other smaller entities of the Group. The subsidiaries Valitor, Stakksberg and Sólbjarg (both subsidiaries of Eignabjarg)
are classified as disposal groups held for sale in accordance with IFRS 5.
Markets & Stefnir comprise Asset Management and Capital Markets. Asset Management manages financial assets on behalf of its
customers according to a pre-determined investment strategy. Asset Management also administers pension funds. Asset management
comprises Institutional Asset Management, Private Banking and Pension Fund Administration. The operation of Stefnir hf. is presented
under the segment. Stefnir hf. is an independently operating financial company owned by Arion Bank and manages a broad range of
mutual funds, investment funds and institutional investor funds. Arion Bank also offers comprehensive selection off funds from some of the
leading international fund management companies. Capital Markets is a securities brokerage and brokers listed securities transactions for
the Bank’s international and domestic clients on all the world’s major securities exchanges.
Corporate & Investment Banking provides companies and investors with comprehensive financial services that meet the needs of each
client, both in Iceland and internationally. The division is divided into Corporate Banking and Corporate Finance.
Treasury is responsible for the Bank's liquidity, currency and interest rate management. Treasury is a market maker in Iceland in domestic
securities and FX. Treasury is responsible for funds' transfer pricing and hedging and pricing of financial products. FX brokerage is part of
the Treasury unit. Treasury also handles all debt issuance both in the domestic and foreign markets and maintaining the Banks credit
ratings.
Supporting units include the Bank's headquarters which carry out support functions such as the CEO office, Risk Management, Finance
(excluding Treasury), IT and Customer Experience. The information presented relating to the supporting units does not represent an
operating segment. A significant proportion of expenses from support functions is allocated to operating segments in a separate line in the
operating segment overview.
23
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
5. Operating segments, continued
Supporting
2021 Corporate & Other units
Markets Investment Retail sub- and elimi-
Income Statement and Stefnir Banking Banking Treasury Vördur sidiaries nations Total
Net interest income ............................. 965 12,854 15,658 2,653 84 (120) (31) 32,063
Net fee and commission income .......... 5,642 5,027 4,061 614 (179) (791) 299 14,673
Net insurance income .......................... - - - - 3,504 - (62) 3,442
Net financial income ............................ 326 1,246 - 2,948 2,125 (436) 11 6,220
Share of (loss) profit of associates ......
- (8) - - - - 30 22
Other operating income ....................... 4 14 507 43 33 397 807 1,805
Operating income .............................. 6,937 19,133 20,226 6,258 5,567 (950) 1,054 58,225
Operating expenses ............................ (1,966) (1,792) (5,147) (605) (2,591) (222) (13,552) (25,875)
Allocated expenses ............................. (1,982) (2,743) (6,873) (1,036) (15) (5) 12,654 -
Bank levy ............................................ (68) (436) (709) (303) - - - (1,516)
Net impairment .................................... - 2,267 1,874 2 - (443) (531) 3,169
Earnings (loss) before income tax .... 2,921 16,429 9,371 4,316 2,961 (1,620) (375) 34,003
Net seg. rev. from ext. customers ........ 4,570 23,190 33,227 (9,029) 5,435 118
714 58,225
Net seg. rev. from other segments ...... 2,367 (4,057) (13,001) 15,287 132 (1,068) 340 -
Operating income .............................. 6,937 19,133 20,226 6,258 5,567 (950) 1,054 58,225
Balance Sheet
Loans to customers ............................. 15 364,925 572,117 - - 4 (824) 936,237
Financial instruments ........................... 47,474 171 - 151,445 26,099 2,796 (2,328) 225,657
Other external assets .......................... 5,500 7,056 2,732 74,141 8,180 35,992 18,369 151,970
Internal assets ..................................... 27,845 - - 273,762 - - (301,607) -
Total assets ........................................ 80,834 372,152 574,849 499,348 34,279 38,792 (286,390) 1,313,864
Deposits .............................................. 68,124 235,378 303,719 61,112 - - (12,857) 655,476
Other external liabilities ....................... 4,997 5,733 1,366 390,526 21,205 11,889 28,074 463,790
Internal liabilities .................................. - 69,756 222,567 - 993 8,291 (301,607) -
Total liabilities ................................... 73,121 310,867 527,652 451,638 22,198 20,180 (286,390) 1,119,266
Allocated equity ................................. 7,713 61,285 47,197 47,710 12,081 18,612 - 194,598
Income taxes and discontinued operations held for sale are excluded from the profit and loss segment information.
Notes to the Consolidated Financial Statements
24
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
5. Operating segments, continued
Supporting
2020 Corporate & Other units
Markets Investment Retail sub- and elimi-
Income Statement and Stefnir Banking Banking Treasury Vördur sidiaries nations Total
Net interest income ............................. 976 10,518 15,414 4,631 172 (389) (164) 31,158
Net fee and commission income .......... 3,962 3,110 4,575 550 (171) (647) 263 11,642
Net insurance income .......................... - - - - 3,145 - (74) 3,071
Net financial income ............................ 142 (144) - 964 1,735 38 10 2,745
Share of profit (loss) of associates 1 (48) - - - (1) 48 -
Other operating income ....................... 13 102 237 - (12) 1,599 209 2,148
Operating income .............................. 5,094 13,538 20,226 6,145 4,869 600 292 50,764
Operating expenses ............................ (1,828) (1,301) (5,423) (608) (2,449) (179) (12,653) (24,441)
Allocated expenses ............................. (1,780) (2,634) (5,880) (1,127) (21) (6) 11,448 -
Bank levy ............................................ (35) (387) (579) (300) - - - (1,301)
Net impairment .................................... - (6,043) (1,114) (4) - 4,546 (2,429) (5,044)
Earnings (loss) before income tax .... 1,451 3,173 7,230 4,106 2,399 4,961 (3,342) 19,978
Net seg. rev. from ext. customers ........ 3,261 19,642 32,209 (10,850) 2,135 4,218
149 50,764
Net seg. rev. from other segments ...... 1,833 (6,104) (11,983) 16,995 2,734 (3,618) 143 -
Operating income .............................. 5,094 13,538 20,226 6,145 4,869 600 292 50,764
Balance Sheet
Loans to customers ............................. 41 308,657 515,115 66 - 4 (942) 822,941
Financial instruments ........................... 43,809 434 - 159,825 22,450 2,869 (2,136) 227,251
Other external assets .......................... 3,298 6,640 3,197 69,380 5,889 38,290 (4,180) 122,514
Internal assets ..................................... 32,045 - - 238,218 1,894 1,322 (273,479) -
Total assets ........................................ 79,193 315,731 518,312 467,489 30,233 42,485 (280,737) 1,172,706
Deposits .............................................. 64,657 103,648 346,224 64,565 - - (10,670) 568,424
Other external liabilities ....................... 6,698 2,790 4,778 349,329 19,694 19,736 3,412 406,437
Internal liabilities .................................. - 149,973 123,506 - - - (273,479) -
Total liabilities ................................... 71,355 256,411 474,508 413,894 19,694 19,736 (280,737) 974,861
Allocated equity ................................. 7,838 59,320 43,804 53,595 10,539 22,749 - 197,845
5,534 56,608 826 67,914 34,490 34,812 4,061
Income taxes and discontinued operations held for sale are excluded from the profit and loss segment information.
25
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
Quarterly statements
6. Operations by quarters, unaudited
2021 Q1 Q2 Q3 Q4 Total
7,342 8,016 7,937 8,768 32,063
3,277 3,562 3,755 4,079 14,673
671 914 992 865 3,442
1,500 2,203 1,366 1,151 6,220
1 25 7 (11) 22
306 284 833 382 1,805
13,097 15,004 14,890 15,234 58,225
(3,271) (3,575) (2,899) (4,893) (14,638)
(2,777) (2,797) (2,689) (2,974) (11,237)
(6,048) (6,372) (5,588) (7,867) (25,875)
(330) (355) (486) (345) (1,516)
1,080 812 718 559 3,169
7,799 9,089 9,534 7,581 34,003
(1,866) (1,408) (1,920) (1,588) (6,782)
5,933 7,681 7,614 5,993 27,221
106 135 624 529 1,394
6,039 7,816 8,238 6,522 28,615
2020
7,253 7,857 7,989 8,059 31,158
3,076 2,688 2,762 3,116 11,642
501 761 1,043 766 3,071
(2,000) 2,691 692 1,362 2,745
(24) (5) 51 (22) -
170 71 475 1,432 2,148
8,976 14,063 13,012 14,713 50,764
(3,130) (3,577) (2,504) (3,121) (12,332)
(3,077) (2,818) (2,728) (3,486) (12,109)
(6,207) (6,395) (5,232) (6,607) (24,441)
(331) (324) (383) (263) (1,301)
(2,860) (918) (1,340) 74 (5,044)
(422) 6,426 6,057 7,917 19,978
(860) (1,468) (1,096) 193 (3,231)
(1,282) 4,958 4,961 8,110 16,747
(889) (45) (995) (2,349) (4,278)
(2,171) 4,913 3,966 5,761 12,469
Operating income ........................................................................................
Operating expenses ....................................................................................
Earnings before income tax .......................................................................
Net earnings from continuing operations ..................................................
Bank levy ......................................................................................................
Net impairment .............................................................................................
Income tax expense .....................................................................................
Discontinued operations, net of tax ...............................................................
Net interest income .......................................................................................
Net fee and commission income ...................................................................
Net insurance income ...................................................................................
Net financial income ......................................................................................
Other operating income .................................................................................
Share of profit (loss) of associates ................................................................
Other operating expense ...............................................................................
Bank levy ......................................................................................................
Net impairment .............................................................................................
Income tax expense .....................................................................................
Earnings before income tax .......................................................................
Net earnings from continuing operations ..................................................
Net earnings ................................................................................................
Net earnings (loss) ......................................................................................
The half-year results were reviewed by the Bank's auditors. Other quarterly statements and the split between quarters were not audited or
reviewed by the Bank's auditors.
Other operating income .................................................................................
Salaries and related expense ........................................................................
Other operating expense ...............................................................................
Salaries and related expense ........................................................................
Discontinued operations, net of tax ...............................................................
Net insurance income ...................................................................................
Net financial income ......................................................................................
Share of profit (loss) of associates ................................................................
Operating income ........................................................................................
Operating expenses ....................................................................................
Net interest income .......................................................................................
Net fee and commission income ...................................................................
26
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
Notes to the Consolidated Income Statement
7. Net interest income
2021 Amortized Fair value Fair value
Interest income
cost thr. P/L thr. OCI Total
573 - - 573
73 49 - 122
49,044 - - 49,044
- 1,387 2,642 4,029
190 - - 190
49,880 1,436 2,642 53,958
Interest expense
(6,820) - - (6,820)
(13,065) - - (13,065)
(1,891) - - (1,891)
(119) - - (119)
(21,895) - - (21,895)
27,985 1,436 2,642 32,063
2020
Interest income
1,435 - - 1,435
188 - - 188
46,804 - - 46,804
- 1,249 1,889 3,138
165 - - 165
48,592 1,249 1,889 51,730
Interest expense
(6,644) - - (6,644)
(12,030) - - (12,030)
(1,780) - - (1,780)
(118) - - (118)
(20,572) - - (20,572)
28,020 1,249 1,889 31,158
Interest spread
2021 2020
2.8% 2.9%
Other ................................................................................................................................
Deposits ...........................................................................................................................
Net interest income calculated using the effective interest rate method were ISK 49,739 million during the year (2020: ISK 48,427 million).
Net interest income ........................................................................................................
Other ................................................................................................................................
Interest spread (the ratio of net interest income to the average carrying amount of interest bearing assets) ..........
Securities .........................................................................................................................
Deposits ...........................................................................................................................
Subordinated liabilities .....................................................................................................
Loans to customers ..........................................................................................................
Subordinated liabilities .....................................................................................................
Borrowings .......................................................................................................................
Other ................................................................................................................................
Loans to customers ..........................................................................................................
Cash and balances with Central Bank ..............................................................................
Other ................................................................................................................................
Securities .........................................................................................................................
Interest expense .............................................................................................................
Net interest income ........................................................................................................
Cash and balances with Central Bank ..............................................................................
Loans to credit institutions ................................................................................................
Interest income ...............................................................................................................
Borrowings .......................................................................................................................
Interest expense .............................................................................................................
Loans to credit institutions ................................................................................................
Interest income ...............................................................................................................
27
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
8. Net fee and commission income
Net
Net
Income Expense income Income Expense income
5,430 (552) 4,878 4,095 (426) 3,669
2,565 (40) 2,525 1,437 (27) 1,410
4,686 - 4,686 4,084 - 4,084
1,461 (113) 1,348 1,308 (109) 1,199
1,777 (520) 1,257 1,666 (304) 1,362
787 (808) (21) 635 (717) (82)
16,706 (2,033) 14,673 13,225 (1,583) 11,642
9. Net insurance income
2021 2020
Earned premiums, net of reinsurers' share
14,032 12,456
(486) (478)
(644) (497)
12,902 11,481
Claims incurred, net of reinsurers' share
(8,186) (7,595)
157 208
(1,374) (951)
(57) (72)
(9,460) (8,410)
3,442 3,071
Combined ratio
93.2% 94.4%
Capital markets and corporate finance .......................................
Change in provision for unearned premiums ..........................................................................................................
Earned premiums, net of reinsurers' share .......................................................................................................
Premiums written, reinsurers' shares ......................................................................................................................
Premiums written ....................................................................................................................................................
Claims paid ............................................................................................................................................................
Claims paid, reinsurers' share ................................................................................................................................
Change in provision for claims ................................................................................................................................
Fee and commission income from capital markets and corporate finance includes miscellaneous corporate finance services plus
commission from capital markets relating to sales of shares, bonds, FX and derivatives.
Combined ratio .......................................................................................................................................................
Claims incurred, net of reinsurers' share ..........................................................................................................
Net insurance income ..........................................................................................................................................
Fee and commission income on collection and payment services is generated billing services, such as issuing invoices and payment
collection notices, wire transfer services and other payment services.
2020
2021
Fee and commission income from lending and financial guarantees is mainly related to lending activities, extension fees, advisory services
and documentation, notification and payment fees plus fees from the issuing of guarantees on behalf of customers.
Other fee and commission income is mainly fees relating to sale, custody and market making on the Icelandic stock exchange.
Commission from cards and payment solutions is mainly from the Bank's issuance of credit and debit cards and other card related
commission, e.g. yearly fee on cards and transaction fees.
Changes in provision for claims, reinsurers' share ..................................................................................................
Asset management fees are earned by the Group for trust and fiduciary activities where the Group holds or invests assets on behalf of the
customers.
Asset management ....................................................................
Cards and payment solution ......................................................
Collection and payment services ...............................................
Lending and financial guarantees ..............................................
Other .........................................................................................
Net fee and commission income .............................................
28
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
10. Net financial income
2021 2020
6,589 4,033
- (700)
(216) (178)
(453) 151
300 (561)
6,220 2,745
Net gain on financial assets and financial liabilities mandatorily measured at fair value through profit or loss
5,126 2,613
1,246 885
217 535
Net gain on financial assets and financial liabilities
6,589 4,033
Net loss on fair value hedge of interest rate swap
(2,262) 221
2,046 (399)
(216) (178)
11. Other operating income
545 580
28 327
542 722
227 312
463 207
1,805 2,148
Net gain on assets held for sale
259 413
(32) (101)
227 312
12. Personnel and salaries
2021 2020
Number of employees
758 789
751 776
Number of employees at the parent company
627 661
619 648
Salaries and related expenses
10,216 10,064
1,215 54
99 -
1,692 1,498
1,577 1,310
(161) (594)
14,638 12,332
Average number of full-time equivalent positions during the year ...........................................................................
Other income ..........................................................................................................................................................
Income from real estates and other assets .............................................................................................................
Full-time equivalent positions at the end of the year ...............................................................................................
Average number of full-time equivalent positions during the year ...........................................................................
Fair value change on bonds issued by the Group attributable to interest rate risk ..................................................
Net loss on fair value hedge of interest rate swap .............................................................................................
Fair value changes on investment property ............................................................................................................
Fair value change of interest rate swaps designated as hedging instruments .........................................................
Share-based payment expenses ............................................................................................................................
Defined contribution pension plans ........................................................................................................................
Real estates and other assets classified as assets held for sale are generally the result of foreclosures on companies and individuals.
Salary-related expenses .........................................................................................................................................
Capitalization of salaries due to implementation of core systems ...........................................................................
Salaries and related expenses .............................................................................................................................
Full-time equivalent positions at the end of the year ...............................................................................................
Salaries ..................................................................................................................................................................
Expense related to real estates and other assets ...................................................................................................
Other operating income .......................................................................................................................................
Net gain on assets held for sale ..........................................................................................................................
Realised gain on investment property .....................................................................................................................
Incentive scheme ...................................................................................................................................................
Net gain on disposal of assets ................................................................................................................................
Net gain on assets held for sale .............................................................................................................................
Net financial income .............................................................................................................................................
Equity instruments ..................................................................................................................................................
Debt instruments ....................................................................................................................................................
Derivatives .............................................................................................................................................................
mandatorily measured at fair value through profit or loss ..............................................................................
Loss on prepayments of borrowings .......................................................................................................................
Net gain on financial assets and financial liabilities mandatorily measured at fair value through profit or loss .........
Net loss on fair value hedge of interest rate swap ..................................................................................................
Realized (loss) gain on financial assets carried at fair value through OCI ...............................................................
Net foreign exchange gain (loss) ............................................................................................................................
29
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
12. Personnel and salaries, continued
2021 2020
Salaries and related expenses for the parent company
8,528 8,327
1,000 -
99 -
1,410 1,233
1,343 1,066
(161) (594)
12,219 10,032
Remuneration to the Board of Directors
Fixed Additional Fixed Additional
remuner- remuner- Pension remuner- remuner- Pension
ation* ation** contribution Total ation* ation** contribution Total
Brynjólfur Bjarnason, Chairman ................. 11.8 6.8 1.7 20.3 11.7 6.1 2.1 19.9
Paul Richard Horner, Vice Chairman ......... 10.9 7.0 - 17.9 11.7 4.5 - 16.2
Gunnar Sturluson, Director ......................... 5.9 7.0 1.0 13.9 5.9 4.3 1.3 11.5
Liv Fiksdahl, Director .................................. 8.1 7.7 - 15.8 11.7 2.6 - 14.3
Steinunn Kristín Thórdardóttir, Director ...... 8.1 7.0 1.3 16.3 11.7 4.9 1.4 18.0
Renier Lemmens, Director until 16.3.2021 . 2.5 1.5 0.3 4.3 11.7 5.0 0.3 17.0
Herdís Fjeldsted, Director until 26.3.2020 .. - - - - 2.2 1.3 1.3 4.8
Alternate directors of the Board .................. 0.7 1.4 0.1 2.3 2.7 3.3 0.8 6.8
Total remuneration ............................ 48.0 38.5 4.4 90.9 69.3 32.1 7.2 108.6
Remuneration to key management personnel
Performance- Performance-
based Pension based Pension
Salaries payments contribution Total Salaries payments contribution Total
Benedikt Gíslason, CEO ............................ 61.0 - 8.8 69.8 57.1 - 8.4 65.5
Eight members of the -
Executive Committee (7 until 6.9.2021) 279.8 3.5 36.8 320.1 222.4 4.8 39.2 266.4
Former members of the Executive Comm. 32.0 2.0 4.6 38.7 20.6 - 5.3 25.9
Total remuneration ............................ 372.8 5.5 50.2 428.5 300.1 4.8 52.8 357.8
** Additional remuneration represents Board Member compensation for their participation in Board Committees.
* Fixed remuneration represents Board Member compensation for their attendance at meetings of the Board of Directors.
The 2021 Annual General Meeting of the Bank held on 16 March 2021 approved the monthly salaries for 2021 for the Chairman, Vice
Chairman and for other Board Members of amounts ISK 981,400, ISK 736,200 and ISK 490,900 (2020: ISK 981,400; 736,200; 490,900)
respectively. It was also approved that the salary of Alternate Board Members would be ISK 248,600 (2020: ISK 248,600) per meeting, up
to a maximum of ISK 490,900 (2020: ISK 490,900) per month. Board members residing outside of Iceland receive ISK 300,000 for each
Board meeting they attend in person. In addition, it was approved to pay Board Members who serve on board committees of the Bank a
maximum of ISK 196,300 (2020: ISK 196,300) per month for each committee they serve on and the Chairman of the board committees
ISK 255,000 (2020: ISK 255,000).
Performance based payments in 2021 are deferred payments based on the Group's performance in 2017 (2020: performance in 2016).
2021
2020
Salaries and related expenses for the parent company .....................................................................................
Salary-related expenses .........................................................................................................................................
Capitalization of salaries due to implementation of core systems ...........................................................................
Share-based payment expenses ............................................................................................................................
Defined contribution pension plans ........................................................................................................................
2021
2020
Salaries ..................................................................................................................................................................
Incentive scheme ...................................................................................................................................................
Board Members receive remuneration for their involvement in board committees. In addition to 14 Board meetings (2020: 12) during the
year 11 Board Credit Committee meetings (2020: 13), 5 Board Audit Committee meetings (2020: 7), 8 Board Risk Committee meetings
(2020: 12), 4 Board Remuneration Committee meetings (2020: 5) and 6 Board Tech committee meetings (2020: 1) were held.
30
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
12. Personnel and salaries, continued
Incentive schemes
Share-based payment expense
13. Other operating expenses 2021
2020
4,686 5,241
937 970
718 1,142
2,414 2,595
558 569
565 617
128 133
1,231 842
11,237 12,109
Auditor's fee
151 135
9 15
15 -
175 150
Other administration expenses ...............................................................................................................................
Depositors' and Investors' Guarantee Fund ............................................................................................................
Other services from auditors ..................................................................................................................................
Depreciation of property and equipment .................................................................................................................
Depreciation of right of use asset ...........................................................................................................................
In 2020 the Board of Directors approved a share option plan for all employees of the Bank. The share option plan is for five years and
employees are entitled to buy shares for up to ISK 600,000 each year. The purchase price of ISK 95.5 per share was determined by the
Bank’s average share price 10 days before the share option agreement was signed, which was 3 February 2021. The employee must
remain continuously employed with Arion Bank until the expiring date. The options carry neither rights to dividends nor voting rights and
are valued using the Black-Scholes pricing model. A total of 628 employees entered into option agreements on up to 3,945,550 shares per
year based on 100% exercise of share options. A total expense of ISK 99 million is recognised in the Consolidated Income Statement
during the year (2020: nil). Estimated remaining expenses due the share option contracts are ISK 161 million and will be expensed over
the next four years.
In 2021 the Group made a provision of ISK 1,580 million (2020: ISK 70 million) for the incentive scheme, including salary-related
expenses, for which the Bank made provision of ISK 1,300 million (2020: nil). Forty percent of the payment is deferred for three years if it
exceeds 10% of the employee's annual salary without any incentive schemes payments, in accordance with FME rules on remuneration
policy for financial undertakings. At the end of the year the Group's accrual for the incentive scheme payments amounted to ISK 1,638
million (31.12.2020: ISK 143 million), of which the Bank's accrual was ISK 1,300 million (31.12.2020: nil).
Revised incentive scheme for Arion Bank hf. and Vördur came into effect in 2021. The scheme is in compliance with the FSA’s rules on
remuneration policy for financial institutions. The scheme is split into two parts. Firstly, employees can receive up to 10% of their fixed
salary for 2021 in the form of a cash payment. Secondly, a limited group can receive up to 25% of their fixed salary as a payment in the
form of shares in the Bank which will be subject to a three-year lock-up period. The key metric used to determine whether incentive
scheme payments will be paid by the Bank for 2021, in part or in full, is whether the Bank’s return on equity in 2021 is higher than the
weighted ROE of the Bank’s main competitors. Other supporting metrics are for example ROE and cost-to-income ratio vs target,
compliance, staff NPS etc. Corresponding metrics are for incentive scheme payment at Vördur, i.e. higher ROE than the Icelandic
competitors and other internal measures. Stefnir hf. has a special incentive scheme where other criteria are used as a basis.
The Board of Directors approved an amendment to the Bank’s share option program in January 2022, based on authorization of the 2021
AGM. The amendment pertains to the increase of employee annual maximum purchase price from ISK 600 thousand to ISK 1.5 million
from 2023 to 2026 in line with changes to Article 10 of the Income Tax Act no. 90/2003. As the updated option agreements have not been
finalized the final total cost of the addition is not available.
Housing expenses ..................................................................................................................................................
Amortization of intangible assets ............................................................................................................................
Other operating expenses ....................................................................................................................................
Auditor's fee ..........................................................................................................................................................
Audit and review of the Consolidated Financial Statements for the relevant fiscal year ..........................................
Other audit related services for the relevant fiscal year ..........................................................................................
IT expenses ............................................................................................................................................................
Professional services .............................................................................................................................................
31
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
14. Bank levy
15. Net impairment
2021 2020
Net impairment on financial instruments and value changes on loans
2,538 (5,741)
- (6)
71 67
560 636
3,169 (5,044)
Net impairment by customer type
101 (85)
917 (262)
2,151 (4,697)
3,169 (5,044)
16. Income tax expense 2021 2020
6,607 3,632
175 (401)
6,782 3,231
Reconciliation of effective tax rate
34,003 19,978
20.0% 6,801 20.0% 3,996
4.1% 1,411 3.3% 669
0.1% 24 0.2% 43
(4.3%) (1,455) (7.4%) (1,484)
0.9% 303 1.3% 260
(1.0%) (350) (0.4%) (78)
0.1% 48 (0.9%) (175)
19.9% 6,782 16.2% 3,231
Tax incentives not recognized in the Income Statement ...................................................
Tax exempt revenues / loss consist mainly of profit / loss from equity positions.
2020
Additional 6% tax on Financial Undertakings ....................................................................
Other changes .................................................................................................................
Tax exempt revenues (loss) .............................................................................................
Non-deductible taxes (Bank levy) .....................................................................................
Non-deductible expenses .................................................................................................
Income tax using the Icelandic corporate tax rate ............................................................
Corporates .............................................................................................................................................................
Net impairment .....................................................................................................................................................
Net impairment .....................................................................................................................................................
Other value changes of loans to individuals and corporates is mainly due to release of discount from loans acquired with discount during
the years 2008 to 2013, both due to impairments and other discount rate than reflected in the interest rates of the loans. The discount
release was primarily related to loans that were paid up or sold during the year.
Earnings before income tax ..............................................................................................
The Bank levy is 0.145% on total debts excluding tax liabilities, in excess of ISK 50 billion (2020: 0.145%). The tax is assessed on
Financial Undertakings but non-financial subsidiaries are exempt from this tax.
Other value changes of loans - corporates .............................................................................................................
Other value changes of loans - individuals .............................................................................................................
Financial institutions ...............................................................................................................................................
Individuals ..............................................................................................................................................................
Current tax expense ...............................................................................................................................................
Deferred tax expense (income) ...............................................................................................................................
Income tax expense ..............................................................................................................................................
2021
Effective tax rate ............................................................................................................
Net impairment on loans to customers and financial institutions .............................................................................
Net impairment on other financial instruments at FVOCI ........................................................................................
Financial undertakings pay 6% additional tax on taxable profit exceeding ISK 1 billion.
32
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
17.
Discontinued operations held for sale, net of income tax
2021 2020
1,415 (4,275)
(21) (3)
1,394 (4,278)
903 (1,298)
(211) (1,425)
702 (1,555)
1,394 (4,278)
18. Earnings per share
2021
2020
2021
2020
2021
2020
27,211 16,754 1,394 (4,278) 28,605 12,476
1,593 1,723 1,593 1,723 1,593 1,723
1,690 1,723 1,690 1,723 1,690 1,723
17.08 9.72 0.88 (2.48) 17.96 7.24
16.10 9.72 0.82 (2.48) 16.93 7.24
Continued
The net profit from Valitor's operation was ISK 320 million during the year whereas Valitor's positive contribution to the Group, after taking
into account the Group's eliminations, was ISK 903 million. Operating income of Valitor was ISK 5,285 million, or ISK 6,023 million after
taking into account the Group's eliminations.
For further information about Valitor hf., Stakksberg ehf. and Sólbjarg ehf., see Note 29.
Discontinued
Discontinued operations held for sale, net of income tax .................................................................................
Income tax expense ...............................................................................................................................................
Discontinued operations held for sale, net of income tax .................................................................................
Valitor hf. ................................................................................................................................................................
Stakksberg ehf. ......................................................................................................................................................
Sólbjarg ehf. ...........................................................................................................................................................
Net gain (loss) from discontinued operations held for sale ......................................................................................
Operating effects of Sólbjarg are mainly due to a binding offer of sale of assets held by the company.
Basic earnings per share (ISK) ...............................................
Diluted earnings per share ISK) ..............................................
Basic earnings per share is based on net earnings attritutable to the shareholders of Arion Bank and the weighted average number of
shares outstanding during the period. Diluted earnings per share is calculated by adjusting the weighted average number of outstanding
shares to assume conversion of all dilutive potential ordinary shares. Arion Bank has issued warrants and stock options that have dilutive
effects.
Weighted average number of outstanding shares (millions) .......
Net earnings attributable to the shareholders of Arion Bank .......
including warrants and options (millions) ................................
Net Earnings
operations
Weighted average number of outstanding shares
operations
33
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
Notes to the Consolidated Statement of Financial Position
19. Cash and balances with Central Bank 2021 2020
3,556 3,342
58,966 32,588
6,535 6,206
69,057 42,136
20. Loans to credit institutions 2021 2020
28,156 22,354
2,116 5,982
- (101)
30,272 28,235
21. Loans to customers
Gross Gross Gross
carrying Book carrying Book carrying Book
2021 amount value amount value amount value
14,255 13,691 18,301 17,785 32,556
31,476
13,192 13,037 1,449 1,409 14,641 14,446
463,895 463,457 41,588 41,420 505,483 504,877
- - 17,798 17,775 17,798 17,775
4,471 4,451 3,882 3,843 8,353 8,294
32,573 31,862 332,433 327,507 365,006 359,369
528,386 526,498 415,451 409,739 943,837 936,237
2020
12,875 12,176 15,471 14,208 28,346
26,384
12,260 12,062 1,086 1,019 13,346 13,081
378,554 377,873 32,175 31,768 410,729 409,641
- - 39,160 39,514 39,160 39,514
3,713 3,700 4,192 4,112 7,905 7,812
28,409 27,525 307,103 298,984 335,512 326,509
435,811 433,336 399,187 389,605 834,998 822,941
22. Financial instruments 2021 2020
151,852 157,744
25,063 18,641
2,905 7,284
45,837 43,582
225,657 227,251
Allowance for impairment .......................................................................................................................................
Other loans .............................................................................................................................................................
Credit cards ...............................................................................
Loans to customers .................................................................
Individuals
Total
Cash with Central Bank ..........................................................................................................................................
Capital lease ..............................................................................
Cash and balances with Central Bank .................................................................................................................
Credit cards ...............................................................................
Mortgage loans ..........................................................................
Further analysis of loans is provided in Risk management disclosures.
Securities used for economic hedging ....................................................................................................................
Derivatives .............................................................................................................................................................
Mortgage loans ..........................................................................
Bonds and debt instruments ...................................................................................................................................
Overdrafts ..................................................................................
Other loans ................................................................................
The total book value of pledged loans that were pledged against amounts borrowed was ISK 267 billion at the end of the year (31.12.2020:
ISK 219 billion). Pledged loans comprised mortgage loans to individuals.
Construction loans .....................................................................
Capital lease ..............................................................................
Shares and equity instruments with variable income ..............................................................................................
Cash on hand .........................................................................................................................................................
Other loans ................................................................................
Bank accounts ........................................................................................................................................................
Loans to credit institutions ..................................................................................................................................
Overdrafts ..................................................................................
Corporates
Financial instruments ...........................................................................................................................................
The mandatory reserve deposit with the Central Bank is not available for the Group to use in its daily operations. Minimum reserve
requirements of the Central Bank falls into two categories: a fixed reserve requirement and an average maintenance requirement. The
fixed reserve requirement is 1%.
Loans to customers .................................................................
Construction loans .....................................................................
Mandatory reserve deposit with Central Bank .........................................................................................................
34
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
23. Financial assets and financial liabilities
Manda-
Fair value torily at
Financial assets
Amortized through fair value
Loans
cost OCI thr. P/L Total
69,057 - - 69,057
28,156 - 2,116 30,272
936,237 - - 936,237
1,033,450 - 2,116 1,035,566
Bonds and debt instruments
- 133,825 17,344 151,169
- - 683 683
- 133,825 18,027 151,852
Shares and equity instruments with variable income
- - 7,707 7,707
- - 13,079 13,079
- - 4,277 4,277
- - 25,063 25,063
Derivatives
- - 1,805 1,805
- - 1,100 1,100
- - 2,905 2,905
Securities used for economic hedging
- - 14,044 14,044
- - 31,793 31,793
- - 45,837 45,837
Other financial assets
5,104 - - 5,104
7,617 - - 7,617
12,721 - - 12,721
1,046,171 133,825 93,948 1,273,944
Financial liabilities
5,000 - - 5,000
655,476 - - 655,476
356,637 - - 356,637
35,088 - - 35,088
- - - -
- - 4,974 4,974
- - 903 903
8,685 - - 8,685
1,060,886 - 5,877 1,066,763
Loans to credit institutions ................................................................................................
Unlisted ............................................................................................................................
Listed ...............................................................................................................................
Loans to customers ..........................................................................................................
OTC derivatives ...............................................................................................................
Derivatives .......................................................................................................................
Borrowings .......................................................................................................................
Derivatives used for hedge accounting ............................................................................
Cash and balances with Central Bank ..............................................................................
2021
Financial liabilities .........................................................................................................
Other financial liabilities ...................................................................................................
Bond funds with variable income, unlisted ........................................................................
Short position in bonds .....................................................................................................
Due to credit institutions and Central Bank .......................................................................
Loans ..............................................................................................................................
Accounts receivable .........................................................................................................
Unlisted ............................................................................................................................
Derivatives used for hedge accounting ............................................................................
Bonds and debt instruments .........................................................................................
Derivatives ......................................................................................................................
Shares and equity instruments with variable income ..................................................
Subordinated liabilities .....................................................................................................
Securities used for economic hedging .........................................................................
Other financial assets ....................................................................................................
Bonds and debt instruments, listed ..................................................................................
Shares and equity instruments with variable income, listed ..............................................
Deposits ...........................................................................................................................
Financial assets .............................................................................................................
Other financial assets .......................................................................................................
Listed ...............................................................................................................................
35
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
23. Financial assets and financial liabilities, continued
Manda-
Fair value torily at
Financial assets
Amortized through fair value
Loans
cost OCI thr. P/L Total
42,136 - - 42,136
28,235 - - 28,235
822,941 - - 822,941
893,312 - - 893,312
Bonds and debt instruments
- 136,145 19,075 155,220
- 1,510 1,014 2,524
- 137,655 20,089 157,744
Shares and equity instruments with variable income
- - 8,816 8,816
- - 6,393 6,393
- - 3,432 3,432
- - 18,641 18,641
Derivatives
- - 5,002 5,002
- - 2,282 2,282
- - 7,284 7,284
Securities used for economic hedging
- - 27,215 27,215
- - 16,335 16,335
- - 32 32
- - 43,582 43,582
Other financial assets
3,740 - - 3,740
5,927 - - 5,927
9,667 - - 9,667
902,979 137,655 89,596 1,130,230
Financial liabilities
13,031 - - 13,031
568,424 - - 568,424
298,947 - - 298,947
36,060 - - 36,060
- - 40 40
- - 63 63
- - 666 666
- - 4,471 4,471
8,011 - - 8,011
924,473 - 5,240 929,713
Bonds and debt instruments .........................................................................................
Shares and equity instruments with variable income ..................................................
Financial liabilities .........................................................................................................
Loans to customers ..........................................................................................................
Cash and balances with Central Bank ..............................................................................
2020
Bonds and debt instruments, listed ..................................................................................
Loans ..............................................................................................................................
Securities used for economic hedging .........................................................................
Bond funds with variable income, unlisted ........................................................................
Unlisted ............................................................................................................................
Listed ...............................................................................................................................
Derivatives used for hedge accounting ............................................................................
Unlisted ............................................................................................................................
OTC derivatives ...............................................................................................................
Listed ...............................................................................................................................
Derivatives ......................................................................................................................
Loans to credit institutions ................................................................................................
Shares and equity instruments with variable income, listed ..............................................
Other financial assets ....................................................................................................
Deposits ...........................................................................................................................
Short position in equity, used for economic hedging .........................................................
Short position in equity .....................................................................................................
Short position in bonds .....................................................................................................
Borrowings .......................................................................................................................
Derivatives .......................................................................................................................
Other financial liabilities ...................................................................................................
Subordinated liabilities .....................................................................................................
Due to credit institutions and Central Bank .......................................................................
Shares and equity instruments with variable income, unlisted ..........................................
Financial assets .............................................................................................................
Accounts receivable .........................................................................................................
Other financial assets .......................................................................................................
36
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
23. Financial assets and financial liabilities, continued
Manda-
Fair value torily at
Bonds and debt instruments measured at fair value, specified by issuer
through fair value
OCI thr. P/L Total
21,001 7,561 28,562
112,824 8,325 121,149
- 2,141 2,141
133,825 18,027 151,852
13,840 7,298 21,138
122,743 11,097 133,840
1,072 1,694 2,766
137,655 20,089 157,744
24. Fair value hierarchy
Level 1 Level 2 Level 3 Total
- 2,116 - 2,116
150,723 1,032 97 151,852
5,519 15,736 3,808 25,063
- 1,805 - 1,805
- 1,100 - 1,100
45,829 8 - 45,837
- - 6,560 6,560
202,071 21,797 10,465 234,333
- 4,974 - 4,974
- 903 - 903
- 5,877 - 5,877
Bonds and debt instruments at fair value ........................................................................................
2021
Public sector .......................................................................................................................................
Financial and insurance activities ........................................................................................................
2021
Bonds and debt instruments .............................................................................................
Shares and equity instruments with variable income ........................................................
Securities used for economic hedging ..............................................................................
Derivatives .......................................................................................................................
Level 2: valuation techniques for which all significant inputs are market observable, either directly or indirectly; and
The Group uses the following hierarchy for determining and disclosing the fair value of assets and liabilities by valuation technique:
Bonds and debt instruments at fair value ........................................................................................
Corporates ..........................................................................................................................................
Assets at fair value
Financial and insurance activities ........................................................................................................
The total amount of pledged bonds was ISK 8.6 billion at the end of the period (31.12.2020: ISK 8.2 billion). Pledged bonds comprised
Icelandic Government Bonds and Financial Institutions Bonds that were pledged against funding received and included in Due to credit
institutions and Central Bank as well as short positions included in Financial liabilities at fair value.
Level 3: valuation techniques which include significant inputs that are not based on observable market data.
For assets and liabilities that are recognized at fair value on a recurring basis, the Group determines whether transfers have occurred
between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value
measurement as a whole) at the end of each reporting period.
Public sector .......................................................................................................................................
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Assets and liabilities recorded at fair value by level of the fair value hierarchy
Derivatives used for hedge accounting ............................................................................
Liabilities at fair value ....................................................................................................
2020
Corporates ..........................................................................................................................................
Derivatives used for hedge accounting ............................................................................
Loans to credit institutions ................................................................................................
Derivatives .......................................................................................................................
Investment property .........................................................................................................
Assets at fair value ........................................................................................................
Liabilities at fair value
37
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
24. Fair value hierarchy, continued
Level 1 Level 2 Level 3 Total
155,061 2,325 358 157,744
6,097 10,859 1,685 18,641
- 5,002 - 5,002
- 2,282 - 2,282
43,551 31 - 43,582
- - 6,132 6,132
204,709 20,499 8,175 233,383
40 - - 40
666 - - 666
63 - - 63
- 4,471 - 4,471
769 4,471 - 5,240
Methods for establishing fair value
For assets and liabilities, for which the market is not active, the Group applies valuation techniques to attain a fair value using as much
market information as available. Valuation techniques include using recent market transactions between knowledgeable and willing
parties, if available, reference to current fair value of another instrument that is substantially the same, discounted cash flow analysis,
option pricing models or other commonly accepted valuation techniques used by market participants to price the instrument.
Level 2: Fair value established using valuation techniques with observable market information
In some cases, the carrying value of an asset in Note 23 is used as an approximation for the fair value of the asset. This is straight
forward for cash and cash equivalents but is also used for short term investments and borrowings to highly rated counterparties, such as
credit institutions, on contracts that feature interest close to or equal to market rates and expose the Group to little or no credit risk.
Level 1: Fair value established from quoted market prices
Bonds and debt instruments .............................................................................................
Short position in bonds used for economic hedging .........................................................
The fair value of asset and liabilities is the amount at which the asset and liability could be exchanged in a current transaction between
willing parties, i.e. not during a forced sale or liquidation. The existence of published price quotations in an active market is the best
evidence of fair value and when they exist they are used by the Group to measure assets and liabilities. If quoted prices for an asset fail to
represent actual and regularly occurring transactions in active market transactions or if quoted prices are not available at all, fair value is
established by using an appropriate valuation technique.
For listed and liquid stocks and bonds, certain financial derivatives and other market traded securities, the fair value is derived directly
from quoted market prices. These instruments are disclosed under Financial instruments and Financial liabilities at fair value in the
Statement of Financial Position.
Shares and equity instruments with variable income ........................................................
Derivatives used for hedge accounting ............................................................................
Liabilities at fair value
Derivatives .......................................................................................................................
Liabilities at fair value ....................................................................................................
Short position in bonds .....................................................................................................
Investment property .........................................................................................................
Assets at fair value ........................................................................................................
Transfers from Level 1 to Level 2 amounted to ISK 172 million during the year and from Level 2 to Level 1 ISK 122 million (2020:
Transfers from Level 2 to Level 1 ISK 82 million).
Level 2 instruments include unlisted shares, unlisted funds with underlying bonds and equity holdings (share certificates), unlisted and less
liquid listed bonds and all OTC derivatives.
In most cases the valuation is based on theoretical financial models, such as the Black Scholes model or variations thereof. These
techniques also include forward pricing and swap models using present value calculations.
For assets and liabilities for which quoted prices on active markets are not available, the fair value is derived using various valuation
techniques. This applies in particular to OTC derivatives such as options, swaps, futures and unlisted equities but also some other assets
and liabilities.
The best evidence of the fair value of an asset and liability at initial recognition is the transaction price, unless the fair value can be
evidenced by comparison with other observable current market transactions, or is based on a valuation technique whose variables include
only data from observable markets.
Fair value of assets and liabilities
Short position in equity .....................................................................................................
Securities used for economic hedging ..............................................................................
Derivatives .......................................................................................................................
Assets at fair value
2020
38
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
24. Fair value hierarchy, continued
Level 3: Fair value established using valuation techniques with significant unobservable market information
Movements in Level 3 assets measured at fair value
Bonds Shares Total
6,132 358 1,685 8,175
545 12 664 1,221
15 301 1,655 1,971
(132) (574) (196) (902)
6,560 97 3,808 10,465
7,119 28 1,555 8,702
580 9 (59) 530
17 762 196 975
(1,584) (441) (7) (2,032)
6,132 358 1,685 8,175
Line items where effects of Level 3 assets are recognized in the Income Statement
- 12 664 676
573 - - 573
573 12 664 1,249
- 9 (59) (50)
912 - - 912
912 9 (59) 862
2020
Additions ..........................................................................................................................
2021
Net financial income .........................................................................................................
Effects recognized in the Income Statement ................................................................
Net fair value changes .....................................................................................................
Balance at the end of the period ...................................................................................
Other operating income ....................................................................................................
2020
Net financial income .........................................................................................................
2021
Equity instruments that do not have a quoted market price are evaluated using methods and guidelines from pertinent international
organizations. In most cases intrinsic value is the basis for the assessment but other factors, such as cash flow analysis, can also modify
the results.
Investment
property
Disposals .........................................................................................................................
Additions ..........................................................................................................................
Balance at the end of the period ...................................................................................
Financial assets
Net fair value changes .....................................................................................................
Balance at the beginning of the year ................................................................................
The Group applies management valuation for determining fair value of investment properties. Management valuation is either based on
recent transactions and offers for similar assets or present value calculations which involve estimation of future cash flow and the
assessment of appropriate discount rate.
Disposal ...........................................................................................................................
Balance at the beginning of the year ................................................................................
In some cases there is little or no market data to rely on for fair value calculations. The most common valuation technique is present value
calculations. Such calculations involve the estimation of future cash flow and the assessment of appropriate discount rate. The discount
rate should both reflect current market rates and the uncertainty in the future cash flow. In such cases internal models and methods are
used to calculate the fair value. The models may be statistical in nature, based on internal or external history of assets with similar
characteristics and/or based on internal knowledge and experience. For example, the credit margin on most loans to customers which, is
added to the current and suitable interest rate to arrive at an appropriate discount rate, is estimated using credit rating and loss
parameters in case of default that have been derived from internal models.
Other operating income ....................................................................................................
Effects recognized in the Income Statement ................................................................
39
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
24. Fair value hierarchy, continued
Carrying values and fair values of financial assets and financial liabilities not carried at fair value
Carrying Fair Unrealized
Financial assets not carried at fair value
value value gain (loss)
69,057 69,057 -
30,272 30,272 -
936,237 937,179 942
12,721 12,721 -
1,048,287 1,049,229 942
Financial liabilities not carried at fair value
5,000 5,000 -
655,476 655,476 -
356,637 367,470 (10,833)
35,088 35,590 (502)
8,685 8,685 -
1,060,886 1,072,221 (11,335)
Financial assets not carried at fair value
42,136 42,136 -
28,235 28,235 -
822,941 827,252 4,311
9,667 9,667 -
902,979 907,290 4,311
Financial liabilities not carried at fair value
13,031 13,031 -
568,424 568,424 -
298,947 316,643 (17,696)
36,060 34,762 1,298
8,011 8,011 -
924,473 940,871 (16,398)
Derivatives Notional
value
Assets Liabilities
59,089 229 444
190,095 1,100 903
51,426 692 874
10,947 359 20
31,029 348 3,530
22 177 106
342,608 2,905 5,877
72,804 1,140 267
137,636 2,282 -
55,838 3,339 1,022
28,617 100 275
13,445 400 2,885
826 11 22
16 12 -
309,182 7,284 4,471
Loans to credit institutions ...................................................................................................................
Loans to customers .............................................................................................................................
Financial assets not carried at fair value .........................................................................................
2021
Cash and balances with Central Bank .................................................................................................
Options - purchased agreements, unlisted ..........................................................................................
Loans to customers .............................................................................................................................
Fair value hedge of interest rate swap .................................................................................................
Subordinated liabilities ........................................................................................................................
Due to credit institutions and Central Bank ..........................................................................................
Bond swap agreements .......................................................................................................................
Options - purchased agreements, unlisted ..........................................................................................
Bond swap agreements .......................................................................................................................
Derivatives .........................................................................................................................................
Borrowings ..........................................................................................................................................
Interest rate and exchange rate agreements .......................................................................................
2020
Financial liabilities not carried at fair value .....................................................................................
Other financial assets ..........................................................................................................................
Due to credit institutions and Central Bank ..........................................................................................
Cash and balances with Central Bank .................................................................................................
Borrowings ..........................................................................................................................................
Financial assets not carried at fair value .........................................................................................
Other financial assets ..........................................................................................................................
Forward exchange rate agreements ....................................................................................................
Interest rate and exchange rate agreements .......................................................................................
Financial liabilities not carried at fair value .....................................................................................
Deposits ..............................................................................................................................................
Other financial liabilities .......................................................................................................................
Forward exchange rate agreements ....................................................................................................
Loans to credit institutions ...................................................................................................................
Subordinated liabilities ........................................................................................................................
Derivatives .........................................................................................................................................
Fair value
Share swap agreements ......................................................................................................................
Deposits ..............................................................................................................................................
Loans to customers largely bear variable interest rates. Those loans, including corporate loans, are presented at book value as they
generally have a short duration and very limited interest rate risk. Loans with fixed interest rates, mainly long-term retail mortgages, are
estimated by using the discount cash flow method with the interest rates offered on new loans, taking into account loan to value. Defaulted
loans are presented at book value as no future cash flow is expected on them. Instead they are written down according to their estimated
potential recovery value.
Options - purchased agreements, listed ..............................................................................................
Share swap agreements ......................................................................................................................
2020
Other financial liabilities .......................................................................................................................
2021
Fair value hedge of interest rate swap .................................................................................................
40
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
24. Fair value hierarchy, continued
Fair value hedge of interest rate swap
Gain (loss)
Notional on FV
2021
Assets Liabilities
changes
44,280 802 - (463)
- - - (122)
44,280 - 151 (301)
12,975 298 - (526)
44,280 - 350 (388)
44,280 - 402 (462)
1,100 903 (2,262)
93,654 1,327 - (304)
31,218 139 - (47)
- - - (45)
12,764 815 - 618
2,281 - 221
Hedged borrowings and subordinated liabilities Gain (loss)
Book
on FV
value
Assets Liabilities
changes
- - - (106)
41,491 119 - 461
44,021 293 - 306
13,224 - 82 526
43,681 455 - 468
43,624 382 - 391
186,041 1,249 82 2,046
31,071 113 - 48
- - - (38)
44,276 - 352 264
46,655 - - -
13,498 - 601 (673)
135,500 113 953 (399)
Interest rates swaps - EUR ........................................................
USD 100 million - issued 2020 - Perpetual .......................................................................
EUR 300 million - issued 2021 - 4 years ...........................................................................
EUR 300 million - issued 2017 - 3 years ...........................................................................
Maturity
1-5 years
Interest rates swaps - EUR ........................................................
Interest rates swaps - EUR ........................................................
1-5 years
1-5 years
2020
EUR 300 million - issued 2018 - 3 years ...........................................................................
-
Interest rates swaps - USD ........................................................
Interest rates swaps - EUR ........................................................
6-12 months
Interest rates swaps - EUR ........................................................
1-5 years
Interest rates swaps - EUR ........................................................
Interest rates swaps - USD ........................................................
1-5 years
-
date
1-5 years
Accumulated
2021
1-5 years
EUR 500 million - issued 2016/18 - 5 years ......................................................................
The Group applies fair value hedge accounting only with respect to interest rate swaps, whereby the Group pays floating rate interest and
receives fixed rate interest, with identical cash flows to the borrowings. The interest rate swaps are hedging the exposure of changes in the
fair value of certain fixed-rate euro bonds, see Note 32, arising from changes in interest rates. On 1 January 2018 the Group adopted
IFRS 9, but has elected to continue to apply the hedge accounting principles under IAS 39. For further information about the Group's
hedge accounting policy, see Note 57.
Fair value
EUR 300 million - issued 2020 - 4 years ...........................................................................
Interest rates swaps - EUR ........................................................
EUR 500 million - issued 2017/18 - 5 years ......................................................................
USD 100 million - issued 2020 - Perpetual .......................................................................
Hedged borrowings and subordinated liabilities .........................................................
2020
EUR 300 million - issued 2020 - 4 years ...........................................................................
EUR 300 million - issued 2021 - 5 years ...........................................................................
EUR 300 million - issued 2018 - 3 years ...........................................................................
Hedged borrowings and subordinated liabilities .........................................................
The effectiveness of each hedge is measured regularly with linear regression. The relationship between fair value changes of an interest
rate swap on the one hand and a borrowing on the other hand is examined. In all cases the effectiveness is within limits, or between 87-
112%.
fair value
Interest rates swaps - EUR ........................................................
41
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
25. Offsetting financial assets and financial liabilities
Assets Assets after Total assets
Gross assets Nettings recognized consideration enforceable recognized
before with gross on Balance Financial Collateral of netting netting arr- on Balance
2021
nettings liabilities Sheet, net liabilities received potential angements Sheet, net
Reverse repurchase agreements ......... 8,560 (720) 7,840 720 - 8,560 - 7,840
Derivatives .......................................... 1,689 - 1,689 (830) - 859 1,216 2,905
Total assets ........................................ 10,249 (720) 9,529 (110) - 9,419 1,216 10,745
2020
Reverse repurchase agreements ......... 8,229 (433) 7,796 (7,074) - 722 - 7,796
Derivatives .......................................... 6,012 - 6,012 (1,167) - 4,845 1,272 7,284
Total assets ........................................ 14,241 (433) 13,808 (8,241) - 5,567 1,272 15,080
Liabilities
Liabilities not
Total
Gross Liabilities after subject to liabilities
liabilities Nettings recognized consideration enforceable recognized
before with gross on Balance Financial Collateral of netting netting arr- on balance
2021
nettings assets Sheet, net assets pledged potential angements sheet
Repurchase agreements ..................... - (720) (720) 720 - - - (720)
Derivatives .......................................... 2,000 - 2,000 (830) - 1,170 3,877 5,877
Total liabilities ................................... 2,000 (720) 1,280 (110) - 1,170 3,877 5,157
2020
Repurchase agreements ..................... 7,507 (433) 7,074 (7,074) - - - 7,074
Derivatives .......................................... 1,167 - 1,167 (1,167) - - 3,304 4,471
Total liabilities ................................... 8,674 (433) 8,241 (8,241) - - 3,304 11,545
26. Investments in associates
2021 2020
891 852
111 39
(356) -
22 -
668 891
The Group's interest in its principal associates
25.4% 25.4%
23.0% 20.0%
35.3% 35.3%
- 33.3%
- 37.4%
Audkenni hf., Borgartún 31, Reykjavík, Iceland ......................................................................................................
Reverse repurchase agreements and repurchase agreements are recognized within the line items Financial instruments and Due to credit
institutions and Central Bank respectively.
Assets not
subject to
Netting potential not
recognized in the
Balance Sheet
220 Fjördur ehf., Fjardargata 13-15, Hafnarfjördur, Iceland ....................................................................................
Acquisitions / increased share capital .....................................................................................................................
Reiknistofa bankanna hf., Katrínartún 2, Reykjavík, Iceland ...................................................................................
Financial assets subject to enforceable master netting arrangements and similar arrangements
Carrying amount at the beginning of the year .........................................................................................................
Arion Bank sold its entire shareholdings in the associates 220 Fjördur ehf. and JCC ehf. with minor effects on the Consolidated Income
Statement.
Disposals ................................................................................................................................................................
Investment in associates .....................................................................................................................................
Liabilities subject to netting
arrangements
SER eignarhaldsfélag ehf., Borgartún 19, Reykjavík ..............................................................................................
Share of profit of associates and profit from sale ....................................................................................................
Financial liabilities subject to enforceable master netting arrangements and similar arrangements
Netting potential not
recognized in the
Balance Sheet
Assets subject to netting
arrangements
JCC ehf., Sundaborg 15, Reykjavík, Iceland ..........................................................................................................
42
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
27. Intangible assets
Policies applied to the Group's intangible assets
Customer
relationship
Infra- and related
2021
Goodwill structure Software Total
669 2,383 667 5,970 9,689
- - - 844 844
- - - 161 161
- - (60) (1,171) (1,231)
669 2,383 607 5,804 9,463
2020
669 2,383 727 4,588 8,367
- - - 1,570 1,570
- - - 594 594
- - (60) (782) (842)
669 2,383 667 5,970 9,689
and infrastructure
Acquired and internally
generated
Straight-line basis over
6-15 years and
impairment test
Finite 6-15 years
and undefined
Finite 3-10 years
Acquired
Straight-line basis
over 3-10 years
Useful lives ................................................................................
Acquired software and internally developed software is capitalized on the basis of the cost of acquiring and bringing the software into
service. Expenditure on internally developed software is recognized as an asset when the Group is able to demonstrate its intention and
ability to complete the development and use the software in a manner that will generate future economic benefits, and when it can reliably
measure the costs to complete the development. The capitalized costs of internally developed software include external expenses directly
attributable to developing the software and salary and salary related expenses of implementation of core systems. Capitalized costs of
software are amortized over its useful life. Computer software licenses and internally developed software recognized as intangible assets
are amortized over their useful life, which is estimated to be 3-10 years.
Software
Acquired
and related agreements
Internally generated or acquired ................................................
Customer relationship
Impairment test
Undefined
Amortization method ..................................................................
Additions .......................................................................................................
Intangible assets .........................................................................................
Additions, capitalized salaries .......................................................................
Goodwill
Balance at the beginning of the year .............................................................
Additions, capitalized salaries .......................................................................
Amortization ..................................................................................................
Additions .......................................................................................................
Customer relationships and related agreements are connected to business relationships and agreements which the Bank acquired in
subsidiaries. The asset is based on the assumption that business relationships and agreements generate regular payments and earnings
to the relevant business segments. The lifetime of these agreements is based on the experience of the Group and the industry. As a
result, these agreements are assessed as having an identified useful lifetime.
Intangible assets comprise the following categories: Goodwill, which arises on business combinations; Infrastructure, Customer
relationships and related agreements which are identified during the acquisition of subsidiaries and related to the activities of the
businesses being acquired; and Software, which is acquired (i.e. software licenses) and expenses of implementation.
Infrastructure, which is capitalized as an intangible asset, is related to the asset management operation and branding of the insurance
operation. The business activity is based on years of developing expertise and systems, during which a valuable platform has been
created for future growth. An impairment test is performed annually.
Balance at the beginning of the year .............................................................
agreements
Goodwill is recognized among assets in the operating segment Vördur, see Note 5.
Intangible assets .........................................................................................
Amortization ..................................................................................................
43
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
27. Intangible assets, continued
Impairment testing
Discount and growth rates
Discount Growth Discount Growth
rates rates rates rates
13.0% 2.5% 10.0% 2.5%
13.0% 2.5% 11.0% 2.5%
28. Tax assets and tax liabilities
Assets Liabilities Assets Liabilities
- 6,543 - 3,799
2 559 2 463
2 7,102 2 4,262
Deferred tax assets and tax liabilities are attributable to the following:
2 - 26 -
- (728) - (542)
562 - 613 -
57 (259) 205 (325)
- (191) - (438)
- - - -
621 (1,178) 844 (1,305)
(619) 619 (842) 842
2 (559) 2 (463)
Recognized
Recognized
Changes in deferred tax assets and tax liabilities through
in profit or
At 1 Jan.
equity loss
At 31 Dec.
26 - (24) 2
(542) - (186) (728)
613 - (51) 562
(120) 350 (432) (202)
(438) - 247 (191)
(461) 350 (446) (557)
(270) - 296 26
(261) - (281) (542)
248 - 365 613
(210) 78 12 (120)
(449) - 11 (438)
1 - (1) -
(941) 78 402 (461)
Tax assets and tax liabilities .........................................................................................
Deferred tax .....................................................................................................................
Current tax .......................................................................................................................
Foreign currency denominated assets and liabilities .........................................................
Other assets and liabilities ...............................................................................................
Investment property and property and equipment ............................................................
Financial assets ...............................................................................................................
Other assets and liabilities ...............................................................................................
Deferred tax related to foreign exchange gain ..................................................................
Deferred tax assets and tax liabilities ...........................................................................
Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which
the losses can be utilized. Significant management judgement is required to determine the amount of deferred tax assets that can be
recognized, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies.
The Group has ISK 235 million (31.12.2020: ISK 672 million) of tax losses carried forward. These losses relate to subsidiaries that have a
history of losses, do not expire, and may not be used to offset taxable income elsewhere in the Group. The subsidiaries neither have any
taxable temporary difference nor any tax planning opportunities available that could partly support the recognition of these losses as
deferred tax assets. On this basis, the Group has determined that it cannot recognize deferred tax assets on the tax losses carried
forward. If the Group was able to recognize all unrecognized deferred tax assets, profit and equity would have increased by ISK 47 million
(2020: ISK 134 million).
Investment property and property and equipment ............................................................
Financial assets ...............................................................................................................
Change in deferred tax assets and tax liabilities .........................................................
Asset Management operation ..........................................................................................
2021
2020
Other assets and liabilities ...............................................................................................
Insurance operation .........................................................................................................
Investment property and property and equipment ............................................................
Change in deferred tax assets and tax liabilities .........................................................
Tax loss carry forward ......................................................................................................
Financial assets ...............................................................................................................
Set-off of deferred tax assets together with tax liabilities of the same taxable entities ......
The model used, to determine the recoverable amount, is most sensitive to changes in the forecast earnings available to shareholders
over a five-year period, the cost of equity and to changes in the growth rate. As a result of this analysis no impairment was recognized in
2020 (2019: nil).
The methodology for impairment testing on the Infrastructure and Customer relationship, which is part of intangible assets, is based on
discounted cash flow model which uses inputs that consider features of the business and the environment.
2020
2021
Foreign currency denominated assets and liabilities .........................................................
2020
Tax loss carry forward ......................................................................................................
Deferred foreign exchange differences .............................................................................
2021
Foreign currency denominated assets and liabilities .........................................................
Deferred foreign exchange differences .............................................................................
44
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
29. Assets and disposal groups held for sale and associated liabilities
Assets and disposal groups held for sale 2021 2020
12,294 11,885
1,548 1,580
1,671 2,323
15,513 15,788
500 1,019
34 4
16,047 16,811
Liabilities associated with disposal groups held for sale
15,564 14,533
1,371 1,650
16,935 16,183
Valitor hf.
2021 2020
14,842 14,127
1,885 1,878
16 -
- 70
4,261 4,534
407 422
2,805 2,104
24,216 23,135
(11,922) (11,250)
12,294 11,885
21 163
20 -
15,528 14,369
- 96
15,569 14,628
(5) (95)
15,564 14,533
8,647 8,507
Sólbjarg ehf., a subsidiary of Eignabjarg ehf.
Loans to customers ................................................................................................................................................
Disposal groups held for sale ..............................................................................................................................
Arion Bank's shareholding in the subsidiary Valitor hf. is 100%. In accordance with IFRS 5 Non-current assets and disposal groups held
for sale, Valitor is classified as asset held for sale in these Consolidated Financial Statements.
Assets ...................................................................................................................................................................
Other liabilities ........................................................................................................................................................
Sólbjarg ehf. ...........................................................................................................................................................
Tax liabilities ...........................................................................................................................................................
Real estates and other assets classified as assets held for sale are generally the result of foreclosures on companies and individuals.
Sólbjarg ehf. ...........................................................................................................................................................
Valitor hf. ................................................................................................................................................................
Tax assets ..............................................................................................................................................................
Intangible assets ....................................................................................................................................................
Borrowings .............................................................................................................................................................
Elimination within Arion Bank Group .......................................................................................................................
Real estate .............................................................................................................................................................
Valitor hf. ................................................................................................................................................................
Valitor's contribution to the Group ......................................................................................................................
Stakksberg ehf. ......................................................................................................................................................
Book value of Valitor ...........................................................................................................................................
On 1 July 2021 Arion Bank and Rapyd entered into a definitive agreement regarding the sale of Valitor hf. for a purchase price of USD 100
million. The transaction is subject to regulatory approval and the parties have agreed on a deadline for obtaining this approval of 1 May
2022. Should the sale not be finalized due to failure to obtain regulatory approval, the risk shall be borne by the buyer, valid for two years.
The sale agreement for Valitor hf. does not affect the Consolidated Financial Statements for the period, in accordance with IFRS. Arion
Bank expects to recognize a net profit of approximately ISK 3.5 billion from the sale when all conditions precedent have been met.
Other assets ...........................................................................................................................................................
Liabilities ...............................................................................................................................................................
Sólbjarg ehf. is a holding company of the former TravelCo hf. tour operator group which included Terra Nova Sól ehf., Heimsferðir ehf. and
TravelCo Nordic/Bravo Tours. In Q1 2020 Sólbjarg completed the sale of Terra Nova Sól ehf. A sales and purchase agreement was
signed with Ferðaskrifstofa Íslands ehf. in December 2020 for the sale of all operations of Heimsferðir ehf. The sale is subject to the
approval of the Icelandic Competition Authorities. Pending the approval, Sólbjarg will be a minority shareholder in Ferðaskrifstofa Íslands
ehf. Sólbjarg ehf. completed the sale of its 59.4% share in the danish operator Bravo Tours 1998 A/S in Q4 2021.
Valitor's contribution to the Group ......................................................................................................................
Financial liabilities at fair value ...............................................................................................................................
Investments in associates ......................................................................................................................................
Other assets ...........................................................................................................................................................
Assets and disposal groups held for sale ...........................................................................................................
Financial instruments ..............................................................................................................................................
Elimination within Arion Bank Group .......................................................................................................................
Loans to credit institutions ......................................................................................................................................
Liabilities associated with disposal groups held for sale ..................................................................................
45
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
29. Assets and disposal groups held for sale and associated liabilities, continued
Stakksberg ehf., a subsidiary of Eignabjarg ehf.
30. Other assets
2021 2020
4,298 4,792
823 754
5,104 5,222
5,113 3,888
1,281 1,141
3,282 2,821
19,901 18,618
Property and equipment Real Equip- Total Total
estate ment 2021 2020
4,608 7,464 12,072 12,324
- 583 583 1,115
(641) (70) (711) (1,366)
3,967 7,977 11,944 12,073
(1,959) (5,322) (7,281) (7,081)
(97) (468) (565) (617)
173 27 200 417
(1,883) (5,763) (7,646) (7,281)
2,084 2,214 4,298 4,792
Right-of-use asset 2021 2020
754 902
185 9
- (42)
18 18
(134) (133)
823 754
In January 2022 a letter of intent was signed with a potential buyer for this asset and due diligence is in progress which is expected to be
completed by mid-year. What the result of the due diligence will be is as yet unknown.
In January 2018 United Silicon was declared bankrupt following severe technical issues at the plant which ended with the temporary
suspension of operations. Following the bankruptcy of United Silicon in 2018, an agreement was reached between the liquidator of the
estate and Arion Bank, under which the Bank acquired all the company's main assets. The assets of the silicon plant are currently under
the supervision of Stakksberg ehf., which is owned by the Bank, via the subsidiary Eignabjarg ehf. After the assets of United Silicon were
transferred to Stakksberg, the company has sought to reduce uncertainty over the recommissioning of the plant, by taking measures such
as transferring the operating license to the company, obtaining a new power agreement for the company and undertaking engineering
designs for the necessary improvements at the plant before it can be reopened.
Property and equipment ................................................................................................
Disposals .........................................................................................................................
Lease agreements terminated ................................................................................................................................
Depreciation ...........................................................................................................................................................
Accounts receivable ...............................................................................................................................................
Property and equipment .........................................................................................................................................
The official real estate value (Registers Iceland) amounted to ISK 4,097 million at the end of the year (2020: ISK 4,561 million) and the
insurance value amounts to ISK 7,489 million (2020: ISK 8,856 million).
Right-of-use asset consists of real estates for own use.
Indexation ...............................................................................................................................................................
Right-of-use asset ................................................................................................................................................
Additions ..........................................................................................................................
Disposals .........................................................................................................................
Gross carrying amount at the beginning of the year ..........................................................
Unsettled securities trading ....................................................................................................................................
Other assets ..........................................................................................................................................................
Sundry assets ........................................................................................................................................................
Investment for life assurance policyholders where risk is held by policyholder ........................................................
Balance at the beginning of the year ......................................................................................................................
New lease agreements ...........................................................................................................................................
Accumulated depreciation at the end of the year .........................................................
Depreciation .....................................................................................................................
Accumulated depreciation at the beginning of the year ....................................................
Gross carrying amount at the end of the year ..............................................................
Right of use asset ...................................................................................................................................................
Stakksberg submitted a new EIA for the plant during the year, and the Environment Agency of Iceland and the National Planning Agency
have both submitted their opinions which support the continued consideration of the project. The Bank’s objective is to investigate the
possibility of selling Stakkberg’s infrastructure on the basis of work which has been carried out for this purpose and also to consider the
sale of infrastructure for other uses. The fundamental aim is to maximize the utilization of this infrastructure and also to find a buyer which
sees opportunities and has the experience and expertise to continue to use this infrastructure in harmony with the local community.
Therefore the Bank’s holding in Stakksberg ehf. has been classified as a disposal group held for sale under IFRS 5.
46
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
31. Other liabilities
2021
2020
818 850
1,259 272
138 131
18,170 16,152
1,281 1,141
810 790
1,516 1,301
4,200 2,888
1,476 1,516
711 1,062
878 787
5,894 5,824
37,151 32,714
Technical provision Technical Reinsurers' Total Technical Reinsurers' Total
provision share 2021 provision share 2020
9,473 (110) 9,363 8,428 (149) 8,279
2,021 (64) 1,957 1,691 (82) 1,609
11,494 (174) 11,320 10,119 (231) 9,888
6,676 (12) 6,664 6,033 (7) 6,026
18,170 (186) 17,984 16,152 (238) 15,914
Lease liability 2021 2020
787 914
183 9
- (43)
31 25
20 42
(143) (160)
878 787
Claims reported and loss adjustment expenses .........................
Accrued expenses ..................................................................................................................................................
Depositors' and Investors' Guarantee Fund ............................................................................................................
Balance at the beginning of the year ......................................................................................................................
Lease liability ........................................................................................................................................................
Interest expense .....................................................................................................................................................
New and amended lease agreements .....................................................................................................................
Lease payments .....................................................................................................................................................
Indexation ...............................................................................................................................................................
Impairment of off-balance items .............................................................................................................................
Unsettled securities trading ....................................................................................................................................
Own technical provision ..........................................................
Insurance claim consists of claims outstanding and provision for unearned premiums. Claims outstanding present unsettled claims
incurred. Claims outstanding is the total of claims reported and actuarial estimation of claims incurred but not reported. Provision for
unearned premiums presents the current insurance risk that will be conditional on future fiscal years.
Provision for unearned premiums ..............................................
Other liabilities .....................................................................................................................................................
Claims outstanding ..................................................................
Claims incurred but not reported ................................................
Technical provision .................................................................................................................................................
Lease agreements terminated ................................................................................................................................
Accounts payable ...................................................................................................................................................
Sundry liabilities .....................................................................................................................................................
Lease liability ..........................................................................................................................................................
Technical provision for life assurance policyholders were investment risk is held by policyholder ...........................
Bank levy ...............................................................................................................................................................
Withholding tax .......................................................................................................................................................
Prepaid income ......................................................................................................................................................
47
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
32. Borrowings
First Maturity
Currency, original nominal value issued Maturity type Terms of interest 2021 2020
ARION CBI 21, ISK 10,220 million ....... 2014 2021 At maturity - 10,576
ARION CB 22, ISK 46,720 million ........ 2015 2022 At maturity 31,508 28,443
ARION CB 24 ISK 40,180 million ......... 2019 2024 At maturity 26,004 16,857
ARION CBI 25, ISK 37,940 million ....... 2017 2025 At maturity 43,341 41,576
ARION CBI 26 ISK 15,460 million ........ 2019 2026 At maturity 17,747 17,030
ARION CBI 29, ISK 25,220 million ....... 2014 2029 At maturity 29,902 28,561
ARION CBI 48, ISK 11,680 million ....... 2018 2048
Amortizing
11,017 10,721
ARION CB EUR 300 million * .............. 2021 2026 At maturity 43,624 -
203,143 153,764
EUR 500 million * ................................ 2016 2021 At maturity - 31,071
EUR 13 million ..................................... 2019 2021 At maturity - 2,030
NOK 750 million .................................. 2019 2022 At maturity 11,096 11,207
SEK 150 million ................................... 2019 2022 At maturity 2,159 2,338
NOK 250 million .................................. 2017 2023 At maturity 3,757 3,798
EUR 300 million * ................................ 2018 2023 At maturity 41,491 44,276
EUR 300 million * ................................ 2020 2024 At maturity 44,021 46,655
NOK 250 million .................................. 2017 2027 At maturity 3,766 3,808
EUR 300 million * ................................ 2021 2025 At maturity 43,680 -
ARION 26 1222 GB, ISK 3,640 million . 2021 2026 At maturity 3,524 -
153,494 145,183
356,637 298,947
33. Subordinated liabilities
First call
Currency, original nominal value Issued Maturity date Terms of interest 2021 2020
SEK 500 million ................................... 2018 2028 22 Nov '23 7,174 7,765
NOK 300 million .................................. 2019 2029 9 Jul '24 4,461 4,508
SEK 225 million ................................... 2019 2029 20 Dec '24 3,232 3,500
ARION T2I 30 ISK 4,800 million .......... 2019 2030 4 Jan '25 5,337 5,088
ARION T2 30 ISK 880 million .............. 2019 2030 4 Jan '25 907 907
EUR 5 million ....................................... 2019 2031 6 Mar '26 752 794
21,863 22,562
ARION AT1 USD 100 million * ............ 2020 Perpetual 26 Mar '26 13,225 13,498
13,225 13,498
35,088 36,060
Fixed, 0.625 % ...............................
Fixed, 1.625% ...............................
Fixed, EUR 0.05% .........................
Fixed, 6.50% .................................
Senior unsecured bonds ......................................................................................................................................
Fixed, CPI linked, 3.50% ...............
Fixed, 6.00% .................................
Fixed, 1.00% ................................
Floating, NIBOR +1.82% ...............
Additional Tier 1 and Tier 2 subordinated liabilities are eligible as regulatory capital under the Icelandic Financial Undertakings Act No.
161/2002.
Fixed, CPI linked, 3.875% ..............
Fixed, 6.75% .................................
Fixed, CPI linked, 2.50% ...............
Statutory covered bonds ......................................................................................................................................
Fixed, CPI linked, 3.00% ...............
Additional Tier 1 subordinated liabilities ...........................................................................................................
Fixed, 0.375% ...............................
Fixed, 3.02% ................................
Fixed, 3.40% ................................
* The Group applies fair value hedge accounting to these bond issuances and uses certain foreign currency denominated interest rate swaps as hedging
instruments, see Note 24.
Subordinated liabilities ........................................................................................................................................
Fixed, CPI linked, 2.00% ...............
Fixed, CPI linked, 3.50% ...............
Floating, 3 month STIBOR +3.10% .
Floating, 3 month STIBOR +3.70% .
Borrowings ...........................................................................................................................................................
* The Group applies fair value hedge accounting to these bond issuances and uses certain foreign currency denominated interest rate swaps as hedging
instruments, see Note 24.
Fixed, 4.70% .................................
Floating, 3. EURIBOR +0.58% .......
Tier 2 subordinated liabilities ..............................................................................................................................
Floating, 3 month STIBOR +1.33%
Floating, NIBOR +3.65% ................
The book value of listed bonds was ISK 357 billion at the end of the period (31.12.2020: ISK 299 billion). The market value of those bonds
was ISK 367 billion (31.12.2020: ISK 317 billion). The Group repurchased no own debts during the year (2020: ISK 54 billion).
Fixed, 6.25% ..................................
Fixed, 3.24% .................................
48
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
34. Pledged assets
Pledged assets against liabilities 2021 2020
287,449 228,358
8,560 8,150
296,009 236,508
(43,182) (36,000)
252,827 200,508
35. Equity
Share capital and share premium
Share Own Share Total Share Own Share Total
capital shares premium 2021 capital shares premium 2020
Balance at the beginning of the year ... 1,730 (11) 49,612 51,331 1,814 (41) 53,942 55,715
Share capital reduction ........................ (70) 70 - - (84) 84 - -
Purchase of treasury stock .................. - (201) (28,446) (28,647) - (54) (4,326) (4,380)
Employees stock grant ........................ - - - - - - (4) (4)
Balance at the end of the year .......... 1,660 (142) 21,166 22,684 1,730 (11) 49,612 51,331
Own shares / issued share capital ....... 8.54% 0.69%
Warrants
Thereof pledged assets against issued covered bonds held by the Bank ...............................................................
Pledged assets against liabilities on balance .....................................................................................................
Assets, pledged as collateral against loans from credit institutions and short positions ..........................................
The warrants reserve represents the consideration received for outstanding warrants. Arion Bank issued 54 million warrants on 9 March
2021. The purchase price of the warrants amounted to ISK 15.6 per warrant, resulting in a total sale price of ISK 842.4 million. The warrant
issuing represents approximately 3% of the Bank's total share capital and the Bank is obliged to issue new shares when the warrants are
exercised. Approximately 48.5% of the total issue was sold to around 150 employees of the Group and 51.5% to professional investors.
The exercise period runs from Q4 2023 to Q3 2024.
According to a decision made by the Board of Directors, own shares were allocated to employees in connection with the Bank's IPO and
listing in 2018. In total, approximately 4 million shares were allocated to employees at ISK 75 per share, a total of ISK 295 million. In
accordance with the employees' stock grant programme, an employee who resigned within the vesting period of two years returned the
shares to the Bank. The vesting period ended in June 2020.
According to the Bank's Articles of Association, total share capital amounts to ISK 1,660 million, with par value of ISK 1 per share. The
holders of ordinary shares are entitled to receive dividends as approved by the AGM and are entitled to one vote per share at
The Group has issued covered bonds amounting to ISK 36 billion that can be used for repo borrowings at the Central Bank of Iceland or
sold if market conditions are favorable (31.12.2020: ISK 30 billion). Pledged assets against those covered bonds are ISK 43.2 billion
(31.12.2020: ISK 36.0 billion).
At the AGM in March 2021 a motion was passed to reduce the Bank’s share capital by ISK 70 million at nominal value, totalling 70 million
shares, by cancelling the company’s own shares. The reduction was effective 20 April 2021. The company’s share capital was reduced
from ISK 1,730 million to ISK 1,660 million at nominal value, divided into an equal number of shares and with one vote attached to each
share. At the AGM in March 2020 a motion was passed to reduce the Bank's share capital by ISK 84 million at nominal value, totalling 84
million shares, by cancelling the company's own shares.
The Group has pledged assets against borrowings, both issued covered bonds and other issued bonds and loan agreements. Pledged
loans comprised mortgage loans to individuals. The book value of those borrowings was ISK 203 billion at the end of the year (31.12.2020:
ISK 154 billion).
Based on three share buyback programs authorized by the Financial Supervisory Authority of the Central Bank of Iceland (FSA) in 2021,
Arion Bank bought back own shares for ISK 28,647 million in 2021. At year end ISK 4.3 billion was remaining of the ongoing buyback
program launched in October 2021, which will end no later than 16 March 2022. Buybacks in 2020 were based on authorisation from the
FSA from 2019 and 2020.
The Group has pledged bonds against short term lending from the Central Bank of Iceland and against short positions, related to swap
agreements, to hedge market risk of those assets.
Assets, pledged as collateral against borrowings ....................................................................................................
Pledged assets against liabilities ........................................................................................................................
49
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
Other information
36. Shareholders of Arion Bank 2021 2020
9.10% 6.03%
8.83% 9.92%
8.81% 7.46%
8.54% 0.69%
4.73% 4.99%
3.16% 2.83%
2.88% 2.73%
2.88% 2.13%
2.71% 2.92%
2.35% 0.63%
2.22% 0.38%
2.22% 1.52%
2.20% 0.63%
1.33% 0.67%
1.31% 0.98%
1.26% 0.14%
1.23% 0.72%
1.19% 1.14%
1.07% 1.37%
0.98% 1.13%
0.61% 2.11%
0.00% 23.22%
0.00% 6.12%
0.00% 1.12%
30.39% 18.43%
100.0% 100.0%
Number Number
of shares Warrants of shares
- 12,000 - -
- 13,000 - 13,000
992,953 2,300,000 - 2,300,000
4,482,724 1,633,076 - 1,633,076
2021
In 2021 the Bank’s largest shareholder, Taconic Capital Advisors, sold its entire 23.22% shareholding in the Bank to a diverse group of
investors, mainly Icelandic pension funds, fund managers and other domestic investors.
Frjálsi lífeyrissjódurinn ............................................................................................................................................
Stefnir rekstrarfélag hf. ...........................................................................................................................................
Warrants /
options
Other members of the Board of Directors do not hold shares or warrants in Arion Bank.
Benedikt Gíslason, CEO ..................................................................................................
2020
Kvika banki hf. ........................................................................................................................................................
Almenni lífeyrissjódurinn .........................................................................................................................................
Kvika eignastýring ..................................................................................................................................................
Bóksal ehf. .............................................................................................................................................................
Festa lífeyrissjódur .................................................................................................................................................
MainFirst Bank AG .................................................................................................................................................
Lífsverk Pension fund .............................................................................................................................................
Stapi lífeyrissjódur ..................................................................................................................................................
Seven members of the Executive Committee (2020: seven) ............................................
Arion banki hf. ........................................................................................................................................................
Stodir hf. ................................................................................................................................................................
Lansdowne partners ...............................................................................................................................................
Íslandsbanki hf. ......................................................................................................................................................
Hvalur hf. ................................................................................................................................................................
Taconic Capital Advisors ........................................................................................................................................
At the end of the year the Bank's employees held a shareholding of 0.51% in Arion Bank (31.12.2020: 0.53%). The Board of Directors and
the members of the Bank's Executive Committee shareholding is as follows:
Eaton Vance funds .................................................................................................................................................
Other shareholders with less than 1% shareholding ...............................................................................................
Steinunn Kristín Thórdardóttir, Director ............................................................................
Lífeyrissjódur verzlunarmanna ................................................................................................................................
Sculptor Capital Management ................................................................................................................................
Lífeyrissjódur Vestmannaeyja .................................................................................................................................
Gildi lífeyrissjódur ...................................................................................................................................................
Birta lífeyrissjódur ...................................................................................................................................................
Lífeyrissjódur starfsmanna ríkisins .........................................................................................................................
Brú lífeyrissjódur .....................................................................................................................................................
Alternate directors of the Board ........................................................................................
50
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
37. Legal matters
Contingent liabilities
Legal proceedings regarding damages
Consumer Association‘s class-action lawsuit
Administrative fine from Central Bank of Iceland
Other legal proceedings
38. Events after the reporting period
In a lawsuit brought in June 2013, Kortaþjónustan hf. claimed damages from Arion Bank hf., Íslandsbanki hf., Landsbankinn hf., Borgun hf.
and Valitor hf. in the amount of ISK 1.2 billion plus interest, as a result of damage Kortaþjónustan hf. contended the five parties caused
the company due to violations of the Competition Act. In June 2017 the Supreme Court dismissed the case on procedural grounds. Since
then Kortaþjónustan hf. and subsequently its largest shareholder EC-Clear have tried to initiate five lawsuits against the same defendants
which have all been dismissed, the last one in March 2021. In September 2021 EC-Clear has once again brought the same matter of
dispute, claiming damages in the amount of ISK 922 million plus interest, against the same defendants. Should the defendants be found
liable for damages, they would be jointly responsible. Therefore, the Bank has not made any provision.
The estate of TravelCo Nordic has filed a case against TravelCo hf. and the Bank in Denmark claiming payment in solidum in the amount
of DKK 58.1 million plus interest. The merits and arguments against the Bank are vague. The bankruptcy estate alleges that the Bank, as
owner of Heimsferdir ehf. and Terra Nova Sól ehf., contrived the sale of the companies to its subsidiary, Sólbjarg ehf., without real
payment. The transaction the bankruptcy estate is referring to is in fact the legal and lawful enforcement of security (i.e. share pledges) by
the Bank over the shares in Heimsferdir hf. and Terra Nova Sól ehf. following a default on a facilities agreement to TravelCo hf. as
borrower. Following the enforcement, the Bank moved the companies to its holding company, Sólbjarg ehf., and the Bank remained the
beneficial owner of the companies. The Bank believes it likely that it will be acquitted of the estate’s claim and has therefore not made any
provision.
No event has arisen after the reporting period and up to the approval of these Consolidated Financial Statements that require additional
disclosures.
The Consumer Association of Iceland sent a letter to Arion Bank, Íslandsbanki and Landsbankinn in April 2020 claiming that the
contractual terms on variable rate mortgages to individuals were illegal. The letter called for revised terms and compensation to borrowers
who, according to the Association, have suffered damage. The Association’s claim is that standard contractual terms lack proper legal
grounds, as parameters for interest rate decisions lack transparency and predictability, thus causing a contractual imbalance to the
detriment of the consumer.
On 7 July 2020 the Financial Supervisory Authority of the Central Bank of Iceland (FSA) published its decision to impose an administrative
fine on Arion Bank of ISK 87.7 million due to the Bank’s alleged breach of an obligation to disclose insider information in a timely manner.
The decision has been published on FSA´s website. Arion Bank paid the fine but filed a claim with the district court of Reykjavik in October
2020 demanding that FSA’s decision be annulled. A statement by FSA was submitted in the case in November 2020. Principal
proceedings in the case are on the District Court’s docket in March of 2022.
Since 2008 Arion Bank has formally been a party to proceedings in Luxembourg, commenced against the Luxembourg company R Capital
S.á r.l. and its beneficial owner, Mr. Umberto Ronsisvalle, for the collection of EUR 6 million plus interest. During this time, Kaupthing ehf.
has been the beneficial owner of the claim, with Arion Bank’s involvement limited to being the formal party to the proceedings while
enjoying indemnity from Kaupthing. The reason for the setup is a decision by the Icelandic Financial Supervisory Authority in 2009 during
the split of Kaupthing to the “new” and “old” bank. In 2019, a counterclaim was made against Arion Bank in the proceedings, for the net
sum of EUR 24 million plus interest, with the Bank continuing to enjoy full indemnity from Kaupthing. In September 2021, Kaupthing and
Arion Bank agreed that all rights and liabilities in the Luxembourg proceedings would be transferred to Arion Bank. The Bank is still held
harmless for any liabilities associated with the claims and has therefore not made any provision.
The Group has formal controls and policies in place for managing legal claims. Once professional advice has been obtained and the
likelihood and amount of loss reasonably estimated, the Group makes adjustments, if appropriate, to account for any adverse effects the
claims may have on its financial standing. Should the Group conclude that it is to the detriment of the Group's case to disclose such
potential amounts, relating to the legal claims raised, it elects not to do so. At the end of the year, the Group had several unresolved legal
claims.
Arion Bank undertook a review of its contractual terms and processes for interest rate decisions in light of these claims, concluding that no
changes were required and that the Association’s claim against the Bank are unfounded. A reasoned response was sent to the Consumer
Association in September 2020. According to information published on the Consumer Association’s website, all three banks have rejected
the Association’s claims.
The Consumer Association in May 2021 published an article on its website calling for participants in a class action lawsuit. The intention is
to commence court proceedings against Icelandic credit institutions to provide court precedents for loans with variable rates. Arion Bank
has received information requests from a legal firm representing approximately 1200 individuals and one case has been filed against the
Bank. The Bank has commissioned an outside opinion on its legal position and believes it likely that it will be acquitted of the claims and
has therefore not made any provision.
51
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
Off balance sheet information
39. Commitments
2021 2020
15,858 20,857
63,108 49,164
108,691 64,055
187,657 134,076
40.
Assets under management and under custody
1,351,573 1,130,978
1,148,203 934,967
Related party
41. Related party
Balances with related parties
Assets Liabilities
139 (284) (145)
530 (311) 219
669 (595) 74
172 (575) (403)
- (112) (112)
172 (687) (515)
Transactions with related parties Interest Interest Other Other
income expense income expense
25 (1) 420 -
- (1) 5 (1,812)
25 (2) 425 (1,812)
8 (9) 19 (408)
- - - (1,565)
8 (9) 19 (1,973)
Board of Directors and key Management personnel ...........................................................................
Associates and other related parties ...................................................................................................
Board of Directors and key Management personnel ............................................................................
The Board of Directors of Arion Bank, key management personnel of the Bank and the Group's associates are defined as related parties,
as are close family members of the individuals referred to above and legal entities controlled by them.
Net
balance
Transactions with related parties have been conducted on an arm's length basis. There have been no further guarantees provided or
received for related party receivables or payables.
2021
Assets under management represent the total market value of the financial assets which the Group manages on behalf of its customers.
2020
Balances with related parties ...........................................................................................................
Transactions with related parties ..................................................................................
Board of Directors and key Management personnel .........................................................
Associates and other related parties ................................................................................
Associates and other related parties ................................................................................
Transactions with related parties ..................................................................................
Board of Directors and key Management personnel .........................................................
2020
Associates and other related parties ...................................................................................................
Balances with related parties ...........................................................................................................
2021
Assets under custody .............................................................................................................................................
Financial guarantees, unused credit facilities and undrawn loan commitments .............................................
At year end 2020 the Group defined a related party relationship with the largest shareholder of Arion Bank, Taconic Capital. In 2021
Taconic Capital sold its entire shareholding in Arion Bank to a diverse group of investors. At the end of December 2021 no shareholder
was defined as related party with an influence over the Group.
The Group, acting as custodian, is responsible for safeguarding a firm's or individual's financial assets, hold in safekeeping securities such
as stocks, bonds and securities funds, arrange the settlement of trades and movements of securities, process corporate actions such as
income on bonds and dividends on shares; and pricing on securities.
Unused overdrafts ..................................................................................................................................................
Financial guarantees ..............................................................................................................................................
Undrawn loan commitments ...................................................................................................................................
Financial guarantees, unused credit facilities and undrawn loan commitments
Assets under management .....................................................................................................................................
52
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Risk management disclosures
Notes to the Condensed Consolidated Interim Financial Statements
Further information on risk management and capital adequacy is provided in the Pillar 3 Risk Disclosures which are available on the
Bank's website, www.arionbanki.is.
The Board of Directors is ultimately responsible for the Group's risk management framework and for ensuring that satisfactory risk policies
and governance for controlling the Group's risk exposure are in place. The Board allocates risk management of subsidiaries to the relevant
subsidiary. For the parent company (the Bank) the Board sets its risk appetite, which is translated into exposure limits and targets
monitored by the Bank's Risk Management division.
The Chief Executive Officer (CEO) is responsible for sustaining an effective risk management framework, processes and controls as well
as maintaining a high level of risk awareness among employees, making risk everyone's business.
The Bank's Compliance function is headed by the Compliance Officer. It is independent and centralized and reports directly to the CEO.
The Compliance function manages the Bank's conduct and compliance risk, including risk relating to data protection and financial crime.
The Bank operates several committees to manage risk. The Board Risk Committee (BRIC) is responsible for supervising the Bank's risk
management framework, risk appetite and the internal capital and liquidity adequacy assessment processes (ICAAP/ILAAP). The Board
Credit Committee (BCC) is the Bank's supreme authority in matters relating to credit risk exposures, including investments and
underwriting activities. On the management level the CEO has established five primary risk committees. The Asset and Liability
Committee (ALCO) is responsible for managing asset-liability mismatches, liquidity and funding risk, market risk, capital adequacy, and
decides on underwriting and investment exposures. The Operational Risk Committee (ORCO) is responsible for managing operational risk,
which includes information security, financial crimes, regulatory compliance and data management. The Arion Credit Committee (ACC)
administers the Bank's credit rules and decides on the origination of credit while the Arion Composition and Debt Cancellation Committee
(ADC) is the principal authority for debt cancellation, debt restructuring and composition agreements. ACC and ADC operate within limits
set by the BCC. The Sustainability Committee ensures that the Bank's strategy and decision making are aligned with the Bank's
commitments in relation to the environmental, social and governance (ESG) agenda. The committee oversees the Bank's Green Financing
Framework.
The Bank's Internal Audit conducts independent reviews of the Bank's and several subsidiaries' operations, risk management framework,
processes and measurements. Internal Audit discusses its results with management and reports its findings and recommendations to the
Board Audit Committee (BAC).
The Bank's Risk Management division is headed by the Chief Risk Officer. It is independent and centralized and reports directly to the
CEO. The division is divided into three units: Risk Analysis, which is responsible for the quantification of risk on a portfolio level, including
risk modeling and reporting; Risk Monitoring and Framework, which facilitates and monitors the management of risk and controls in the
first line of defense; and Credit Analysis, which supports the Bank's credit transaction process and participates in credit decisions. The
Bank's Security Officer and the Bank's Pension Risk Officer are part of the Risk Management division.
Arion Bank is a small bank in international context but classified as systemically important in Iceland. The Group operates in a small
economy which is subject to sectoral concentration, fluctuations in capital flows, and exchange rate volatility. The Group’s most significant
risks are credit risk, concentration risk, liquidity risk, interest rate risk, cyber risk, third party risk and business risk. These risk factors are to
the largest extent encountered within the parent company. Through the Bank's subsidiaries, the Group bears risk arising from insurance
activities, card payment solutions and fund management. Operational risk is the predominant risk for the latter two.
The Group faces various risks arising from its day to day operations. Managing risk is a core activity within the Group. The key to effective
risk management is a process of on-going identification of significant risk, quantification of risk exposure, actions to limit risk and constant
monitoring of risk. This process of risk management and the ability to evaluate, manage and correctly price the risk encountered is critical
to the Group's continuing profitability and this process enables the Group to ensure that the exposure to risk remains within acceptable
levels.
53
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk
Exposure to credit risk
The value of collateral is based on estimated market value. The valuation of real estate is based on market price, official valuation by
Registers Iceland, or the opinion of internal or external specialists. The valuation of fishing vessels takes into account related fishing
quotas. The quality of collateral is evaluated in the lending process with regards to specialization, location, age and condition and
possibilities for reuse.
Collateral value is monitored and additional collateral requested in accordance with the underlying agreement. Collateral value is reviewed
in line with the adequacy of the allowance for impairment losses. Collateral values are capped by the related exposure amount.
- Other collateral: Fixed and current assets including vehicles, equipment, inventory and trade receivables
- Vessels: Ships with assigned fishing quota and other vessels
Credit risk is managed and controlled by setting limits on the amount of risk the Group is willing to accept for individual counterparties and
group of connected clients, and by monitoring exposures in relation to such limits. The Group seeks to limit its total credit risk through
diversification of the loan portfolio across sectors and by limiting large exposures to groups of connected clients.
Credit risk arises anytime the Group commits its funds, resulting in capital or earnings being dependent on counterparty, issuer or
borrower performance. Loans to customers are the largest source of credit risk. Credit risk is also inherent in other types of assets, such
as loand to credit institutions, bonds, derivatives and off-balance sheet items such as commitments and guarantees.
Managing and analyzing the Group's loan portfolio is of utmost importance. Great emphasis is placed on the quality of the credit portfolio,
by maintaining a strict credit process, by critically inspecting loan applications, by actively monitoring the credit portfolio and by identifying
and reacting to possible problem loans at an early stage as well as by restructuring impaired credits.
The Group grants credit based on well informed lending decisions and seeks to build business relationships with customers that have
good repayment capacity and are backed by strong collateral. The risk level of each credit is considered in the pricing.
The following table shows the maximum exposure to credit risk for the components of the Statement of Financial Position before the effect
of mitigation due to collateral agreements or other credit enhancements. The table also shows related collateral and credit enhancements.
The amount and type of collateral required depends on an assessment of the credit risk of the counterparty and the exposure type. The
main types of collateral obtained are as follows:
- Real estate: Residential property, commercial real estate and land
- Cash and securities: Cash, treasury notes and bills, asset backed bonds, listed equity, and funds that consist of eligible securities
Credit risk is the risk that the Group will incur a loss because its customers or counterparties fail to discharge their contractual obligations.
54
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk, continued
Maximum Cash and Real Other Total
2021
exposure securities estate Vessels collateral collateral
69,057 - - - - -
28,156 - - - - -
936,237 29,159 704,442 42,797 85,030 861,428
526,498 712 481,088 15 15,139 496,954
409,739 28,447 223,354 42,782 69,891 364,474
90,321 329 87,256 - 1,752 89,337
37,010 486 33,597 48 1,876 36,007
78,094 1,967 12,850 40,999 21,056 76,872
16,736 939 1,219 - 1,684 3,842
65,298 154 49,874 29 9,107 59,164
45,798 24,433 1,814 - 12,877 39,124
27,919 7 15,206 - 11,040 26,253
14,162 - 1,556 1,556 3,395 6,507
17,269 119 8,559 143 6,235 15,056
6,918 13 2,120 7 193 2,333
10,214 - 9,303 - 676 9,979
12,721 - - - - -
15,858 1,184 5,618 41 3,888 10,731
171,799 - - - - -
133,825 - - - - -
112,824 - - - - -
21,001 - - - - -
1,367,653 30,343 710,060 42,838 88,918 872,159
2020
42,136 - - - - -
28,235 - - - - -
822,941 19,233 599,938 43,338 82,881 745,390
433,336 52 393,680 8 12,335 406,075
389,605 19,181 206,258 43,330 70,546 339,315
76,617 195 62,157 19 1,117 63,488
51,271 78 48,296 46 1,795 50,215
81,582 244 13,655 41,206 25,665 80,770
20,810 44 5,184 - 4,693 9,921
51,599 274 38,600 25 10,220 49,119
35,749 18,295 3,267 - 9,606 31,168
31,193 14 16,214 - 12,520 28,748
12,740 1 744 1,875 2,340 4,960
13,175 33 8,615 152 1,998 10,798
6,786 3 2,103 7 228 2,341
8,083 - 7,423 - 364 7,787
9,667 - - - - -
20,857 6,200 6,255 35 2,374 14,864
113,219 - - - - -
137,655 - - - - -
122,743 - - - - -
14,912 - - - - -
1,174,710 25,433 606,193 43,373 85,255 760,254
Construction .....................................................................................
Construction .....................................................................................
Collateral
Loans to credit institutions at amortized cost ...............................
Loans to customers at amortized cost .........................................
Industry, energy and manufacturing ................................................
Undrawn loan commitments and unused overdrafts ...................
Individuals ...............................................................................
Corporates ...............................................................................
Real estate activities ........................................................................
Financial and insurance activities ....................................................
Information and communication technology ....................................
Wholesale and retail trade ...............................................................
Cash and balances with Central Bank .........................................
Fishing industry ................................................................................
Other assets with credit risk ........................................................
Transportation ..................................................................................
Services ...........................................................................................
Public sector ....................................................................................
Agriculture and forestry ....................................................................
Financial guarantees ...................................................................
Fishing industry ................................................................................
Loans to credit institutions at amortized cost ...............................
Fair value through OCI ................................................................
Services ...........................................................................................
Public sector ....................................................................................
Industry, energy and manufacturing ................................................
Information and communication technology ....................................
Corporates ...............................................................................
Individuals ...............................................................................
Wholesale and retail trade ...............................................................
Balance at the end of the year ..................................................
Bonds issued by financial institutions and corporates ..............
Financial and insurance activities ....................................................
Cash and balances with Central Bank .........................................
Real estate activities ........................................................................
Government bonds ..................................................................
Loans to customers at amortized cost .........................................
Financial guarantees ...................................................................
Agriculture and forestry ....................................................................
Undrawn loan commitments and unused overdrafts ...................
Fair value through OCI ................................................................
Other assets with credit risk ........................................................
Bonds issued by financial institutions and corporates ..............
Government bonds ..................................................................
Balance at the end of the year ..................................................
Transportation ..................................................................................
Maximum exposure to credit risk and collateral held against different types of financial instruments subject to the impairment requirements
of IFRS 9
55
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk, continued
LTV ratio for residential mortgage lending
Gross Thereof Gross Thereof
carrying
credit
carrying
credit
amount
impaired
amount
impaired
137,392 1,194 117,591 883
233,904 1,975 169,206 1,559
88,276 1,112 84,899 810
1,821 209 3,170 216
753 50 1,004 111
1,716 - 2,609 177
33 - 75 -
463,895 4,540 378,554 3,756
Collateral for financial assets in stage 3
Collateral repossessed
Large exposures
Credit quality
More than 110% ...............................................................................................................
Not classified ....................................................................................................................
At the end of the year, the gross carrying amount of assets in stage 3 was ISK 17,703 million (31.12.2020: ISK 21,606 million) with ISK
14,421 million in collateral (31.12.2020: ISK 16,097 million), thereof ISK 12,875 million in real estate (31.12.2020: 14,790 million).
A large exposure is defined as an exposure to a group of financially related borrowers which is equal to or exceeds 10% of the Group's
Tier 1 capital according to the Financial Undertakings Act No. 161/2002 and Regulation No. 233/2017 on Prudential Requirements. The
definition changed on 28 June 2021 with the adoption of CRR II in Iceland, which specifies Tier 1 capital as benchmark instead of eligible
capital. The legal maximum for individual large exposures is 25% of Tier 1 capital, net of eligible credit risk mitigation.
The Group had one large exposure at the end of the year, totaling ISK 19.9 billion (11,5% of Tier 1 capital) before taking into account
eligible credit risk mitigation (31.12.2020: one large exposure of ISK 20.9 billion or 10.4% of Tier 1 capital). The total exposure is ISK 19.7
billion (11.4% of Tier 1 capital) after taking into account eligible credit risk mitigation.
The following table describes the loan to value (LTV) and impairment status of the Group's mortgage loan book to individuals. LTV is
calculated as the ratio of the gross carrying amount of the loan to the value of the collateral without adjusting for possible costs of
obtaining and selling the collateral.
90-100% ...........................................................................................................................
70-90% .............................................................................................................................
2021
2020
Less than 50% .................................................................................................................
The Group uses internal credit ratings and external credit ratings, if available, to monitor credit risk. The Group's internal credit rating
system rates customers through application of statistical models based on a variety of information that has been determined to be
predictive of default. This includes demographic, behavioral, financial and economic data, coupled with qualitative expert judgment for
large corporate exposures. Six exposure type models rate individuals' exposures – mortgages, consumer loans, auto loans, guarantees,
loans to individuals for work purposes and other loans. The models are validated annually and recalibrated and updated with current data
with the aim of maintaining their predictive power. Year-on-year changes in risk classification of loans may in part be due to model
refinement. External ratings are primarily used for marketable securities and loans to credit institutions. For further information on the
rating scales used, see Note 56.
50-70% .............................................................................................................................
Balance at the end of the year .......................................................................................
The following tables show financial instruments subject to the impairment requirements of IFRS 9 broken down by rating scale, where risk
class 5, DD, denotes the highest risk. Assets carried at fair value through profit and loss are not subject to the impairment requirements of
IFRS 9. The tables below sum up the gross carrying amount of assets by rating class and impairment stage. The gross carrying amount
net of loss allowance is the book value of the underlying assets. For off-balance sheet exposures, the nominal amount is shown. FVOCI
stands for fair value through other comprehensive income.
Exposures that are 'Unrated' are typically due to newly formed entities, entities for which the Bank's rating models are not applicable or no
external rating is available.
During the year, the Group took possession of assets due to foreclosures. The total value of real estate the Group took possession of
during the year and still holds at the end of the year is ISK 422 million (31.12.2020: ISK 330 million) and ISK 34 million in other assets
(31.12.2020: ISK 4 million). The assets are held for sale, see Note 29.
100-110% .........................................................................................................................
56
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk, continued
Credit quality profile for financial instruments subject to IFRS 9 impairment requirements
Financial
Cash and Loans to instru-
2021
balances credit ments at
Loans to credit institutions, securities and cash
with CB FVOCI
69,057 28,125 133,838
- 31 -
69,057 28,156 133,838
- - (13)
69,057 28,156 133,825
Loans to customers
Stage 1 Stage 2 Stage 3 POCI Total
163,670 3 - 41 163,714
348,912 - - 12 348,924
218,228 21,582 - 105 239,915
128,930 43,034 - 35 171,999
- - 17,469 236 17,705
1,188 392 - - 1,580
860,928 65,011 17,469 429 943,837
(1,313) (1,806) (4,480) (1) (7,600)
859,615 63,205 12,989 428 936,237
Loans to customers - Individuals
120,152 - - 41 120,193
276,228 - - 12 276,240
88,083 6,963 - 105 95,151
23,961 6,394 - 35 30,390
- - 5,947 236 6,183
4 225 - - 229
508,428 13,582 5,947 429 528,386
(490) (246) (1,151) (1) (1,888)
507,938 13,336 4,796 428 526,498
Loans to customers - Companies and sovereign
43,518 3 - - 43,521
72,684 - - - 72,684
130,145 14,619 - - 144,764
104,969 36,640 - - 141,609
- - 11,522 - 11,522
1,184 167 - - 1,351
352,500 51,429 11,522 - 415,451
(823) (1,560) (3,329) - (5,712)
351,677 49,869 8,193 - 409,739
Loan commitments, guarantees and unused credit facilities
106,445 - - - 106,445
65,119 5,479 1,614 - 72,212
8,703 297 - - 9,000
180,267 5,776 1,614 - 187,657
(293) (91) (344) - (728)
179,974 5,685 1,270 - 186,929
Risk class 3 to 4 - (Grades B+ to CCC-) ....................................................
Risk class 5 - (DD) ....................................................................................
Risk class 1 - (Grades BBB+ to BBB-) .....................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ..........................................................
Book value .........................................................................................................................................
institutions
Risk class 2 - (Grades BB+ to BB-) .................................................................
Unrated ...........................................................................................................
Risk class 1 - (Grades BBB+ to BBB-) .....................................................
Risk class 0 - (Grades AAA to A-) ...................................................................
Gross carrying amount .....................................................................................................................
Loss allowance ...................................................................................................................................
Book value ...............................................................................................
Book value ...............................................................................................
Risk class 2 - (Grades BB+ to BB-) ...........................................................
Risk class 0 - (Grades AAA to A-) .............................................................
Gross carrying amount .................................................................................
Non-investment grade .........................................................................................................................
Risk class 1 - (Grades BBB+ to BBB-) ...........................................................
Risk class 0 - (Grades AAA to A-) .............................................................
Unrated .....................................................................................................
Nominal ..........................................................................................................
Investment grade ................................................................................................................................
Nominal less loss allowance ........................................................................
Risk class 2 - (Grades BB+ to BB-) ...........................................................
Risk class 5 - (DD) ....................................................................................
Gross carrying amount ...........................................................................
Loss allowance ..........................................................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ....................................................
Risk class 0 to 1 (Grades AAA to BBB-) ..........................................................
Risk class 2 to 4 (Grades BB+ to CCC-) .........................................................
Unrated ...........................................................................................................
Loss allowance ................................................................................................
Risk class 5 - (DD) ..........................................................................................
Unrated .....................................................................................................
Loss allowance ................................................................................................
Book value .....................................................................................................
Gross carrying amount ...........................................................................
Loss allowance ..........................................................................................
57
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk, continued
Financial
Cash and Loans to instru-
2020
balances credit ments at
Loans to credit institutions, securities and cash
with CB institutions FVOCI
42,136 21,238 137,667
- 7,098 -
42,136 28,336 137,667
- (101) (12)
42,136 28,235 137,655
Loans to customers
Stage 1 Stage 2 Stage 3 POCI Total
147,816 207 - - 148,023
274,237 2,093 - 40 276,370
174,857 28,364 - 54 203,275
83,702 98,619 - 153 182,474
- - 21,297 310 21,607
2,641 608 - - 3,249
683,253 129,891 21,297 557 834,998
(1,844) (3,305) (6,824) (84) (12,057)
681,409 126,586 14,473 473 822,941
Loans to customers - Individuals
107,395 207 - - 107,602
210,503 1,292 - 40 211,835
75,261 6,865 - 54 82,180
19,531 8,940 - 153 28,624
- - 5,149 310 5,459
109 2 - - 111
412,799 17,306 5,149 557 435,811
(807) (395) (1,189) (84) (2,475)
411,992 16,911 3,960 473 433,336
Loans to customers - Companies and sovereign
40,421 - - - 40,421
63,734 801 - - 64,535
99,596 21,499 - - 121,095
64,171 89,679 - - 153,850
- - 16,148 - 16,148
2,532 606 - - 3,138
270,454 112,585 16,148 - 399,187
(1,037) (2,910) (5,635) - (9,582)
269,417 109,675 10,513 - 389,605
Loan commitments, guarantees and unused credit facilities
62,426 590 - - 63,016
43,550 17,530 1,435 - 62,515
8,543 2 - - 8,545
114,519 18,122 1,435 - 134,076
(239) (577) (171) - (987)
114,280 17,545 1,264 - 133,089
Loss allowance ..........................................................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ....................................................
Book value ...............................................................................................
Loss allowance ................................................................................................
Nominal less loss allowance ........................................................................
Risk class 0 - (Grades AAA to A-) ...................................................................
Book value .........................................................................................................................................
Risk class 2 - (Grades BB+ to BB-) ...........................................................
Risk class 1 - (Grades BBB+ to BBB-) ...........................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ..........................................................
Risk class 1 - (Grades BBB+ to BBB-) .....................................................
Risk class 5 - (DD) ..........................................................................................
Unrated ...........................................................................................................
Gross carrying amount .................................................................................
Loss allowance ................................................................................................
Risk class 0 - (Grades AAA to A-) .............................................................
Book value ...............................................................................................
Nominal ..........................................................................................................
Unrated .....................................................................................................
Book value .....................................................................................................
Risk class 0 - (Grades AAA to A-) .............................................................
Risk class 0 to 1 - (Grades AAA to BBB-) ........................................................
Risk class 2 to 4 - (Grades BB+ to CCC-) ......................................................
Unrated ...........................................................................................................
Loss allowance ..........................................................................................
Gross carrying amount ...........................................................................
Risk class 1 - (Grades BBB+ to BBB-) .....................................................
Risk class 2 - (Grades BB+ to BB-) ...........................................................
Unrated .....................................................................................................
Gross carrying amount ...........................................................................
Investment grade ................................................................................................................................
Non-investment grade .........................................................................................................................
Gross carrying amount .....................................................................................................................
Loss allowance ...................................................................................................................................
Risk class 5 - (DD) ....................................................................................
Risk class 2 - (Grades BB+ to BB-) .................................................................
Risk class 5 - (DD) ....................................................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ....................................................
58
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk, continued
Gross Gross Gross
Carrying Loss Carrying Loss Carrying Loss Book
2021
amount allowance amount allowance amount allowance value
231,051 (13) - - - - 231,038
508,428 (490) 13,777 (246) 6,181 (1,152) 526,498
450,305 (127) 9,055 (84) 4,536 (228) 463,457
58,123 (363) 4,722 (162) 1,645 (924) 63,041
352,500 (823) 51,429 (1,560) 11,522 (3,329) 409,739
80,318 (160) 7,092 (45) 3,472 (356) 90,321
34,382 (49) 2,411 (24) 317 (27) 37,010
69,632 (58) 8,193 (199) 653 (127) 78,094
15,949 (58) 792 (39) 128 (36) 16,736
46,824 (162) 17,362 (1,032) 3,420 (1,114) 65,298
37,275 (135) 8,411 (45) 733 (441) 45,798
25,937 (49) 1,900 (10) 170 (29) 27,919
12,474 (32) 1,065 (2) 1,649 (992) 14,162
14,125 (70) 2,796 (153) 721 (150) 17,269
6,499 (29) 343 (4) 110 (1) 6,918
9,085 (21) 1,064 (7) 149 (56) 10,214
(1,326) 65,206 (1,806) 17,703 (4,481) 1,167,275
2020
208,139 (113) - - - - 208,026
412,799 (807) 17,554 (395) 5,458 (1,273) 433,336
360,964 (365) 13,833 (141) 3,756 (174) 377,873
51,835 (442) 3,721 (254) 1,702 (1,099) 55,463
270,454 (1,037) 112,585 (2,910) 16,148 (5,635) 389,605
53,092 (155) 23,345 (376) 1,265 (554) 76,617
25,483 (221) 26,021 (200) 235 (45) 51,273
73,520 (232) 7,832 (9) 675 (204) 81,582
20,131 (31) 680 (66) 170 (74) 20,810
14,917 (54) 30,925 (1,459) 8,851 (1,581) 51,599
27,835 (132) 7,791 (102) 703 (346) 35,749
25,653 (70) 5,253 (132) 1,214 (725) 31,193
9,910 (40) 2,846 (155) 1,166 (987) 12,740
6,357 (26) 6,775 (387) 1,284 (828) 13,175
6,429 (40) 282 (4) 164 (45) 6,786
7,129 (36) 835 (20) 421 (246) 8,083
891,392 (1,957) 130,139 (3,305) 21,606 (6,908) 1,030,967
Construction ...........................................................
Construction ...........................................................
Industry, energy and manufacturing ........................
Transportation .........................................................
Services ..................................................................
Public Sector ..........................................................
Agriculture and forestry ...........................................
Loans to credit instit., securities & cash ......................
Loans to individuals ....................................................
Mortgage ................................................................
Other ......................................................................
Public Sector ..........................................................
Agriculture and forestry ...........................................
Balance at the end of the year .................................
Loans to corporates and sovereign .............................
Real estate activities ...............................................
Fishing industry .......................................................
Information and communication technology ............
Wholesale and retail trade ......................................
Industry, energy and manufacturing ........................
Transportation .........................................................
Services ..................................................................
Mortgage ................................................................
Loans to individuals ....................................................
Loans to credit instit., securities & cash ......................
Loans to corporates and sovereign .............................
Balance at the end of the year .................................
Other ......................................................................
Real estate activities ...............................................
Fishing industry .......................................................
Information and communication technology ............
Wholesale and retail trade ......................................
Financial and insurance activities ............................
Sector split, gross carrying value and loss allowance for financial instruments subject to IFRS 9 impairment requirements
Stage 1
Stage 2
Financial and insurance activities ............................
Stage 3
1,091,979
59
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk, continued
2021
Impairment loss allowance *
Stage 1 Stage 2 Stage 3 POCI Total
(2,083) (3,882) (6,995) (84) (13,044)
(1,741) 1,465 276 - -
202 (293) 92 (1) -
60 382 (442) - -
3,137 243 (1,332) - 2,048
(1,969) (374) (327) - (2,670)
782 552 1,525 (289) 2,570
6 10 2,379 373 2,768
(1,606) (1,897) (4,824) (1) (8,328)
(13) - - - (13)
(1,619) (1,897) (4,824) (1) (8,341)
Impairment loss allowances for assets only carrying 12-month ECL ................
**** Loss allowance for all assets other than cash, bonds and loans to credit institutions.
Transfers of financial assets:
Impairment loss allowance **** ....................................................................
Total impairment loss allowance ..................................................................
** During the year the loss allowance balance for stage 3 loans was raised by ISK 468 million due to unwinding of interest income.
*** During the year an amount of ISK 2,059 million was written off but is still subject to enforcement activities subject to Icelandic law.
Transfers to Stage 3 (credit impaired financial assets) ..............................
* These amounts are a combination of all impairments, including an allowance for loan commitments and guarantees presented as a liability in these Consolidated
Financial Statements.
Transfers to Stage 1 (12-month ECL) .......................................................
Write-offs *** ...................................................................................................
Derecognitions and maturities
Reflect the allowance related to assets derecognized during the year without a credit loss being incurred, including those assets that were
derecognized following a modification of terms.
Include purchases and originations and reflect the allowance related to assets newly recognized during the year.
Write-offs
Comprise the impact of changes in model inputs or assumptions, including changes in forward-looking macroeconomic conditions, partial
repayments and additional draws on existing facilities, inflation, changes in the measurement following a transfer between stages, effects
of foreign exchange rate changes, impairment of interest income due to impaired debt instruments and unwinding of the time value
discount due to the passage of time.
Balance at the beginning of the year ...............................................................
New financial assets, originated or purchased .................................................
The table below reconciles the opening and closing allowance balance for loans to customers and debt securities at amortized cost and
FVOCI and loan commitments, guarantees and unused credit facilities by impairment stages. The reconciliation includes:
All transfers are presumed to occur before any corresponding remeasurement of the loss allowance.
Net remeasurement of loss allowance
New financial assets, originated or purchased
Net remeasurement of loss allowance ** .........................................................
Transfers to Stage 2 (lifetime ECL) ...........................................................
Transfers of financial assets between impairment stages
Derecognitions and maturities .........................................................................
The amount after net remeasurements of loss allowance written off during the year.
60
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk, continued
Impairment loss allowance for loans to customers
Stage 1 Stage 2 Stage 3 POCI Total
(1,844) (3,305) (6,824) (84) (12,057)
(1,585) 1,309 276 - -
190 (281) 92 (1) -
58 377 (435) - -
2,774 21 (1,164) - 1,631
(1,481) (267) (327) - (2,075)
569 330 1,523 (289) 2,133
6 10 2,379 373 2,768
(1,313) (1,806) (4,480) (1) (7,600)
Impairment loss allowance for loans to customers - Individuals
(807) (395) (1,189) (84) (2,475)
(614) 454 160 - -
112 (162) 51 (1) -
43 157 (200) - -
921 (333) (472) - 116
(341) (67) (107) - (515)
190 90 284 (289) 275
6 10 322 373 711
(490) (246) (1,151) (1) (1,888)
Impairment loss allowance for loans to customers - Companies and sovereign
(1,037) (2,910) (5,635) - (9,582)
(971) 855 116 - -
78 (119) 41 - -
15 220 (235) - -
1,853 354 (692) - 1,515
(1,140) (200) (220) - (1,560)
379 240 1,239 - 1,858
- - 2,057 - 2,057
(823) (1,560) (3,329) - (5,712)
Impairment loss allowance for loan commitments, guarantees and unused credit facilities
(239) (577) (171) - (987)
(156) 156 - - -
12 (12) - - -
2 5 (7) - -
363 222 (168) - 417
(488) (107) - - (595)
213 222 2 - 437
(293) (91) (344) - (728)
Total loss allowance for loan commit., guarantees, unused cr. facilities
Derecognitions and maturities .............................................................
Net remeasurement of loss allowance .................................................
Net remeasurement of loss allowance .................................................
Balance at the beginning of the year .........................................................
Transfers to Stage 2 (lifetime ECL) .....................................................
Transfers to Stage 2 (lifetime ECL) ...............................................
Transfers to lifetime ECL .....................................................................
Derecognitions and maturities ...................................................................
New financial commitments originated ......................................................
Total loss allowance for loans to companies and sovereign .........
Transfers to Stage 3 (credit impaired financial assets) ..................
Transfers to Stage 1 (12-month ECL) ...........................................
Net remeasurement of loss allowance .......................................................
Transfers to 12-month ECL ................................................................
Balance at the beginning of the year .........................................................
Transfers
Transfers to credit impaired .................................................................
Balance at the beginning of the year ...................................................
Write-offs ............................................................................................
Transfers of financial assets
Transfers of financial assets:
Total loss allowance for loans to individuals ..................................
Balance at the beginning of the year ...................................................
Transfers to Stage 3 (credit impaired financial assets) ........................
Transfers of financial assets
Transfers to Stage 1 (12-month ECL) ...........................................
New financial assets, originated or purchased ...........................................
Net remeasurement of loss allowance .......................................................
Derecognitions and maturities ...................................................................
Write-offs ..................................................................................................
New financial assets, originated or purchased .....................................
New financial assets, originated or purchased .....................................
Derecognitions and maturities .............................................................
Write-offs ............................................................................................
Transfers to Stage 2 (lifetime ECL) ...............................................
Transfers to Stage 1 (12-month ECL) .................................................
Total loss allowance for loans to customers .........................................
Transfers to Stage 3 (credit impaired financial assets) ..................
61
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk, continued
2020
Impairment loss allowance *
Stage 1 Stage 2 Stage 3 POCI Total
(1,137) (1,166) (7,141) (209) (9,653)
- - - - -
(3,394) 3,116 278 - -
1,052 (1,085) 33 - -
82 816 (898) - -
2,282 (5,598) (2,773) (20) (6,109)
(1,713) (428) (1,067) - (3,208)
756 496 1,882 - 3,134
- 2 2,977 149 3,128
(2,072) (3,847) (6,709) (80) (12,708)
(113) - - - (113)
(2,185) (3,847) (6,709) (80) (12,821)
Impairment loss allowance for loans to customers
Stage 1 Stage 2 Stage 3 POCI Total
(974) (921) (7,067) (209) (9,171)
- - - -
(3,109) 2,838 271 - -
994 (1,027) 33 - -
80 812 (892) - -
2,045 (5,141) (2,626) (20) (5,742)
(1,295) (213) (1,063) - (2,571)
420 382 1,821 - 2,623
- 2 2,977 149 3,128
(1,839) (3,268) (6,546) (80) (11,733)
Impairment loss allowance for loans to customers - Individuals
(418) (319) (1,601) (209) (2,547)
- - - -
(1,594) 1,451 143 - -
520 (548) 28 - -
48 333 (381) - -
832 (1,393) (721) (20) (1,302)
(345) (20) (26) - (391)
151 99 428 - 678
- 2 975 149 1,126
(806) (395) (1,155) (80) (2,436)
Transfers to Stage 2 (lifetime ECL) .....................................................
Transfers to Stage 3 (credit impaired financial assets) ........................
Derecognitions and maturities ...................................................................
Transfers to Stage 2 (lifetime ECL) ...............................................
Total loss allowance for loans to customers .........................................
Balance at the beginning of the year ...................................................
New financial assets, originated or purchased .....................................
Total loss allowance for loans to individuals ..................................
Net remeasurement of loss allowance .................................................
New financial assets, originated or purchased ...........................................
Transfers to Stage 1 (12-month ECL) .................................................
Derecognitions and maturities .........................................................................
Impairment loss allowance **** ....................................................................
Impairment loss allowances for assets only carrying 12-month ECL ................
Derecognitions and maturities .............................................................
Transfers to Stage 3 (credit impaired financial assets) ..................
Transfers to Stage 1 (12-month ECL) ...........................................
Transfers of financial assets
Transfers of financial assets:
Transfers to Stage 1 (12-month ECL) .......................................................
Transfers to Stage 2 (lifetime ECL) ...........................................................
Transfers to Stage 3 (credit impaired financial assets) ..............................
Write-offs ............................................................................................
Transfers of financial assets:
Write-offs ..................................................................................................
Net remeasurement of loss allowance .......................................................
Balance at the beginning of the year ...............................................................
**** Loss allowance for all assets other than cash, bonds and loans to credit institutions.
Write-offs *** ...................................................................................................
Balance at the beginning of the year .........................................................
New financial assets, originated or purchased .................................................
Total impairment loss allowance ..................................................................
* These amounts are a combination of all impairments, including an allowance for loan commitments and guarantees presented as a liability in these Consolidated
Financial Statements.
** During the year the loss allowance balance for stage 3 loans was raised by ISK 640 million due to unwinding of interest income.
*** During the year an amount of ISK 3,312 million was written off but is still subject to enforcement activities subject to Icelandic law.
Net remeasurement of loss allowance ** .........................................................
62
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk, continued
Stage 1 Stage 2 Stage 3 POCI Total
Impairment loss allowance for loans to customers - Companies and sovereign
(556) (602) (5,466) - (6,624)
- - - -
(1,515) 1,387 128 - -
474 (479) 5 - -
32 479 (511) - -
1,213 (3,748) (1,905) - (4,440)
(950) (193) (1,037) - (2,180)
269 283 1,393 - 1,945
- - 2,002 - 2,002
(1,033) (2,873) (5,391) - (9,297)
Impairment loss allowance for loan commitments, guarantees and unused credit facilities
(163) (245) (74) - (482)
- - - -
(285) 278 7 - -
58 (58) - - -
2 4 (6) - -
237 (457) (147) - (367)
(418) (215) (4) - (637)
336 114 61 - 511
(233) (579) (163) - (975)
Macroeconomic forecast
2022 2023 2024
4.8% 4.5% 4.1%
10.2% 5.0% 4.4%
4.1% 3.3% 3.2%
5.8% 3.1% 2.3%
2022 2023 2024 2022 2023 2024
3.8% 3.8% 3.7% 6.8% 5.7% 4.7%
13.0% 5.5% 4.9% 3.4% 2.5% 3.4%
4.8% 4.1% 3.8% 3.9% 2.9% 3.0%
6.8% 3.4% 2.3% 5.3% 2.5% 2.3%
Sensitivity analysis
Balance at the beginning of the year .........................................................
GDP ....................................................................................................................................................
Optimistic
Total loss allowance for loans to companies and sovereign .........
Transfers to lifetime ECL .....................................................................
Transfers to credit impaired .................................................................
The calculation of expected credit losses under IFRS 9 uses forward-looking information in the form of scenarios where the development
of macro-economic variables is predicted. The expected credit loss is a probability-weighted average of the estimated forecasts over three
scenarios: base case (60%), pessimistic (20%) and optimistic (20%) (31.12.2020: base case 65%, pessimistic 20% and optimistic 15%).
The macroeconomic forecast and scenario probability weights is done by the Bank’s Chief Economist and approved by the Bank’s IFRS 9
committee. The following table shows values used for IFRS 9 impairment calculations.
Private consumption ....................................................................
Transfers to 12-month ECL ................................................................
Base case
Unemployment rate .............................................................................................................................
Housing prices ....................................................................................................................................
GDP ............................................................................................
New financial commitments originated ......................................................
Transfers
Balance at the beginning of the year ...................................................
Derecognitions and maturities .............................................................
Housing prices ............................................................................
Net remeasurement of loss allowance .......................................................
Derecognitions and maturities ...................................................................
Transfers to Stage 3 (credit impaired financial assets) ..................
Net remeasurement of loss allowance .................................................
New financial assets, originated or purchased .....................................
Pessimistic
Total loss allowance for loan commit., guarantees, unused cr. facilities
Private consumption ...........................................................................................................................
Unemployment rate .....................................................................
Transfers to Stage 1 (12-month ECL) ...........................................
Transfers of financial assets
Write-offs ............................................................................................
Transfers to Stage 2 (lifetime ECL) ...............................................
Regarding macroeconomic outlook, see Note 3, Significant accounting estimates and judgements. The Group calculates loss for three
different scenarios, optimistic, neutral and pessimistic and the loss allowance is the weighted average of the results. As a sensitivity
analysis, it can be noted that the loss allowance in stage 1 and 2 for each of these scenarios separately is ISK 1.8 billion, ISK 3.3 billion
and ISK 5.9 billion for the optimistic, base case and pessimistic scenarios, respectively. At year end 2020 the corresponding calcualated
loss allowance was ISK 2.3 billion, ISK 4.9 billion and ISK 13.7 billion, respectively.
63
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
42. Credit risk, continued
Forbearance
Gross Gross Gross Gross
carrying Loss carrying Loss carrying Loss carrying Loss
2021
amount
a
l
allowance
Gross
carrying
allowance
Gross
carrying
allowance
Gross
carrying
Loss
allowance
Individuals ................................................. 10,972 (20) 1,962 (28) 2,695 (445) 15,629 (493)
Companies ................................................ 10,912 (54) 17,440 (1,353) 7,104 (2,526) 35,456 (3,933)
Tourism ................................................... 5,495 (40) 15,710 (1,148) 5,155 (2,055) 26,360 (3,243)
Other than tourism .................................. 5,417 (14) 1,730 (205) 1,949 (471) 9,096 (690)
Total .......................................................... 21,884 (74) 19,402 (1,381) 9,799 (2,971) 51,085 (4,426)
2020
Individuals ................................................. 10,549 (71) 3,995 (53) 2,155 (410) 16,699 (534)
Companies ................................................ 4,106 (20) 28,747 (1,319) 9,513 (2,301) 42,366 (3,640)
Tourism ................................................... 23,874 (1,178) 6,771 (1,067) 30,645 (2,245)
Other than tourism .................................. 4,106 (20) 4,873 (141) 2,742 (1,234) 11,721 (1,395)
Total .......................................................... 14,655 (91) 32,742 (1,372) 11,668 (2,711) 59,065 (4,174)
Groups with special focus due to the Covid-19 pandemic
Recipient
of govern-
Payment ment Thereof
Tourism moratoria sponsored All focus secured by
2021
in Q4 loans groups real estate
4,212 612 161 4,917 4,535
10,545 2,627 1,176 11,058 10,870
5,838 33 2,315 6,353 2,251
8,679 - 867 8,685 358
152 550 536 1,119 826
43,766 12,588 18,336 44,527 39,681
1,347 - 1,065 2,409 1,282
74,539 16,410 24,456 79,068 59,803
(3,614) (955) (1,675) (3,683)
70,925 15,455 22,781 75,385
2020
3,912 12,598 130 16,496 15,704
25,549 13,858 1,667 33,327 32,980
5,593 1,311 2,384 6,366 2,897
9,166 1,013 905 9,173 262
27 2,622 496 3,014 1,917
32,717 20,842 17,831 33,568 30,349
934 4,151 1,032 5,615 2,278
77,898 56,395 24,445 107,559 86,387
(5,148) (1,583) (1,354) (5,524)
72,750 54,812 23,091 102,035
Book value of Covid-19 impacted loans was ISK 75,385 million or 8.1% of loans to customers (31.12.2020: ISK 102,035 million and
12.4%).
Book value .....................................................................................................
Individuals .......................................................................................................
The Group grants forbearance measures to facilities where the customer is facing temporary difficulties and needs measures which would
not generally be available to customers. These forbearance measures include refinancing and renegotiations of loan terms, including loan
extensions and adjustment of the payment schedule. After forbearance measures have been granted, the facility is classified as forborne
for a period of at least 24 months. The forborne classification is not removed until the customer has demonstrated repayment capacity.
Gross carrying amount .................................................................................
Transportation .................................................................................................
Wholesale and retail trades .............................................................................
Industry, energy and manufacturing ................................................................
Services ..........................................................................................................
Three groups of customers have been identified as a focus for the assessment of the impact of the Covid-19 pandemic on the Group; i)
Tourism; where there is a high probability of impact due to public health restrictions; ii) Customers which have had active payment
moratoria in the fourth quarter leading up to the reporting date; and iii) Recipients of loans through government sponsored loan schemes
initiated as a consequence of the pandemic. The exposure to these groups is shown in the following table, broken down by industry sector.
Also shown is the amount secured by real estate as this is the largest type of collateral for loans to customers. The same customer can be
in more than one group.
At the beginning of the Covid-19 public health crisis, the Group partook in widely available schemes to grant moratoria to its customers.
These were not classified as forbearance in accordance with guidelines from EBA. These schemes have expired, and concessions
granted to customers facing temporary difficulties due to the public health crisis are now classified as forbearance when appropriate
according to the definition.
Loss allowance ................................................................................................
Book value .....................................................................................................
Individuals .......................................................................................................
Real estate and construction ...........................................................................
Services ..........................................................................................................
Transportation .................................................................................................
Industry, energy and manufacturing ................................................................
Wholesale and retail trades .............................................................................
Other sectors ..................................................................................................
Gross carrying amount .................................................................................
Loss allowance ................................................................................................
dependent
Real estate and construction ...........................................................................
Stage 1
Stage 2
Stage 3
Total
Other sectors ..................................................................................................
64
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
43. Market risk
Interest rate risk
Interest rate risk in the banking book
2021
Up to 3 3-12
?
1-5 5-10 Over 10
Assets
months months years years years Total
65,501 - - - - 65,501
30,272 - - - - 30,272
578,253 107,607 235,275 4,920 11,124 937,179
42,731 64,162 39,278 5,431 249 151,851
716,757 171,769 274,553 10,351 11,373 1,184,803
Liabilities
5,000 - - - - 5,000
655,476 - - - - 655,476
11,308 34,217 275,315 34,665 11,965 367,470
- - 35,860 - - 35,860
671,784 34,217 311,175 34,665 11,965 1,063,806
(196,457) (5) 193,205 3,766 - 509
(151,484) 137,547 156,583 (20,548) (592) 121,506
Subordinated liabilities ................................................................
Liabilities ...................................................................................
Derivatives and other off-balance sheet items (net position) .......
Borrowings .................................................................................
Assets ........................................................................................
The Group keeps close track of market risk and separates its exposures for the trading book and the banking book. Market risk in the
trading book arises from market making activities and non-strategic derivatives positions arising from the Group's operations of meeting
customers' investment and risk management needs. Market risk in the banking book arises from various mismatches in assets and
liabilities in e.g. currencies, maturities and interest rates. Market risk in the trading book and in the banking book is managed separately.
Loans to credit institutions ...........................................................
Loans to customers .....................................................................
At the beginning of the COVID-19 pandemic, the Icelandic Central Bank lowered interest rates to historic lows which resulted in sharp
increase in demand for non-indexed mortgages with floating rates in 2020 and first half of 2021. Inflation in Iceland, currently at 5.1%, has
exceeded the Central Bank’s target of 2.5% since June 2020 and is expected to remain over the target until the first half of 2023. The
Central Bank has responded by increasing interest rates by 125bps in 2021 with further increases expected. This has resulted in a sharp
increase in demand for non-indexed fixed rate mortgages in recent months with corresponding increase in interest rate risk for nominal
rates.
Market risk allowance is set by the Board in the Bank's risk appetite and limit frameworks are in place for each trading desk. The Asset
and Liability Committee (ALCO) is responsible for managing the Bank's overall market risk. Risk Management is responsible for measuring
and monitoring market risk exposure, and reporting the exposure, usage and limit breaches.
Market risk arises from imbalances in the Group's balance sheet as well as in market making activities and position taking in bonds,
equities, currencies, derivatives and other commitments which are marked to market.
Interest rate risk arises from the possibility that changes in market rates adversely affect net interest income and fair value of interest-
bearing instruments on the Group's balance sheet. The Group's operations are subject to interest rate risk due to mismatches in the fixing
of interest rates between assets and liabilities, resulting in a repricing risk for the Group. The Group also faces interest basis risk between
interest-bearing assets and interest-bearing liabilities due to different types of floating-rate indices in different currencies.
The Group manages and limits market risk exposure in accordance with its risk appetite and strategic goals for net profit.
Net interest gap ........................................................................
Deposits ......................................................................................
Balances with Central Bank .........................................................
The Group's interest rate risk for foreign currencies is limited as foreign denominated assets predominantly have short fixing periods and
the Group generally applies cash flow hedging for its foreign denominated fixed rate borrowings. For domestic rates, longer fixing periods
are more common.
Due to credit institutions and Central Bank ..................................
The following table shows the Group's interest-bearing assets and liabilities by interest fixing periods. The figures for loans to customers
and borrowings are shown on a fair value basis, see Note 24, and are therefore different from the amounts shown in these Consolidated
Financial Statements. The fair value reflects the likelihood of prepayment. Defaulted loans are presented at book value, which is based on
the value of the underlying collateral, and are therefore assumed to be independent of interest adjustment periods and placed in the 'Up to
3 months' category. The assets and liabilities of Valitor hf. are not included in the figures as they are classified as held for sale.
Financial instruments ..................................................................
Market risk is the current or prospective risk that changes in financial market prices and rates adversely affect the Group's earnings and
equity position due to changes to the value and cash flows of its assets and liabilities.
65
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
43. Market risk, continued
2020
Up to 3 3-12
?
1-5 5-10 Over 10
Assets
months months years years years Total
38,794 - - - - 38,794
28,235 - - - - 28,235
568,875 63,622 172,247 4,838 17,670 827,252
33,329 61,122 38,392 1,672 4,171 138,686
669,233 124,744 210,639 6,510 21,841 1,032,967
Liabilities
13,031 - - - - 13,031
540,730 15,367 9,610 1,542 1,175 568,424
15,410 42,351 191,650 55,533 11,699 316,643
15,831 - 17,957 975 - 34,763
585,002 57,718 219,217 58,050 12,874 932,861
(119,170) 31,260 91,774 861 - 4,725
(34,939) 98,286 83,196 (50,679) 8,967 104,831
NPV change -100 bps +100 bps -100 bps +100 bps
(2,250) 2,418 (3,849) 3,511
2,308 (2,322) 933 (1,002)
338 (461) 301 (327)
NII change
(881) 85 (1,032) 309
(3,808) 774 (3,414) 668
(12) 15 (27) 27
Sensitivity analysis of interest rate risk in the trading book
Currency -100 bps +100 bps -100 bps +100 bps
93 (85) 117 (105)
(41) 43 185 (169)
74 (74) 34 (34)
Balances with Central Bank .........................................................
Liabilities ...................................................................................
Assets ........................................................................................
Due to credit institutions and Central Bank ..................................
Borrowings .................................................................................
The following table shows the interest sensitivity of the Group's net positions in the trading book by currencies. Sensitivity is quantified as
the net change in value when assuming a simultaneous parallel shift upwards and downwards of all yield curves by 100 basis points. The
sensitivity does not relate to variation of annual net interest income and is not an estimate of risk. The calculations are based on duration
and convexity in this table.
Deposits ......................................................................................
Subordinated liabilities ................................................................
ISK, Non index-linked .......................................................................................................
Foreign currencies ............................................................................................................
2021
ISK, CPI index-linked ........................................................................................................
Net interest gap ........................................................................
Foreign currencies ............................................................................................................
Derivatives and other off-balance sheet items (net position) .......
The following table shows the sensitivity of the Group's net present value (NPV) of interest-bearing assets and liabilities and variation of
annual net interest income (NII), due to changes in interest rates by currencies. The variation is calculated on the basis of simultaneous
parallel shifts upwards or downwards of yield curves. The choice of shifts is not an estimate of risk likelihood. Behavioral maturities are
taken into account in the NPV calculations, including prepayment likelihood and expected behavior of non-maturing deposits. The change
to NII is however primarily based on contractual interest rate adjustments where it is simplistically assumed that all rates are equally
sensitive to the presumed change in market rates. Behavioral maturity assumptions are however applied for non-maturing deposits and a
zero percentage floor is applied to krona deposit interest rates.
ISK, CPI index-linked ........................................................................................................
ISK, Non index-linked .......................................................................................................
ISK, Non index-linked .......................................................................................................
Foreign currencies ............................................................................................................
2020
Loans to credit institutions ...........................................................
Loans to customers .....................................................................
Financial instruments ..................................................................
Sensitivity analysis of interest rate risk in the banking book
2021
2020
ISK, CPI index-linked ........................................................................................................
66
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
43. Market risk, continued
Indexation risk
2021
Up to 1 1 to 5 Over 5
Assets, CPI index-linked
year years years Total
7,500 41,730 172,662 221,892
5,753 2,541 7,549 15,843
- - - -
13,253 44,271 180,211 237,735
Liabilities, CPI index-linked
84,902 9,296 3,036 97,234
297 62,355 39,355 102,007
- - 5,337 5,337
1,134 222 1,316 2,672
1,221 3,246 - 4,467
87,554 75,119 49,044 211,717
(73,080) (27,602) 131,167 30,485
(1,221) (3,246) - (4,467)
(74,301) (30,848) 131,167 26,018
(73,444) (33,167) 124,030 17,419
2020
Assets, CPI index-linked
12,366 49,754 195,666 257,786
14,917 - - 14,917
- (487) - (487)
27,283 49,267 195,666 272,216
Liabilities, CPI index-linked
77,805 13,322 2,724 93,851
10,851 42,747 54,865 108,463
- - 5,088 5,088
1,091 208 1,318 2,617
3,334 3,739 45 7,118
93,081 60,016 64,040 217,137
(62,464) (6,523) 131,671 62,684
(3,334) (4,226) (45) (7,605)
(65,798) (10,749) 131,626 55,079
(65,668) (13,386) 126,684 47,632
Off-balance sheet position ................................................................................................
Financial instruments .......................................................................................................
Deposits ...........................................................................................................................
Liabilities, CPI index-linked ...........................................................................................
CPI Balance ....................................................................................................................
Liabilities, CPI indexed linked .......................................................................................
Subordinated liabilities ......................................................................................................
Net off-balance sheet position ..........................................................................................
Borrowings .......................................................................................................................
Net off-balance sheet position ..........................................................................................
Borrowings .......................................................................................................................
Other ................................................................................................................................
Assets, CPI index-linked ................................................................................................
Deposits ...........................................................................................................................
* Consolidated situation as per EU Regulation No 575/2013 (CRR)
Off-balance sheet position ................................................................................................
Off-balance sheet position ................................................................................................
Loans to customers ..........................................................................................................
Net on-balance sheet position ..........................................................................................
CPI Balance ....................................................................................................................
CPI Balance for prudential consolidation, excluding insurance operations * ............
CPI Balance for prudential consolidation, excluding insurance operations * ............
Net on-balance sheet position ..........................................................................................
Other ................................................................................................................................
Assets, CPI index-linked ................................................................................................
Book value and maturity profile of indexed assets and liabilities
Financial instruments .......................................................................................................
Loans to customers ..........................................................................................................
Subordinated liabilities ......................................................................................................
A significant part of the Group's balance sheet is linked to the Icelandic Consumer Price Index (CPI). For index-linked instruments,
principal and interest payments are adjusted proportionally to the CPI. The Group is exposed to indexation risk as indexed assets exceed
indexed liabilities. Financial instruments held for liquidity or market making purposes are assumed to be on demand.
Off-balance sheet position ................................................................................................
67
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
43. Market risk, continued
Currency risk
Breakdown of assets and liabilities by currency
2021
Financial assets
ISK EUR USD GBP DKK NOK Other Total
67,690 608 280 154 75 34 216 69,057
Loans to credit institutions ......................... 523 8,145 7,499 6,820 3,647 1,313 2,325 30,272
Loans to customers ................................... 780,384 99,748 39,007 768 10,820 1,629 3,881 936,237
Financial instruments ................................. 133,340 53,847 18,657 216 9 19,553 35 225,657
Other financial assets ................................ 11,936 280 93 1 8 2 400 12,720
Financial assets ....................................... 993,873 162,628 65,536 7,959 14,559 22,531 6,857 1,273,943
Financial liabilities
Due to credit inst. and Central Bank ........... 3,982 81 845 9 49 - 34 5,000
Deposits .................................................... 573,316 26,542 37,278 2,559 10,529 3,030 2,222 655,476
Financial liabilities at fair value ................... 4,463 991 86 135 97 89 16 5,877
Other financial liabilities ............................. 4,559 359 2,755 157 604 36 215 8,685
Borrowings ................................................. 163,044 172,815 - - - 18,619 2,159 356,637
Subordinated liabilities ............................... 6,245 752 13,224 - - 4,461 10,406 35,088
Financial liabilities ................................... 755,609 201,540 54,188 2,860 11,279 26,235 15,052 1,066,763
Net on-balance sheet position .................... 238,264 (38,912) 11,348 5,099 3,280 (3,704) (8,195)
Net off-balance sheet position .................... (27,584) 40,030 (15,587) (6,577) (1,889) 3,703 7,904
Net position .............................................. 210,680 1,118 (4,239) (1,478) 1,391 (1) (291)
Non-financial assets
Investment property ................................... 6,560 - - - - - - 6,560
Investments in associates .......................... 668 - - - - - - 668
Intangible assets ........................................ 9,463 - - - - - - 9,463
Tax assets ................................................. 2 - - - - - - 2
Assets and disposal groups
held for sale ............................................ 13,975 78 25 1,903 3 1 62 16,047
Other non financial assets ......................... 6,915 124 35 78 - 26 3 7,181
Non-financial assets ................................ 37,583 202 60 1,981 3 27 65 39,921
Non-financial liabilities and equity
Tax liabilities .............................................. 7,102 - - - - - - 7,102
Liabilities associated with disposal
groups held for sale ................................ 16,136 129 50 174 304 77 65 16,935
Other non-financial liabilities ...................... 28,366 81 30 - 3 - (14) 28,466
Shareholders' equity .................................. 193,925 - - - - - - 193,925
Non-controlling interest .............................. 673 - - - - - - 673
Non-financial liabilities and equity .......... 246,202 210 80 174 307 77 51 247,101
Management reporting
of currency risk * .................................. 2,061 1,110 (4,259) 329 1,087 (51) (277)
Cash and balances with CB ........................
Currency risk is the risk of loss due to adverse movements in foreign exchange rates. The Group is exposed to currency risk through a
currency mismatch between assets and liabilities. Net exposures per currency are monitored centrally in the Bank.
* The net position of the currency risk is presented in accordance with IFRS. The management monitors currency risk with more assets and liabilities underlying
as it is considered to be a more accurate measurement of the Group's currency exposure. The net position, as seen by the management, is the position used for
managing the currency imbalance.
68
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
43. Market risk, continued
2020
Financial assets
ISK EUR USD GBP DKK NOK Other Total
40,996 407 270 153 77 40 193 42,136
Loans to credit institutions ......................... 6,453 9,785 4,631 1,158 756 2,397 3,055 28,235
Loans to customers ................................... 665,640 105,764 34,653 6,257 4,189 833 5,605 822,941
Financial instruments ................................. 154,745 27,274 38,139 24 4 6,917 148 227,251
Other financial assets ................................ 7,458 208 3,460 1 - 22 (1,482) 9,667
Financial assets ....................................... 875,292 143,438 81,153 7,593 5,026 10,209 7,519 1,130,230
Financial liabilities
Due to credit inst. and Central Bank ........... 7,433 3,235 2,348 14 - - 1 13,031
Deposits .................................................... 494,606 32,505 29,069 1,992 2,895 4,556 2,801 568,424
Financial liabilities at fair value ................... 4,925 95 171 44 - 4 1 5,240
Other financial liabilities ............................. 4,444 857 2,103 150 275 53 128 8,010
Borrowings ................................................. 153,764 124,032 - - - 18,813 2,338 298,947
Subordinated liabilities ............................... 5,995 794 13,498 - - 4,508 11,265 36,060
Financial liabilities ................................... 671,167 161,518 47,189 2,200 3,170 27,934 16,534 929,712
Net on-balance sheet position .................... 204,125 (18,080) 33,964 5,393 1,856 (17,725) (9,015)
Net off-balance sheet position .................... (9,148) 22,434 (31,586) (5,184) (1,932) 17,739 7,677
Net position .............................................. 194,977 4,354 2,378 209 (76) 14 (1,338)
Non-financial assets
Investment property ................................... 6,132 - - - - - - 6,132
Investments in associates .......................... 891 - - - - - - 891
Intangible assets ........................................ 9,689 - - - - - - 9,689
Tax assets ................................................. 2 - - - - - - 2
Assets and disposal groups -
held for sale ............................................ 13,709 955 132 920 947 10 138 16,811
Other non financial assets ......................... 7,228 121 20 71 - 26 1,485 8,951
Non-financial assets ................................ 37,651 1,076 152 991 947 36 1,623 42,476
Non-financial liabilities and equity
Tax liabilities .............................................. 4,262 - - - - - - 4,262
Liabilities associated with disposal
groups held for sale ................................ 13,184 268 66 467 1,765 224 209 16,183
Other non-financial liabilities ...................... 24,508 119 73 - 4 - - 24,704
Shareholders' equity .................................. 197,672 - - - - - - 197,672
Non-controlling interest .............................. 173 - - - - - - 173
Non-financial liabilities and equity .......... 239,799 387 139 467 1,769 224 209 242,994
Management reporting
of currency risk * .................................. (7,171) 5,043 2,391 733 (898) (174) 76
* The net position of the currency risk is presented in accordance with IFRS. The management monitors currency risk with more assets and liabilities underlying
as it is considered to be a more accurate measurement of the Group's currency exposure. The net position, as seen by the management, is the position used for
managing the currency imbalance.
Cash and balances with CB ........................
69
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
43. Market risk, continued
Sensitivity analysis for currency risk
Currency -10% +10% -10% +10%
(111) 111 (504) 504
426 (426) (239) 239
(33) 33 (73) 73
(109) 109 90 (90)
5 (5) 17 (17)
28 (28) (8) 8
Equity risk
Sensitivity analysis for equity risk
Equity -10% +10% -10% +10%
(266) 266 (391) 391
(414) 414 (382) 382
(662) 662 (276) 276
Derivatives
Other ................................................................................................................................
GBP .................................................................................................................................
EUR .................................................................................................................................
Banking book - listed ........................................................................................................
USD .................................................................................................................................
2021
NOK .................................................................................................................................
2020
2020
DKK ..................................................................................................................................
Derivatives are a part of the Group's customer product offering. The types of derivatives currently offered are forward contracts, swaps
and options. Eligible underlying market factors are interest rates, foreign exchange rates, equities and commodities. Exposure limits,
hedging requirements and collateral requirements are determined in accordance with the Group's risk appetite and monitored by Risk
Management on a daily basis. The Group also uses derivatives to hedge market risk on its balance sheet. Note 24 provides a breakdown
of the Group's derivative positions by type.
The table below indicates the currencies to which the Group had significant exposure at the end of the year. The analysis calculates the
effect of a reasonably possible movement of the currency rate against the ISK, with all other variables held constant, on the Consolidated
Income Statement (due to the fair value of currency sensitive non-trading monetary assets and liabilities). A negative amount in the table
reflects a potential net reduction in the Consolidated Interim Income Statement or equity, while a positive amount reflects a net potential
increase. An equivalent decrease in each of the below currencies against the ISK would have resulted in an equivalent but opposite
impact (+10% denotes a depreciation of the ISK).
The analysis below calculates the effect of a reasonable possible movement in equity prices that affect the Consolidated Financial
Statements. A negative amount in the table reflects a potential net reduction in the Consolidated Income Statement or equity, while a
positive amount reflects a potential net increase. Investments in associates are excluded. The result of value-at-risk calculations for the
trading book are shown in the Group's Pillar 3 Risk Disclosures.
Banking book - unlisted ....................................................................................................
Trading book - listed .........................................................................................................
Equity risk is the risk that the fair value of equities decreases. For information on assets seized and held for sale and equity exposures,
see Notes 30 and 23 respectively.
2021
70
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
44. Liquidity and Funding risk
Maturity analysis of assets and liabilities
Contractual cash flow of assets and liabilities
2021 On Up to 3 3-12 1-5 Over 5 With no Book
Financial assets
demand months months years years maturity Total value
Cash and balances with CB ....................... 25,975 36,547 6,633 - - - 69,155 69,057
Loans to credit institutions ......................... 25,663 2,509 51 2,123 - - 30,346 30,272
Loans to customers ................................... 3,033 100,588 137,323 345,777 790,442 - 1,377,163 936,237
Financial instruments ................................. 16,091 39,164 60,412 46,502 14,898 56,857 233,924 225,657
Derivatives - assets leg .................................
- 33,562 10,841 35,105 1,100 - 80,608 74,952
Derivatives - liabilities leg ..............................
- (32,614) (10,779) (31,674) (985) - (76,052) (72,047)
Other financial instruments ............................
16,091 38,216 60,350 43,071 14,783 56,857 229,368 222,752
Other financial assets ................................ 679 6,720 3,734 1,588 - - 12,721 12,721
Financial assets ....................................... 71,441 185,528 208,153 395,990 805,340 56,857 1,723,309 1,273,944
Financial liabilities
3,230 1,811 - - - - 5,041 5,000
Deposits .................................................... 499,362 63,407 80,999 9,557 3,152 - 656,477 655,476
Financial liabilities at fair value ................... - 3,943 537 2,644 4 - 7,128 5,877
Derivatives - assets leg .................................
- (53,896) (3,855) (5,590) (519) - (63,860) (63,483)
Derivatives - liabilities leg ..............................
- 57,839 4,392 8,234 523 - 70,988 69,360
Other financial liabilities ............................. 74 6,010 725 1,033 843 - 8,685 8,685
Borrowings ................................................. - 13,996 40,498 258,049 73,001 - 385,544 356,637
Subordinated liabilities ............................... - 1,192 946 42,763 1 - 44,902 35,088
Financial liabilities ................................... 502,666 90,359 123,705 314,046 77,001 - 1,107,777 1,066,763
Net position for assets and liab. ............. (431,225) 95,169 84,448 81,944 728,339 56,857 615,532 207,181
Off-balance sheet items
Financial guarantees .................................. - 974 5,501 1,942 7,441 - 15,858 15,858
Unused overdraft ....................................... - 63,108 - - - - 63,108 63,108
Undrawn loan commitments ....................... - 62,529 23,636 22,410 116 - 108,691 108,691
Off-balance sheet items ........................... - 126,611 29,137 24,352 7,557 - 187,657 187,657
Net contractual cash flow ........................ (431,225) (31,442) 55,311 57,592 720,782 56,857 427,875 19,524
The Group's strategy in relation to liquidity risk is to actively manage its liquidity positions and risks to meet payment and settlement
obligations on a timely basis under both normal and stressed conditions. The Group seeks to maintain a stable funding profile which
supports its business strategy and liquidity profile, ensuring that the Group can withstand periods of market turbulence, without reliance on
volatile funding or external support.
Liquidity risk is defined as the risk that the Group, though solvent, either does not have sufficient financial resources available to meet its
liabilities when they fall due, or can secure them only at excessive cost. Liquidity risk arises from the inability to manage unplanned
decreases or changes in funding sources.
Liquidity risk is one of the Group's most significant risk factors and a great deal of emphasis is placed on managing it. The Asset and
Liability Committee (ALCO) is responsible for managing liquidity and funding risk within the risk appetite set by the Board of Directors. The
Bank's Treasury manages liquidity positions on a day-to-day basis. Risk Management measures, monitors and reports the Bank's liquidity
and funding risk on a daily basis.
Due to credit inst. and Central Bank ...........
A primary source of funding for the Group is deposits from individuals, businesses and financial undertakings. The Group's liquidity risk
stems from the fact that the maturity of loans exceeds the maturity of deposits, of which 76% is on-demand.
The maturity analysis is based on contractual cash flows. The amounts are not discounted and include future interest payments, but CPI-
linked amounts do not include accrued indexation due to future inflation. The total amount for each item is higher than the corresponding
amount on the Bank's balance sheet, since the amounts on the balance sheet are either at amortized cost and do not contain future
interest payments, or at fair value where future cash flows have been discounted.
Contractual cash flows differ in many ways from expected cash flows. The difference is most significant for deposits on the liability side
and bonds on the asset side. Deposits are always assumed to be withdrawn at the earliest possible date, despite the fact that a large part
of the deposit base is considered to be stable funding where behavioral maturity considerably exceeds contractual maturity. Furthermore,
although contractual cash flows are presented for bonds held by the Bank, a large portion of the bonds are a part of the Bank's liquidity
buffer and are considered to be highly liquid and can be sold or pledged to the Central Bank of Iceland and thus converted into cash at
very short notice.
71
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
44. Liquidity and Funding risk, continued
2020 On Up to 3 3-12 1-5 Over 5 With no Book
Financial assets
demand months months years years maturity Total value
Cash and balances with CB ....................... 5,723 30,210 6,299 - - - 42,232 42,136
Loans to credit institutions ......................... 20,170 8,065 - - - - 28,235 28,235
Loans to customers ................................... 4,643 109,363 106,656 307,086 600,174 - 1,127,922 822,941
Financial instruments ................................. 32,665 35,485 67,721 52,118 13,778 35,007 236,774 227,251
Derivatives - assets leg .................................
- 63,147 35,669 8,328 1,116 - 108,260 105,362
Derivatives - liabilities leg ..............................
- (61,599) (32,638) (4,628) (776) - (99,641) (98,078)
Other financial instruments ............................
32,665 33,937 64,690 48,418 13,438 35,007 228,155 219,967
Other financial assets ................................ 534 5,413 2,882 838 - - 9,667 9,667
Financial assets ....................................... 63,735 188,536 183,558 360,042 613,952 35,007 1,444,830 1,130,230
Financial liabilities
11,491 1,550 28 - - - 13,069 13,031
Deposits .................................................... 414,052 58,226 84,196 9,321 3,221 - 569,016 568,424
Financial liabilities at fair value ................... - 4,123 1,116 1,349 44 - 6,632 5,240
Derivatives - assets leg .................................
- (46,444) (5,067) (9,196) (413) - (61,120) (55,928)
Derivatives - liabilities leg ..............................
- 49,798 6,183 10,545 457 - 66,983 60,399
Short position in bonds ..................................
- 40 - - - - 40 40
Short position in equity ..................................
- 63 - - - - 63 63
Short position in bonds used for hedging ......
- 666 - - - - 666 666
Other financial liabilities ............................. 82 5,423 112 1,328 1,066 - 8,011 8,011
Borrowings ................................................. - 2,803 50,635 212,471 65,633 - 331,542 298,947
Subordinated liabilities ............................... - 1,178 943 19,762 25,586 - 47,469 36,060
Financial liabilities ................................... 425,625 73,303 137,030 244,231 95,550 - 975,739 929,713
Net position for assets and liab. ............. (361,890) 115,233 46,528 115,811 518,402 35,007 469,091 200,517
Off-balance sheet items
Financial guarantees .................................. - 593 4,539 2,016 13,709 - 20,857 20,857
Unused overdraft ....................................... - 49,164 - - - - 49,164 49,164
Undrawn loan commitments ....................... - 51,231 8,910 3,914 - - 64,055 64,055
Off-balance sheet items ........................... - 100,988 13,449 5,930 13,709 - 134,076 134,076
Net contractual cash flow ........................ (361,890) 14,245 33,079 109,881 504,693 35,007 335,015 66,441
Net Stable Funding Ratio
2021 2020
1,001,543 875,261
827,953 745,050
121% 117%
Net stable funding ratio ......................................................................................................................................
Due to credit inst. and Central Bank ...........
Available stable funding ........................................................................................................................................
Required stable funding ........................................................................................................................................
The NSFR calculations are based solely on figures for the parent company. The Bank's subsidiaries have negligible impact on the funding
ratio.
The Net Stable Funding Ratio (NSFR) measures the amount of available stable funding (ASF) with the Group against the required stable
funding (RSF) as per the definition of the Central Bank of Iceland rules No. 750/2021. In general, RSF is determined by applying different
weights to different asset classes depending on the level of liquidity. ASF however is calculated by applying weights to the Group's
liabilities depending on maturity and stickiness. The NSFR in total shall exceed 100%.
72
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
44. Liquidity and Funding risk, continued
Liquidity coverage ratio
Foreign
2021
ISK
currency
Total
96,563 83,777 180,340
16,406 - 16,406
112,969 83,777 196,746
107,698 34,682 142,380
433 55 488
10,157 6,882 17,039
118,288 41,619 159,907
2,287 25,246 27,533
32,799 2,575 35,374
35,086 27,821 62,907
136% 607% 203%
2020
103,138 61,282 164,420
10,515 - 10,515
113,653 61,282 174,935
99,885 27,592 127,477
287 64 351
10,427 11,678 22,105
110,599 39,334 149,933
3,178 19,501 22,679
28,251 6,194 34,445
31,429 25,695 57,124
144% 449% 188%
The Liquidity Coverage Ratio (LCR) is one of the standards introduced in the Basel III Accord. The LCR is the result of a stress test that is
designed to ensure that banks have the necessary assets on hand to withstand short-term liquidity disruptions. More precisely, LCR
represents the balance between highly liquid assets and the expected net cash outflow of the Group in the next 30 days under stressed
conditions.
Liquid assets level 1 * ........................................................................................................................
Other cash inflows .............................................................................................................................
Cash outflows ...................................................................................................................................
The following table shows the breakdown for the Group's LCR calculations. The ratio is based on consolidated figures for the Bank and
Valitor hf.
Cash inflows ......................................................................................................................................
Other cash outflows ...........................................................................................................................
Liquidity coverage ratio (LCR) *** ...................................................................................................
** Short-term deposits with other banks are defined as cash inflows in LCR calculations.
Other cash outflows ...........................................................................................................................
Borrowings .........................................................................................................................................
Cash outflows ...................................................................................................................................
Deposits .............................................................................................................................................
Liquid assets .....................................................................................................................................
Short-term deposits with other banks ** .............................................................................................
Liquid assets .....................................................................................................................................
Liquid assets level 2 ...........................................................................................................................
Short-term deposits with other banks ** .............................................................................................
Liquid assets level 2 ...........................................................................................................................
Cash inflows ......................................................................................................................................
Borrowings .........................................................................................................................................
Liquidity coverage ratio (LCR) *** ...................................................................................................
* Level 1 assets include the Group's cash and balances with the Central Bank, domestic bonds eligible as collateral at the Central Bank and foreign government
bonds which receive 100% weight. Under Rules No. 266/2017 the Group's foreign covered bonds are also classified as Level 1 assets and receive 93% weight.
*** LCR is defined as: LCR = Weighted liquid assets / (weighted cash outflows - weighted cash inflows) where weighted cash inflows are capped at 75% of
weighted cash outflows.
Other cash inflows .............................................................................................................................
To qualify as highly liquid assets under the LCR rules, assets must be non-pledged, liquid and easily priced on the market, traded on an
active market and not issued by the Group or related entities.
Liquid assets level 1 * ........................................................................................................................
Deposits .............................................................................................................................................
The Bank complies with the Central Bank of Iceland's liquidity rules No. 266/2017, which effectively adopt the liquidity rules of the EU
Capital Requirements Regulation (CRR). The Bank is required to maintain a 100% minimum LCR ratio for both the aggregate position in
all foreign currencies and all currencies. For LCR in ISK, the requirement is 30% in 2021, 40% in 2022 and 50% as of 2023.
73
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
44. Liquidity and Funding risk, continued
Composition of liquid assets
2021
ISK USD EUR Other Total
67,690 280 608 479 69,057
2,287 7,170 6,176 11,900 27,533
48,178 - - - 48,178
- 14,272 49,016 19,117 82,405
118,155 21,722 55,800 31,496 227,173
2020
40,996 270 407 463 42,136
3,179 4,467 7,765 7,268 22,679
74,637 - - - 74,637
- 33,817 20,364 5,956 60,137
118,812 38,554 28,536 13,687 199,589
LCR deposit categorization
LCR categorization - amounts and LCR outflow weights
Less Weight Weight Term Total
2021 stable % Stable % deposits* deposits
89,425 11% 125,515 5% 91,170 306,110
84,557 11% 18,210 5% 9,122 111,889
73,261 40% 2,797 20% 16,213 92,271
31,041 40% - - 786 31,827
42,334 100% - - 13,448 55,782
45,662 100% - - 15,641 61,303
1,294 100% - - - 1,294
367,574 146,522 146,380 660,476
2020
89,950 11% 123,897 5% 73,321 287,168
52,527 11% 16,180 5% 5,572 74,279
64,445 40% 3,854 20% 8,646 76,945
43,379 40% - - 12,932 56,311
38,042 100% - - 14,325 52,367
22,391 100% - - 9,907 32,298
2,087 100% - - - 2,087
312,821 143,931 124,703 581,455
Foreign government bonds ............................................................................
Individuals ...................................................................................
* Here term deposits refer to deposits with maturities greater than 30 days.
Domestic financial entities ...........................................................
Foreign financial entities ..............................................................
Small and medium enterprises ....................................................
Sovereigns, central banks and PSE ............................................
Liquidity reserve ...........................................................................................
Cash and balances with Central Bank ............................................................
Domestic bonds eligible as collateral with Central Bank .................................
The table below shows the breakdown of the Group's deposit base according to the LCR categorization, with the associated weighted
average of the stressed outflow weights.
Cash and balances with Central Bank ............................................................
Liquidity reserve ...........................................................................................
Short-term deposits with financial institutions .................................................
Deposits maturing within 30 days
Foreign financial entities ..............................................................
Domestic financial entities ...........................................................
Short-term deposits with financial institutions .................................................
Individuals ...................................................................................
Pension funds .............................................................................
Total ...........................................................................................
Corporations ...............................................................................
Corporations ...............................................................................
Pension funds .............................................................................
Sovereigns, central banks and PSE ............................................
As per the LCR methodology, the Group's deposit base is split into different categories depending on customer type. A second
categorization is used where term deposits refer to deposits with residual maturity greater than 30 days. Deposits that can be withdrawn
within 30 days are marked stable if the customer has a business relationship with the Group and the amount is covered by the Deposit
Insurance Scheme. Other deposit funds are considered less stable. A weight is attributed to each category, representing the expected
outflow under stressed conditions, i.e. the level of stickiness.
Small and medium enterprises ....................................................
The following table shows the composition of the Group's liquidity buffer.
Foreign government bonds ............................................................................
Domestic bonds eligible as collateral with Central Bank .................................
Total ...........................................................................................
74
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
45. Capital management
Capital adequacy
Own funds 2021 2020
194,598 197,845
(673) (173)
193,925 197,672
(8,435) (13,092)
(197) (2,282)
(240) (238)
(26,773) (17,990)
920 1,890
159,200 165,960
133 173
13,225 13,498
172,558 179,631
21,863 22,562
(1,056) (1,007)
20,807 21,555
193,365 201,186
Risk-weighted exposure amount (REA)
623,395 570,554
69,553 60,813
7,761 3,462
4,691 8,569
8,958 13,063
2,379 842
96,085 88,462
812,822 745,765
Capital ratios
19.6% 22.3%
21.2% 24.1%
23.8% 27.0%
Cash flow hedges ..................................................................................................................................................
Non-controlling interest not eligible for inclusion in CET1 capital ...........................................................................
Non-controlling interest eligible for inclusion in T1 capital ......................................................................................
The focus of capital management at the Group is to normalize the capital structure in the medium term and consequently maintain the
Group's capitalization comfortably above regulatory requirements, including the Pillar 2 and combined capital buffer requirements.
Common Equity Tier 1 capital before regulatory adjustments ..........................................................................
Credit risk, loans ....................................................................................................................................................
Intangible assets ...................................................................................................................................................
Additional value adjustments .................................................................................................................................
Foreseeable dividend and buyback * .....................................................................................................................
Tier 1 capital ........................................................................................................................................................
Operational risk .....................................................................................................................................................
The Group's consolidated situation as stipulated in CRR is the Group's accounting consolidation excluding insurance subsidiaries, in
particular Vördur.
Tier 2 capital ........................................................................................................................................................
Common equity Tier 1 capital .............................................................................................................................
The Group's capital ratios are calculated in accordance with the Icelandic Financial Undertakings Act No. 161/2002 and Regulation No.
233/2017 on prudential requirements with later changes. Iceland has adopted the EU Capital Requirements Directive and Regulation and
the CRD V / CRR II amendments were adopted on 28 June 2021. The primary impact on capital adequacy was the expansion of the SME
supporting factor, which resulted in an ISK 14 billion decrease in total risk-weighted exposure amount. Other changes are smaller. The
Group applies the standardized approach to calculate capital requirements for credit risk, including counterparty credit risk, credit valuation
adjustment, market risk and operational risk.
Tier 2 instruments ..................................................................................................................................................
Tier 2 instruments of financial sector entities (significant investments) ..................................................................
Adjustment under IFRS 9 transitional arrangements as amended .........................................................................
Capital adequacy ratio ...........................................................................................................................................
Valitor hf. is classified as held for sale in these Consolidated Financial Statements. For disclosure, assuming an authorized adjustment of
Valitor's contribution to operational risk REA in accordance with Article 317 (4) of CRR, a sale at USD 100 million in accordance with the
publicly disclosed definitive agreement with Rapyd would result in an increase in capital ratio from 23.8% to 25.0%.
Counterparty credit risk ..........................................................................................................................................
Total risk-weighted exposure amount ................................................................................................................
* On 31 December 2021, the foreseeable dividend and buyback is the aggregation of an expected dividend of ISK 22.5 billion and the remainder of the current
buyback program amounting to ISK 4.3 billion based on permission from the FSA from 7 October 2021. The dividend amount is beyond the target of 50% of
audited profits set in the Bank’s dividend policy and represents a step towards the normalization of own funds. On 31 December 2020, the foreseeable dividend
and buyback is the aggregation of a dividend distribution of ISK 3 billion, which adheres to the guidance of the FSA, and planned buyback of own shares
amounting to ISK 15 billion which has received permission from the FSA.
CET1 ratio .............................................................................................................................................................
Tier 1 ratio .............................................................................................................................................................
Market risk, other ...................................................................................................................................................
Credit valuation adjustment ...................................................................................................................................
Credit risk, securities and other .............................................................................................................................
Market risk due to currency imbalance ..................................................................................................................
Additional Tier 1 capital .........................................................................................................................................
Total own funds ...................................................................................................................................................
Total equity ............................................................................................................................................................
75
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
45. Capital management, continued
Capital ratios of the parent company 2021 2020
20.2% 22.8%
21.9% 24.6%
24.4% 27.5%
Capital buffer requirement, % of REA
2.5%
2.0%
3.0%
-
7.5%
Capital requirement, % of REA
2021 CET1 Tier 1 Total
4.5% 6.0% 8.0%
1.8% 2.4% 3.2%
7.3% 7.3% 7.3%
13.6% 15.7% 18.5%
19.6% 21.2% 23.8%
Leverage ratio
2021 2020
1,256,916 1,114,450
4,796 9,124
720 512
102,016 65,425
1,364,448 1,189,511
172,558 179,631
12.6% 15.1%
Pillar 1 capital requirement ..................................................................................................................
CET1 ratio .............................................................................................................................................................
On 23 December 2020, the Icelandic Ministry of Finance ratified art 1 para 7 of Regulation (EU) 2020/873 into Icelandic law. The
regulation modifies the transitional arrangements for IFRS 9 to allow the regulatory capital impact of the increase in expected credit loss
due to the Covid-19 pandemic to be phased in over time. Institutions that elect to make use of these transitional arrangements can in 2021
add back CET1 equivalent to up to 100% of provisions incurred between 1 January 2020 and the reporting date from the application of
IFRS9 to performing facilities. The Bank has opted to make use of the transitional arrangements, thus reflected in the Group's capital
ratios. The transitional arrangements increase the capital adequacy ratio by 0.1 percentage points.
Tier 1 ratio .............................................................................................................................................................
Derivative exposures .............................................................................................................................................
Tier 1 capital ........................................................................................................................................................
The leverage ratio is seen as a complementary measure to the risk-based capital ratios. The ratio is calculated on the basis of the Group's
consolidated situation as per the CRR, which excludes the Group's insurance subsidiaries. The minimum leverage ratio requirement is 3%
as stated in the Icelandic Financial Undertakings Act No. 161/2002.
Off-balance sheet exposures .................................................................................................................................
On-balance sheet exposures .................................................................................................................................
Combined capital buffer requirement .....................................................................................................................................
The Bank carries out an ongoing process, the Internal Capital Adequacy Assessment Process (ICAAP), with the aim to ensure that the
Group has in place sufficient risk management processes and systems to identify, manage and measure the Group's total risk exposure.
The ICAAP is aimed at identifying and measuring the Group's risk across all risk types and ensure that the Group has sufficient capital in
accordance with its risk profile. The FSA supervises the Group, receives the Group's internal estimation on the capital adequacy and sets
the Pillar 2R capital requirements for the Group as a whole following the Supervisory Review and Evaluation Process (SREP). The Group's
own funds exceed the FSA's SREP requirements.
The following table outlines the implementation of the capital buffer requirements in accordance with the Icelandic Financial Undertakings
Act No. 161/2002, as prescribed by the Financial Stability Council (FSC) and approved by the FSA. The FSC has announced that the
countercyclical capital buffer will increase to 2% on 29 September 2022.
Available capital .................................................................................................................................
Pillar 2R capital requirement ** ...........................................................................................................
** The SREP result based on the Group's Financial Statement at 31 December 2020. The Pillar 2 requirement is 3.2% of risk-weighted exposure amount based on
the Group's prudential consolidation under CRR, which excludes Vördur tryggingar hf.
* The Icelandic buffer value shown. In the combined buffer requirement, the effective countercyclical capital buffer is determined by calculating the weighted
average of the corresponding buffer levels of each country, the weights being the total risk-weighted exposures for credit risk against counterparties residing in
those countries. The systemic risk buffer only applies to domestic exposures and is calculated using the same weighting method.
Combined buffer requirement * ...........................................................................................................
Regulatory capital requirement ........................................................................................................
Capital conservation buffer ........................................................................................................................................................
Leverage ratio .......................................................................................................................................................
Securities financing transaction exposures ............................................................................................................
Capital adequacy ratio ...........................................................................................................................................
The Pillar 1 and Pillar 2R capital requirements may comprise 56.25% CET1 capital, 18.75% AT1 capital and 25% Tier 2 capital.
Total exposure .....................................................................................................................................................
Capital buffer for systematically important institutions ................................................................................................................
Systemic risk buffer * .................................................................................................................................................................
Countercyclical capital buffer * ...................................................................................................................................................
76
Arion Bank Consolidated Financial Statements 2021 Amounts are in ISK millions
Notes to the Condensed Consolidated Interim Financial Statements
45. Capital management, continued
Solvency II 2021 2020
9,090 7,397
1,069 1,000
- (800)
10,159 7,597
6,775 5,105
149.9% 148.8%
46. Operational risk
47. Sustainability risk
The Green Financing Framework
Green Financing Instruments 2021
8,209
47,148
55,357
Identified eligible green assets by category
42,245
2,255
55,881
5,591
105,972
Pollution prevention and control and wastewater management ..................................................................................................
Book value ................................................................................................................................................................................
Sustainability risk is defined as the risk that certain activities or practices compromise the Bank's assets or reputation or the ability of
future generations or segments of society to meet their own needs. This can be due to negative effects on the environment, natural or
cultural resources or social conditions. The Bank‘s Sustainability Committee is responsible for reviewing the Bank‘s performance in relation
to its commitments and policies in relation to environmental, social and governance (ESG) factors and aligning the Bank‘s strategy and
risk appetite with them.
The Bank's Green Financing Framework was published in 2021. Undir this framework the Bank can issue Green Financing Instruments,
including covered bonds, bonds, loans, commercial paper, repurchase agreements and deposits. The use of proceeds from these
instruments is restricted to the financing of eligible assets as defined in the Framework. Eligible assets are divided into several eligible
categories with inclusion and exclusion criteria. The Framework furthermore details the processes for identifying eligible assets, for
reporting on use of the framework and for external review. Before the introduction of this framework the Bank had a framework for green
deposits but these frameworks have been merged.
Deposits .....................................................................................................................................................................................
Borrowings .................................................................................................................................................................................
Book value ................................................................................................................................................................................
Sustainable fishery and aquaculture ..........................................................................................................................................
Clean transportation ...................................................................................................................................................................
Green buildings ..........................................................................................................................................................................
The Group uses the standardized approach for the calculation of capital requirements for operational risk.
Operational risk is the risk of direct or indirect loss, or damage to the Group's reputation resulting from inadequate or failed internal
processes or systems, from human error or external events that affect the Group's image and operational earnings.
Each business unit within the Group is primarily responsible for taking and managing their own operational risk. Risk management is
responsible for developing and maintaining tools for identifying, measuring, monitoring and reporting the Group's operational risk.
The solvency capital requirement for the subsidiary Vördur is calculated in accordance with the Icelandic Insurance Companies Act.
Own funds ............................................................................................................................................................
Solvency capital requirements (SCR) ....................................................................................................................
SCR ratio ...............................................................................................................................................................
Foreseeable dividends ...........................................................................................................................................
Excess of assets over liabilities in accordance with Solvency II .............................................................................
Subordinated liabilities ...........................................................................................................................................
77
Arion Bank Consolidated Financial Statements 2021
Significant accounting policies
47. Going concern assumption
48. Principles underlying the consolidation
Subsidiaries
Business combinations
–
–
–
–
–
–
–
Non-controlling interests
–
–
at their proportionate share of the acquiree's identifiable net assets, which are generally at fair value.
Notes to the Consolidated Financial Statements
the fair value of the consideration transferred; plus
Subsidiaries are entities controlled by the Group. The Financial Statements of subsidiaries are included in the Consolidated Financial
Statements from the date that control commences until the date that control ceases. The Financial Statements of the subsidiaries are
prepared for the same reporting period as the parent entity, using consistent accounting policies.
power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);
The accounting policies adopted in the preparation of these Consolidated Financial Statements are consistent with those followed in the
preparation of the Annual Financial Statements for the year ended 31 December 2020, except for when there have been made
amendmends to current IFRS valid from 1 January 2021, Icelandic Act on Financial Statements, Act on Financial Undertakings and rules
on Accounting for Credit Institutions. A number of new standards and interpretations were effective from 1 January 2021 but they do not
have a material effect on these Consolidated Financial Statements.
the ability to use its power over the investee to affect its returns.
The Group's management has made an assessment of the ability to continue as a going concern and is satisfied that the Group has the
resources to continue. In making this assessment, management has taken into consideration the risk exposures facing the Group, which
are further described in the Risk Management Disclosures. The Consolidated Financial Statements are prepared on a going concern basis.
Changes in the Group's interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
Business combinations are accounted for using the acquisition method as at the acquisition date, i.e. when control is transferred to the
Group. The Group controls an investee if, and only if, the Group has:
Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less
than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether
it has power over an investee, including (i) the contractual arrangement with the other vote holders of the investee, (ii) rights arising from
other contractual arrangements and (iii) the Group's voting rights and potential voting rights. The Group re-assesses whether or not it
controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control.
exposure, or rights, to variable returns from its involvement with the investee; and
Transaction costs incurred are expensed and included in administration expense.
The Group measures goodwill at the acquisition date as:
For each business combination, the Group elects to measure any non-controlling interests in the acquiree either:
if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less
the recognized amount of any non-controlling interests in the acquiree; less
When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.
Non-controlling interests represent the portion of profit or loss and equity not owned, directly or indirectly, by the Group; such interests are
presented separately in the Income Statement and are included in equity in the Statement of Financial Position, separately from equity
attributable to owners of the Group.
at fair value; or
the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
78
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
48. Principles underlying the consolidation, continued
Loss of control
Funds management
49. Associates
Impairment on investments in associates
50. Foreign currency
Foreign currency transactions
Intragroup balances, income and expenses arising from intragroup transactions, are eliminated in preparing the Consolidated Financial
Statements. This also applies to subsidiaries classified as disposal groups held for sale.
Upon loss of significant influence over the associate, the Group measures and recognizes any retained investment at its fair value. Any
difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and
proceeds from disposal is recognized in profit or loss.
The considerations made in determining significant influence are similar to those necessary to determine control over subsidiaries.
The Group manages and administers assets held in unit trusts and investment vehicles on behalf of investors. The Financial Statements of
these entities are not included in these Consolidated Financial Statements except when the Group controls the entity.
The Financial Statements include the Group's share of the total recognized income and expenses of associates from the date that
significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds its carrying
value of associate, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that
the Group has incurred legal or constructive obligations or made payments on behalf of the associate. If the associate subsequently
reports profits, the Group resumes recognizing its share of those profits only after its share of the profits equals the share of losses not
recognized.
On the loss of control, the Group derecognizes the assets and liabilities of the subsidiary, any non-controlling interests and the other
components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognized in profit or loss.
Transactions eliminated on consolidation
When assessing whether to consolidate investment funds, the Group reviews all facts and circumstances to determine whether the Group,
as fund manager, is acting as agent or principal. The Group is deemed to be a principal, and hence controls and consolidates a fund, when
the Group acts as fund manager and cannot be removed without cause, has variable returns through significant holdings, and is able to
influence the returns of the funds by exercising its power. The Group is defined as agent in all instances.
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of
transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional
currency at the exchange rate at that date. All differences arising on settlement or translation of monetary items are taken to the Income
Statement. Non-monetary assets and liabilities denominated in foreign currencies are reported at historic cost.
Associates are those entities over which the Group has a significant influence, i.e. the power to participate in the financial and operating
policy decisions of the associates but not control or joint control over those policies. Significant influence generally exists when the Group
holds 20% or more of the voting power, including potential voting rights, unless it can be clearly demonstrated that this is not the case.
Investments in associates are initially recognized at cost. The carrying amount of investments in associates includes intangible assets and
accumulated impairment loss.
The Group's investments in its associate are accounted for using the equity method.
After applying the equity method to account for investments in associates, the Group determines whether it is necessary to recognize any
impairment loss with respect to its investments in associates. The Group first determines whether there is any objective evidence that an
investment in an associate is impaired. If such evidence exists, the Group then tests the entire carrying amount of the investment for
impairment, by comparing its recoverable amount, which is the higher of value in use and fair value less costs to sell, with its carrying
amount. The recoverable amount of an investment in an associate is assessed for each associate, unless the associate does not generate
cash inflows from continuing use that are largely independent of those from other assets of the Group. The excess of the carrying amount
over the recoverable amount is recognized in the Income statement as an impairment loss. Impairment losses are subsequently reversed
through the Income Statement if the reasons for the impairment loss no longer apply.
Items included in the Consolidated Financial Statements of each of the Group's subsidiaries are measured using the functional currency of
the respective entity.
79
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
51. Interest
–
–
–
52. Fee and commission
53. Net financial income
i)
ii)
iii)
54. Net insurance income
amortized cost;
Net financial income comprises Dividend income, Net gain on financial assets and liabilities at fair value and Net foreign exchange gain.
The calculation of the effective interest rate includes all transaction costs and fees and points paid or received that are an integral part of
the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial
asset or financial liability.
Claims recognized in the Income Statement are the periods claims including increases or decreases due to claims from previous fiscal
years. Outstanding claims included in technical provision in the Statement of Financial Position are the total amount of reported but unpaid
claims as well as actuarial provision for claims occurred but unreported.
Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the
measurement of the effective interest rate.
Net gain on financial assets and liabilities at fair value comprises all realized and unrealized fair value changes, except for interest
(which is included in Interest income and Interest expense) and foreign exchange gain and losses (which are included in Net foreign
exchange gains as described below).
Net foreign exchange gain comprise all foreign exchange differences arising on the settlement of foreign currency monetary assets and
liabilities and on translating foreign currency monetary assets and liabilities at rates different from those at which they were translated
on initial recognition during the year or in previous Consolidated Financial Statements.
Net foreign exchange gain also include foreign exchange differences arising on translating non-monetary assets and liabilities which are
measured at fair value in foreign currencies and whose other gain and loss are also recognized in profit or loss.
Dividend income is recognized when the right to receive dividend is established. Usually this is the ex-dividend date for equity
securities.
The Group provides various services to its clients and earns income therefrom, such as income from Corporate Banking, Retail Banking,
Capital Markets, Corporate Finance, Asset Management and Private Banking. Fees earned from services that are provided over a certain
period of time are recognized as the services are provided, i.e. point in time. Fees earned from transaction type services are recognized
when the service has been completed, i.e. point in time. Fees that are performance linked are recognized when the performance criteria
are fulfilled, i.e. point in time.
fair value through other comprehensive income (FVOCI).
Interest income and expense presented in the Income Statement include Income and expenses of assets and liabilities carried at:
fair value through profit and loss (FVTPL); and
Interest income and expense are recognized in the Income Statement using the effective interest method. The effective interest rate is the
rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or,
where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on
initial recognition of the financial asset and financial liability and is not revised subsequently.
Premiums recognized as income comprise the premiums contracted during the fiscal year including premiums transferred from last years
but excluding next periods premiums, which are recognized as provision for unearned premiums. Provision for unearned premiums is a
part of the technical provision in the Statement of Financial Position.
80
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
55. Income tax expense
56. Financial assets and financial liabilities
Derecognition
Debt instruments
–
–
–
–
–
–
–
Debt instruments, including loans and debt securities, are classified into one of the following measurement categories:
amortized cost;
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to
taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities
and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
All other debt instruments are carried at FVTPL.
its contractual cash flows are SPPI.
A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL:
Tax expense comprises current and deferred tax. Income tax for the year has been calculated and recognized in the Consolidated
Financial Statements.
A debt instrument is measured at amortized cost only if it meets both of the following conditions and is not designated as at FVTPL:
its contractual cash flows are solely payments of principal and interest on the principal amount outstanding (here after SPPI).
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates
enacted or substantively enacted at the reporting date.
it is held within a business model whose objective is to collect contractual cash flows and selling financial assets; and
fair value through profit and loss (FVTPL); or
fair value through other comprehensive income (FVOCI).
A financial asset or financial liability is measured initially at fair value and for an item not at fair value through profit or loss, transaction cost
that are directly attributable to its acquisition or issue.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities and the realization of
foreign exchange gain or loss, for financial reporting purposes and the amounts used for taxation purposes.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting
date, and any adjustment to tax payable in respect of previous years. Taxable profit may differ from earnings before tax as reported in the
Income Statement as it may exclude income or expense that is deductible in other years and it excludes income or expense that are never
taxable or deductible.
Current and deferred tax relating to items recognized directly in equity is recognized in equity and not in the statement of profit or loss.
it is held within a business model whose objective is to collect contractual cash flows; and
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable
that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reviewed at each reporting date
and reduced to the extent that it is no longer probable that the related tax benefit will be realized. Such deferred tax assets and liabilities
are not recognized if the temporary difference arises from the initial recognition (other than in a business combination) of assets and
liabilities in transaction that affects neither the taxable profit nor the accounting profit. In addition, tax liabilities are not recognized if the
temporary difference arises from the initial recognition of goodwill.
Financial liabilities are derecognized when the obligation of the Group specified in the contract is discharged or cancelled or expires.
Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or when the Group has
transferred substantially all risks and rewards of ownership.
Recognition and initial measurement
The Group initially recognizes financial assets and financial liabilities on the date that they are originated at the fair value of consideration
paid. Regular-way purchases and sales of financial assets are recognized on the trade date at which the Group commits to purchase or sell
assets. All other financial assets and liabilities are recognized on the trade date, which is the date that the Group becomes a party to the
contractual provision of the instrument.
81
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
56. Financial assets and financial liabilities, continued
-
-
-
-
-
Debt instrument are measured at FVOCI if they are held within a business model whose objective is to hold for collection of contractual
cash flows and/or selling financial assets, where the assets' cash flows represent payments that are solely payments of principal and
interest. Subsequent to initial recognition, unrealized gains and losses on debt instruments measured at FVOCI are recorded in Other
Comprehensive Income (OCI). At realization the accumulated profit or loss recognized in OCI in previous periods is recycled to the
Consolidated Income Statement. Foreign exchange gains and losses of the debt instrument are recognized in the Consolidated Income
Statement. Interest income from received payments are recognized in interest income in the Consolidated Income Statement upon
payment.
Debt instrument are measured at amortized cost if they are held within a business model whose objective is to hold for collection of
contractual cash flows where those cash flows represent solely payments of principal and interest. After initial measurement, debt
instruments in this category are carried at amortized cost using the effective interest rate method. The effective interest rate is the rate that
discounts contractual cash payments or receipt through the contractual lifetime of the financial asset to the gross carrying amount of a
financial asset. Amortized cost is calculated taking into account any discount or premium on acquisition, transaction cost and fees that are
an integral part of the effective interest rate. Amortization is included in interest income in the Consolidated Income Statement.
Impairment on debt instruments measured at FVOCI is calculated using the expected credit loss approach. The ECL on debt instruments
measured at FVOCI does not reduce the carrying amount of the asset in the Statement of Financial Position, which remains at its fair
value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortized cost is recognized in OCI with
a corresponding charge to net impairment in the Consolidated Statement of Comprehensive Income. The accumulated allowance
recognized in OCI is recycled to the Consolidated Statement of Comprehensive Income upon derecognition of the debt instrument.
In performing this assessment, the Group takes into consideration contractual features that could change the amount or timing of
contractual cash flows, such that the cash flows are no longer consistent with a basic lending arrangement. If the Group identifies any
contractual features that could modify the cash flows of the instruments such that they are no longer consistent with a basic lending
arrangement, the related financial assets is classified at FVTPL.
Business model assessment
Interest is defined as consideration for the time value of money, the banks funding costs, the credit risk associated with the principal
amount outstanding and other costs (e.g liquidity risk and administrative costs), as well as a profit margin. Indexation of loans to the
Consumer Price Index (CPI) are considered part of interest as CPI guarantees the time value of money of the original outstanding balance.
Principal may change over the life of the instruments due to repayments. Indexation on principal accumulates over time.
Impairment on debt instruments measured at amortized cost is calculated using the expected credit loss (ECL) approach. Loans and debt
securities measured at amortized cost are presented net of allowance for credit losses in the Consolidated Statement of Financial Position.
Debt instruments measured at FVOCI
Debt instruments measured at amortized cost
whether the assets are held for trading purposes, i.e. assets that the Group acquires or incurs principally for the purpose of selling or
repurchasing in the near term, or holds as part of a portfolio that is manage together for short-term profit or position taking;
Cash flow characteristics assessment
The contractual cash flow characteristics assessment involves assessing the contractual features of an instrument to determine if they give
rise to cash flows that are consistent with a basic lending arrangement. Contractual cash flows that are consistent with a basic lending
arrangement are considered SPPI.
the risks that affect the performance of assets held within a business model and how those risks are managed;
how the performance of assets in a portfolio is evaluated and reported to group heads and other key decision makers within the
Group's business lines;
Business model assessment involves determining whether financial assets are managed in order to generate cash flows from collection of
contractual cash flows, selling financial assets or both. The Group assesses the business model at a portfolio level reflective of how
groups of assets are managed together to achieve a particular business objective. For the assessment of business models the Group
takes into consideration the following factors:
how compensation is determined for the Group's business lines' management that oversee the assets; and
the frequency and volume of sales in prior periods and expectations about future sales activity.
82
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
56. Financial assets and financial liabilities, continued
Equity instruments
Offsetting
Equity instruments are measured at FVTPL.
Debt instruments measured at FVTPL
POCI loans do not have allowance at initial recognition but subsequently the allowance will reflect the changes in the lifetime expected
losses. At recognition the discount of each POCI loan is split up into two categories, impairment discount and interest discount or premium.
Interest is calculated with a credit adjusted effective interest rate and is posted to interest income. Periodically the Group recalculates the
carrying amount by computing the present value of estimated future cash flows at the financial instrument's original credit adjusted
effective interest rate, any changes in the expected cash flows since the date of acquisition are recorded as a charge/recovery in net
impairment in the Consolidated Income Statement at the end of all reporting periods subsequent to the date of acquisition.
For equity instruments measured at FVTPL, changes in fair value are recognized as part of Financial income in the Consolidated Income
Statement.
Purchased performing loans are reflected in Stage 1 and will follow the same accounting as other performing loans. They will be subject to
a 12-month allowance for credit losses which is recorded as provision for credit losses in the Consolidated Income Statement. The fair
value adjustments set up for these loans on the date of acquisition is amortized into interest income over the life of these loans.
Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains or losses arising from a
group of similar transactions such as in the Group's trading activity.
Financial assets and liabilities are set off and the net amount reported in the Statement of Financial Position when, and only when, the
Group has a legal right to offset the recognized amounts and intends either to settle on a net basis or to realize the asset and settle the
liability simultaneously.
The Group can elect to classify non-trading equity instruments at FVOCI. This election will be used for certain equity instruments for
strategic or longer term investment purposes. The FVOCI election is made upon initial recognition, on an instrument-by-instrument basis
and once made is irrevocable. Gains and losses on these instruments including when derecognized/sold are recorded in OCI and are not
subsequently reclassified to the Consolidated Income Statement. Dividends received are recorded in Financial income in the Consolidated
Income Statement. Any transaction costs incurred upon purchase of the security are added to the cost basis of the security and are not
reclassified to the Consolidated Income Statement of the security.
Debt instrument are measured at FVTPL if they are held for short term gain, held as part of a portfolio managed on a fair value basis or the
cash flows do not represent payments that are solely payments of principal and interest. These instruments are measured at fair value in
the Consolidated Statement of Financial Position. Realized and unrealized gains and losses are recognized as part of Net financial income
in the Consolidated Income Statement.
Purchased loans
All purchased loans are initially measured at fair value on the date of acquisition. As a result no allowance for credit losses would be
recorded in the Consolidated Statement of Financial Positions on the date of acquisition. Purchased loans may fit into either of the two
categories: Performing loans or Purchased or Originated Credit Impaired (POCI) loans.
83
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
56. Financial assets and financial liabilities, continued
Stage Criteria
–
–
Lifetime expected credit loss is recorded, based on the
probability of default over the remaining estimated life of the
financial instrument. Effective interest rate is calculated on the
gross carrying amount.
Exposures not impaired with significant increase in
credit risk subsequent to origination.
The Group measures the ECL on each balance sheet date according to a three-stage expected credit loss impairment model:
the borrower is considered to be unlikely to pay.
Exposures not impaired and with no significant increase
in credit risk
Definition of default
The Group allocates to each exposure a credit risk rating (e.g. A+, A, A-, BBB+, etc.) based on the calculated 12 month probability of
default ('the PD'). The PD is assessed through the Group's credit rating models or based on external ratings if available. The Group's credit
rating models are statistical models based on a variety of information that has been determined to be predictive of default. These include
demographic, behavioral, financial and economic data, coupled with qualitative expert judgement for large corporate exposures. Factors
vary depending on the nature of the exposure and the profile of the borrower. The PD estimates used for the purpose of calculating IFRS 9
impairments are point-in-time, i.e. dependent on the economic cycle. The Group's credit rating models are subject to annual performance
tests and are recalibrated on a regular basis if needed.
1
12 month expected credit loss is recorded. The expected credit
loss is computed using a probability of default occurring over
the next 12 months. For those instruments with a remaining
maturity of less than 12 months, a probability of default
corresponding to remaining term to maturity is used. The
effective interest rate is calculated on the gross carrying
amount.
Expected credit loss (ECL) is established for all financial assets, except for financial assets classified or designated as FVTPL and equity
instruments designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment are
primarily debt instruments (including loans to customers) measured at amortized cost or FVOCI. ECL on financial assets is presented in
Net impairment. Other financial assets carried at amortized cost are presented net of ECL in the Group's Consolidated Statement of
Financial Position. Off-balance sheet items subject to impairment assessment include financial guarantees and undrawn loan
commitments. ECL for Off-balance sheet items is separately calculated and included in Other Liabilities.
Assessment of expected credit loss, and effective interest
rates.
Probability of default and credit risk rating
Increases or decreases in the required ECL attributable to purchases and new originations, derecognitions or maturities, and
remeasurements due to changes in loss expectations or state migrations are recorded in net impairment. Write-offs and recoveries of
amounts previously written off are recorded against ECL.
Lifetime expected credit loss is recorded. Effective interest rate
is calculated on the book value.
The ECL is an unbiased discounted probability-weighted estimate of the cash shortfalls expected to result from defaults occurring in the
next 12 months or, in cases where credit risk has significantly increased, in the expected lifetime of an exposure. For guarantees and loan
commitments, credit loss estimates consider the portion of the commitment that is expected to be paid out or expected to be drawn over
the relevant time period, contingent on significant financial difficulty.
For corporate counterparties it is assumed that if one exposure is in default, all other exposures to that counterparty are also in default
(cross-default). For individuals however, each exposure portfolio is assessed separately, meaning that if an individual is in default on a loan
belonging to one portfolio, their other exposures, belonging to other portfolios, are not automatically assumed to be in default. However,
default in other portfolios are considered when assessing unlikeliness to pay. The Bank now defines six different exposure portfolios for
individuals and has different statistical credit risk model for each of them - mortgages, consumer loans, auto loans, guarantees, loans to
individuals for work purposes and other loans.
3
Exposures in default / Credit impaired
2
In assessing whether a borrower is unlikely to pay, the Group considers both qualitative and quantitative indicators, e.g. overdue status,
debt and equity ratios, market circumstances and other data developed internally or obtained from external sources.
Expected credit losses
The Group considers a financial assets to be in default when:
the asset is more than 90 days past due, or
The ECL represents an unbiased estimate of expected credit losses on our financial assets as at the balance sheet date. Judgement is
required in making assumptions and estimations when calculating the ECL, including movements between the three stages and the
application of forward looking scenarios. The underlying assumptions and estimates may results in changes to the provisions from period
to period that significantly affect our results of operations.
84
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
56. Financial assets and financial liabilities, continued
Risk
S&P /
class Rating Lower PD
Upper PD
Fitch
Moody's
0 AAA ................................................................................ 0.000% 0.006% AAA Aaa
AA+ ................................................................................ 0.006% 0.018% AA+ Aa1
AA .................................................................................. 0.018% 0.029% AA Aa2
AA- ................................................................................. 0.029% 0.045% AA- Aa3
A+ .................................................................................. 0.045% 0.070% A+ A1
A .................................................................................... 0.070% 0.110% A A2
A- ................................................................................... 0.110% 0.170% A- A3
1 BBB+ .............................................................................. 0.170% 0.260% BBB+ Baa1
BBB ................................................................................ 0.260% 0.410% BBB Baa2
BBB- ............................................................................... 0.410% 0.640% BBB- Baa3
2 BB+ ................................................................................ 0.640% 0.990% BB+ Ba1
BB .................................................................................. 0.990% 1.540% BB Ba2
BB- ................................................................................. 1.540% 2.400% BB- Ba3
3 B+ .................................................................................. 2.400% 3.730% B+ B1
B .................................................................................... 3.730% 5.800% B B2
B- ................................................................................... 5.800% 9.010% B- B3
4 CCC+ ............................................................................. 9.010% 14.000%
CCC ............................................................................... 14.000% 31.000%
CCC- .............................................................................. 31.000% 99.990%
5 DD .................................................................................. 99.99% 100.00% D C
The Group's PDs and PD term structures are based on both quantitative and qualitative factors and in some cases external ratings are
used. PD's are re-assessed on a regular basis with different frequencies depending on the type of counterparty and/or exposure.
Each exposure is allocated a credit risk rating at initial recognition. The calculations are based on available information at the time of
origination. Exposures are continuously monitored and revaluated using the models described above and this may result in transitions
between risk ratings.
The Group's rating scale is shown below, including mapping of external ratings. The lower bounds are inclusive.
Description
Non-investment
Grade
Non-investment
Grade
The Group uses external ratings for counterparties that receive such ratings from recognized rating agencies such as Moody's, Standard &
Poor's and Fitch. The Group's internal rating scale was originally calibrated to match historical default rates shown in publications of the
aforementioned rating agencies and using smoothing techniques. External ratings are primarily used to assess expected losses for
counterparties of marketable securities, money market and deposit accounts positions which fall under the Impairment requirements of
IFRS 9. The Bank's ECL is broken down by investment grade and non-investment grade classes for such exposures, as per the definition
of the corresponding rating agency.
In addition to calculating PD and allocating a credit risk rating to each exposure, the Group calculates the lifetime probability of default
(LPD), which is an assessment of the probability that a default event occurs over the lifetime of the exposure. The LPD incorporates
management's view of possible future macroeconomic developments and the likelihood of rating transitions over the lifetime of the
exposure. For the determination of LPD, the Bank calculates PD term structures – which effectively provides the probability of default for
any given time period, one for each rating grade, PD model and economic scenario. The annualized lifetime probability of default (ALPD) of
an exposure is the fixed 12 month PD (without transitions) that corresponds to the exposure's LPD. The credit risk rating that corresponds
to the ALPD is defined as the lifetime credit risk rating.
Investment Grade
Default / Impaired
Non-investment
Grade
Assumptions on key macro-economic indicators are on an ongoing basis estimated based on internal and external information available at
each time. The Group formulates a 'base case' view of the future direction of relevant economic variables as well as a representative range
of other possible forecast scenarios. The Group uses these forecasts to adjust its estimates of lifetime probability of default and other
factors that affect the lifetime expected credit loss.
Investment Grade
Probability of default
The assessed 12 months PDs are the basis for the determination of the term structure of PDs for exposures. The Group applies transition
models, developed on the basis of historical data, to predict the development of risk grades for periods that exceed one year. The Group
has separated transition behavior due to specific and general risk and applies its macro-economic forecasts to the latter. The analysis of
credit rating transitions due to general risk includes the identification and calibration of relationships between changes in default rates and
changes in key macro-economic factors. Unemployment rate is the predominant predictive variable. Among other indicators examined are
GDP growth, private consumption expenditure, inflation, development of housing prices and benchmark interest rates.
85
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
56. Financial assets and financial liabilities, continued
–
–
–
–
For a given exposure, the Group considers a significant increase in credit risk to have occurred if one of the following holds:
the number of days in arrears exceeds 30 days; or
the exposure's credit risk rating on reporting date is not in risk class 0 or 1 and has deteriorated by more than one risk rating compared
to the credit risk rating at origination;
the exposure's lifetime credit risk rating on reporting date is not in risk class 0 or 1 and has deteriorated by more than one risk grade
(two or more) compared to the lifetime credit risk rating at origination. As the Group does not have the benefit of hindsight, this
comparison is only used for exposures that originate on or after 1 January 2018;
Significant increase in credit risk
The Group monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that the
criteria is capable of identifying significant increases in credit risk before an exposure is in default and there is no unwarranted volatility in
loss allowance from transfers between 12-month ECL (stage 1) and lifetime ECL (stage 2).
The Bank has six different exposure specific PD models for individuals: mortgages, consumer loans, auto loans, guarantees, loans to
individuals for work purposes and other loans. The Bank has a different model or rating logic for the following corporate portfolios – large
corporates, retail SMEs, holding companies, financial institutions (external ratings), municipalities, state related entities and cooperatives.
Each credit facility is assigned an LGD. The LGD is an assessment of loss conditional on a default occurrence. The Group splits LGD into
three components; the probability of cure, the expected recovery from liquidation of collateral, and the recovery rate for the unsecured part
of the exposure. The cure rate is modeled on the Group’s historical data of assets returning to performing status after being in default
without loss. The expected recovery is the outcome of the Group’s collateral allocation algorithm which takes into account the seniority of
debt and collateral type. Haircuts are applied to different types of collaterals based on expert judgment, supported by historical data, and
take into account costs and the time value of money. Different haircuts are applied for different macro-economic scenarios in the ECL
calculations. In some instances, assets are considered to be fully covered by collateral after haircut application and therefore carry no ECL.
The recovery rate for the unsecured part of the exposure is based on expert judgment, taking into account historical loss experience.
The cut-off period for cure is taken to be 18 months from default, which means that a return to non-default after that period is not
considered a cure. Furthermore, cure is defined on a portfolio level instead of on a loan level i.e. the same level as the PD models. In this
version, statistical cure rate models have been created for the largest portfolios – mortgages, consumer loans and large corporates and
retail SMEs. As the explanatory variables in the statistical cure rate models can be related to variables in PD models, this change prompts
a consideration of PD-cure correlation. The correlation effects are taken into account in the Bank’s ECL calculations. Furthermore, long-
run average cure rate models using macro-economic variables have been created. The models can be used to assess cure rate under
different economic conditions to be able to apply different cure rates for different economic scenarios given different economic conditions.
The EAD represents the expected exposure at the event of a default. For a given exposure, the Group derives the EAD from the
contractual amortization schedule and takes into account the likelihood of pre-payments, drawdowns, rollovers, extensions and use of
unused allowance in the period leading up to default. These behavioral estimates, which are based on historical observations and forward-
looking forecasts, apply differently to each type of exposure.
Loss given default
Exposure at default
the exposure is on the Group's watch list.
The assessment of significant increase in credit risk requires significant judgment. In determining whether the risk of default for an
exposure has increased significantly since initial recognition, the Group considers relevant, reasonable and supportable information on an
ongoing basis. Assumptions are drawn based on the Group's historical experience and expert judgement including forward-looking
expectations. If a debt investment security has low credit risk and is considered investment grade at the reporting date, the Group
determines that the credit risk on the asset has not increased significantly since initial recognition.
86
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
56. Financial assets and financial liabilities, continued
–
–
–
Write-off of loans
probability of default (PD),
loss given default (LGD); and
Loans are written off, either partially or in full, when there is no realistic prospect of recovery i.e. the bankruptcy of the borrower or an
ineffective attachment or distraint. Collateralized loans are generally written of when the realization of collateral have been received. After
write-off, exposures continue to be subject to collection activities in accordance with Icelandic law.
exposure at default (EAD).
Impairment losses are recognized in net impairment, see note 42. Any decreases in impairment loss amounts are reversed through net
impairment.
Expected credit loss measurement
The predominant macro-economic variable used across all portfolios is the unemployment rate in Iceland, as measured by the Directorate
of Labor. Among other variables considered are GDP growth, private consumption expenditure, inflation, development of housing prices
and benchmark interest rates. The average cure is also correlated with unemployment rate, depending on portfolio, and collateral haircuts
are adjusted for different scenarios. Exit and pre-payment rates, which affects EAD, are dependent on refinancing spreads and due to the
correlation between interest rates and unemployment rate they are adjusted for different scenarios.
The expected credit loss (ECL) calculations are based on three main components:
Forward looking scenarios
The ECL for an exposure is the weighted average of the expected credit loss for different macro-economic scenarios provided by the
Group's management. The Group currently considers three scenarios: 'base case', 'optimistic' and 'pessimistic' and assigns its best
estimate of the likelihood of occurrence to each one. The development of macro-economic variables and the corresponding weights are
based on expert judgement supported by historical data. The Group incorporates forward-looking macro-economic information into both its
assessment of whether the credit risk of an instrument has increased significantly since its initial recognition (via the lifetime credit risk
rating comparison) and its measurement of ECL as the PD term structures, LGD and EAD include macro-economic adjustments for each
of the scenarios.
Each component is derived from internally generated models, apart from external credit ratings. The models are developed with statistical
methods and/or expert judgement supported by historical data and adjusted for expected macro-economic effects.
The Group measures ECL considering the risk of default over the maximum contractual period (including any extension periods) over
which it is exposed to credit risk. The maximum contractual period extends to the date at which the Group has the right to require
repayment of an advance or terminate a loan commitment or guarantee. However, for overdrafts and credit card facilities that include both
a loan and an undrawn commitment component, the Group measures ECL over a period longer than the maximum contractual period if the
Group’s procedures for extensions do not limit the Group’s exposure to credit losses to the contractual period. These facilities do not have
a fixed term or repayment structure. The Group can cancel them with immediate effect but this contractual right is not enforced in the
normal day-to-day management, but only when the Group becomes aware of an increase in credit risk at the facility level. This longer
period is estimated taking into account the credit risk management actions that the Group expects to take and that serve to mitigate ECL.
These include a reduction in limits, cancellation of the facility and/or turning the outstanding balance into a loan with fixed repayment terms.
The ECL calculations involve discounting using the exposures' effective interest rates.
The amount of the loss impaired is the difference between the assets' gross carrying value and the present value of estimated future cash
flow. In some instances, the impairment of exposures is zero due to collateral coverage.
Exposures in default at each reporting date, according to the Group’s definition, are considered to be credit impaired.
Exposures in default
87
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
56. Financial assets and financial liabilities, continued
57. Hedge accounting
58. Cash and cash equivalents
Modifications
The original terms of a financial asset may be renegotiated or otherwise modified, resulting in changes to the contractual terms of the
financial asset that affect the contractual cash flow. The treatment of such modifications is primarily based on the process undertaken to
execute the renegotiation and the nature and extent of changes made. Modifications which are performed for credit reasons, primarily
related to troubled debt restructurings, are generally treated as modifications of the original financial asset unless modifications are
significant. Significant modifications are generally considered to be an expiry of the original cash flows; accordingly, such renegotiations
are treated as a derecognition of the original financial asset and recognition of a new financial asset.
From the applying of IFRS 9 from 1 January 2018, the Group has chosen to continue to apply the hedge accounting requirements of IAS
39, in line with exemption from IFRS 9. However, the Group will provide the expanded disclosures on hedge accounting introduced by IFRS
9's amendments to IFRS 7, as the accounting policy election does not provide an exemption from the new disclosure requirements under
IFRS 7.
The Group applies fair value hedge accounting with respect to designated hedging relationship of certain fixed-rate foreign currency
denominated notes issued by the Bank as the hedged items and certain foreign currency denominated interest rate swaps as the hedging
instruments. The Group recognizes the changes in fair value of the interest rate swaps together with changes in the fair value of bonds
attributable to interest rate risk immediately in profit or loss in the line item of Note 10, Net gain on fair value hedge of interest rate swap.
Calculated accrued interest on both swaps and bonds are included in the line item of Note 7, Interest expense.
On initial designation of the hedges, the Group formally documented the relationship between the hedging instruments and hedged items,
including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the
effectiveness of the hedging relationships. The Group makes an assessment, both at inception of the hedge relationships and on an
ongoing basis, of whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value of the
hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within the range of
80–125%.
If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for fair value hedge
accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. Any adjustments, up to the point of
discontinuation, to a hedged item for which the effective interest method is used, is amortized to profit or loss as part of the recalculated
effective interest rate of the item over its remaining life.
If a modification of terms does not result in derecognition of the financial asset, the carrying amount of the financial asset is recalculated as
the present value of the renegotiated or modified contractual cash flows, discounted at the original effective interest rate and gain or loss is
recognized. The financial asset continues to be subject to the same assessments for significant increase in credit risk relative to initial
recognition and credit-impairment, as described above. A modified financial asset will migrate out of Stage 3 if the conditions that led to it
being identified as credit-impaired are no longer present and relate objectively to an event occurring after the original credit-impairment was
recognized. A modified financial asset will migrate out of Stage 2 when it no longer satisfies the relative thresholds set to identify significant
increase in credit risk, which are based on changes in its PD, lifetime PD, days past due and other qualitative considerations.
If a modification of terms results in derecognition of the original financial asset and recognition of the new financial asset, the new financial
asset will generally be recorded in Stage 1, unless it is determined to be credit-impaired at the time of renegotiation. For the purposes of
assessing for significant increase in credit risk, the date of initial recognition for the new financial asset is the date of modification.
Other derivatives, not designated in a qualifying hedge relationship, are used to manage its exposure to foreign currency, interest rate,
equity market and credit risk. The financial instruments used include, but are not limited to, interest rate swaps, cross-currency swaps,
forward contracts, futures, options, credit swaps and equity swaps.
Cash and cash equivalents in the Statement of Cash Flows consist of cash, demand deposits with the Central Bank and demand deposits
with other credit institutions. Cash and cash equivalents comprise balances with less than three months' maturity from the date of
acquisition. Cash and cash equivalents are carried at amortized cost in the Statement of Financial position.
88
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
59. Loans
60. Derivatives
61. Intangible assets
Goodwill and infrastructure
Customer relationship and related agreements
Software
Amortization of intangible assets
62. Investment property
When the Group purchases an asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a
fixed price on a future date reverse repo or stock borrowing, the arrangement is accounted for as a loan, and the underlying asset is not
recognized in the Group's Consolidated Financial Statements.
Goodwill and infrastructure that arises on the acquisition of subsidiaries is presented with intangible assets. Subsequent to initial
recognition goodwill and infrastructure is measured at cost less accumulated impairment losses.
Customer relationship and related agreements are measured at cost less any accumulated impairment losses.
A derivative is a financial instrument or other contract, the value of which changes in response to a change in an underlying variable, such
as share, commodity or bond prices, an index value or an exchange or interest rate, which requires no initial net investment or initial net
investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to
changes in market factors and which is settled at a future date.
Software acquired by the Group is measured at cost less accumulated amortization and any accumulated impairment losses.
When the Group is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of the
asset to the lessee, the arrangement is classified as a capital lease and a receivable equal to the net investment in the lease is recognized
and presented within loans.
Subsequent expenditure on software is capitalized only when it increases the future economic benefits embodied in the specific asset to
which it relates. All other expenditure is expensed as incurred.
Derivatives are recognized at fair value. Fair value changes are recognized in the Income Statement. Changes in fair values of derivatives
are split into interest income, foreign exchange differences and net financial gain or loss. Interest income is recognized on an accrual
basis. Derivatives with positive fair values are recognized as Financial instruments and derivatives with negative fair values are recognized
as Financial liabilities at fair value.
Amortization of intangible assets is recognized in the Income Statement on a straight-line basis over the estimated useful life, from the date
that it is available for use. The estimated useful life of intangible assets for the current and comparative periods is three to ten years.
An investment property is a property which is held either to earn rental income or for capital appreciation or for both.
Investment property is initially measured at cost and subsequently at fair value. Gains or losses arising from changes in the fair values of
investment properties are included in the Income Statement.
Loans are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortized cost
using the effective interest method.
Loans are financial instruments with fixed or determinable payments that are not quoted in an active market and that the Group does not
intend to sell immediately or in the near term. Loans include loans provided by the Group to credit institutions and to its customers,
participation in loans from other lenders and purchased loans.
89
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
63. Impairment of non-financial assets
64. Deposits
65. Borrowings
66. Subordinated liabilities
67. Assets and disposal groups held for sale
The Group classifies a Asset or disposal group as held for sale if its carrying amount will be recovered principally through a sale transaction
rather than through continuing use. For this to be the case the asset or disposal group must be available for immediate sale in its present
condition subject only to terms that are usual and customary for sales of such asset or disposal group and the sale must be highly
probable.
Immediately before classification as held for sale, the measurement of the qualifying assets and all assets and liabilities in a disposal group
is brought up-to-date in accordance with applicable IFRS. Then, on initial classification as held for sale, Assets and disposal groups are
recognized at the lower of carrying amount and fair value less costs to sell. Impairment losses on initial classification as held for sale are
included in the Income Statement, even when there is a revaluation. The same applies to gains and losses on subsequent remeasurement.
Revaluation through the reversal of impairment in subsequent periods is limited so that the carrying amount of the held for sale, Assets or
disposal groups does not exceed the carrying amount that would have been determined had no impairment loss been recognized in prior
years.
An impairment loss in respect of other assets, where impairment losses have been recognized in prior periods, are assessed at each
reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a
change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's
carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no
impairment loss had been recognized.
Deposits are initially measured at fair value plus transaction costs, and subsequently measured at their amortized cost using the effective
interest method.
Subordinated liabilities are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition,
subordinated liabilities are stated at principal amount due plus accrued interest, which is recognized in the Income Statement based on the
contractual terms of the borrowing.
Subordinated liabilities are financial liabilities in the form of subordinated capital which, in case of the Group's voluntary or compulsory
winding-up, will not be repaid until after the claims of ordinary creditors have been met. In the calculation of the capital ratio, they are
included within both Tier 1 and Tier 2, based on terms of each instrument. The Group may only retire subordinated liabilities with the
permission of the FSA.
Borrowings are measured at amortized cost with any difference between cost and redemption amount being recognized in the Income
Statement over the period of the borrowings on an effective interest basis. Accrued interest is included in the carrying amount of the
borrowings.
The carrying amounts of the Group's non-financial assets, other than assets held for sale, investment property and deferred tax assets, are
reviewed at each reporting date to determine, whether there is any indication of impairment. If any such indication exists then the asset's
recoverable amount is estimated. The recoverable amount of intangible assets is assessed annually.
An impairment loss is recognized if the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in
profit or loss.
The recoverable amount of an asset is the greater of its value in use and its fair value less cost to sell. In assessing value in use, the
estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the asset.
90
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
68. Other assets and other liabilities
Property and equipment
Right-of-use asset and lease liability
Other assets and other liabilities
Technical provision
69. Equity
Share capital and share premium
Treasury shares
Dividends
Option reserve
Warrants reserve
Reserve for investments in subsidiaries and associates
Reserve for investments in securities
The depreciable amount of property and equipment is determined after deducting its residual value. Depreciation is charged to the Income
Statement on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. The estimated useful
lives are as follows:
Estimate is made in accordance with Solvency II rules. Data from the company's claim system are extrapolated to predict the final amount
of the claims that will be paid at the end of the reporting period with corresponding expected payments from reporting date until the
settlement of claims that occurred prior to the reporting date. In addition, estimation of settlement cost, risk and other factors is made in
accordance with the instructions in Solvency II rules. This approach is consistent with the valuation of insurance liabilities in IFRS 4.
The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and
a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases and leases of
low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the
term of the lease. The lease liability is initially measured at the present value of the lease payments that are not paid at the
commencement date, discounted by using the Group's incremental borrowing rate. The right-of-use assets comprise the initial
measurement of the corresponding lease liability. They are subsequently measured at cost less accumulated depreciation.
Real estates ....................................................................................................................................................................
Dividends on shares are recognized in equity in the period in which they are approved by Arion Bank's shareholders.
According to the Financial Statements Act No. 3/2006 the difference between share of profit of subsidiary or associate in excess of
dividend payment or dividend payment pending, shall be transferred to a restricted shareholding equity reserve, net of tax, which is not
subject to dividend payments. When shareholding in subsidiary or associate is sold or written off the shareholding equity reserve shall be
released and the amount transferred to retained earnings.
According to the Financial Statements Act No. 3/2006 fair value changes of financial assets from the initial reporting, shall be transferred
from retained earnings to a fair value equity reserve, net of tax. The fair value equity reserve is not subject to dividend payments. The fair
value equity reserve shall be released in accordance with fair value changes recognized when financial asset is sold or redeemed or the
assumptions for the fair value change is no longer in force.
The consideration paid for the purchase of own shares is deducted from the shareholders equity as treasury shares. No gain or loss is
recognised in the Income Statement on purchase or sale of treasury stock.
The option reserve represents the cumulative charge to the Income Statement for options for employees to purchase shares in Arion Bank.
The stock option plan is set up in accordance with article 10 in Act on income tax No. 90/2003.
Par value of issued share capital is ISK 1 per share. The holders of ordinary shares are entitled to receive dividends as approved by the
AGM and are entitled to one vote per share at shareholders' meetings.
The depreciation methods, useful lives and residual values are reassessed annually.
Items of property and equipment are measured at cost less accumulated depreciation and impairment losses. When parts of an item of
property and equipment have different useful lives, they are accounted for as separate items of property and equipment.
Other assets and other liabilities are stated at cost less impairment.
Equipment ......................................................................................................................................................................
33 years
3-15 years
Subsequent expenditure is capitalized only when it is probable that the future economic benefits of the expenditure will flow to the Group.
Ongoing repairs and maintenance are expensed as incurred.
The warrants reserve represents the consideration received for outstanding warrants.
91
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
69. Equity, continued
Reserve due to capitalized development cost
Financial assets at fair value through OCI
Statutory reserve
Foreign currency translation reserve
70. Earnings per share
71. Financial guarantees
72. Fiduciary activities
73. Employee benefits
Share-based payment expense
Unrealized fair value changes net of tax for assets held at fair value through other comprehensive income. The fair value reserve is
released in correlation with realization of gains or losses of financial assets at derecognition.
According to the Financial Statements Act No. 3/2006 entities that capitalize development costs shall transfer a corresponding amount
from retained earnings to a separate reserve. The reserve is not subject to dividend payments. The reserve shall be eliminated in an
amount corresponding to the annual depreciation of the capitalized development cost. The reserve shall be released if the asset is sold or
fully depreciated.
According to the Icelandic Companies Act No. 2/1995 at least 10% of the profit of the Group which is not devoted to meeting losses from
previous years and is not contributed to other legal reserves must be contributed to the statutory reserve until it amounts to 10% of the
share capital. When that limit has been reached the contribution must be at least 5% of the profit until the statutory reserve amounts to
25% of the share capital of the Bank.
The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the Consolidated
Financial Statements of foreign operations.
The Group presents basic and diluted earnings per share (EPS). Basic earnings per share is calculated by dividing the net earnings
attributable to the shareholders of Arion Bank hf. by the weighted average number of ordinary shares outstanding during the year. Diluted
earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding during the year to assume
conversion of all dilutive potential ordinary shares, which comprise share options granted to employees and issued warrants.
In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances.
Financial guarantees are initially recognized in the Consolidated Financial Statements at fair value, being the premium received.
Subsequent to initial recognition, the Group's liability under each guarantee is measured at the higher of the amount initially recognized
less, when appropriate, cumulative amortization recognized in the Income Statement, and the best estimate of expenditure required to
settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is recorded in
the Income Statement. The premium received is recognized in the Income Statement in Net fees and commission income on a straight line
basis over the life of the guarantee.
All entities with employees within the Group have defined contribution plans. The entities pay fixed contributions to publicly or privately
administered pension plans on a mandatory and contractual basis. The Group has no further payment obligations once these contributions
have been paid. The contributions are recognized as an expense in the Income Statement when they become due. The Group does not
operate any pension fund which confers pension rights.
The Group provides asset custody, asset management, investment management and advisory services to its clients. These services
require the Group to make decisions on the treatment, acquisition or disposal of financial instruments. Assets in the Group's custody are
not reported in its Statement of Financial Position.
Equity-settled share‐based payments to employees are measured at the fair value of the equity instruments at grant date. The grant date
fair value of equity-settled share‐based payments granted to employees is recognized as an salary expense, with a corresponding increase
in equity, over the contratual period. The amount recognized as an expense is adjusted to reflect the number of shares that are expected to
be exercised at the vesting date.
92
Arion Bank Consolidated Financial Statements 2021
Notes to the Consolidated Financial Statements
74. Standards issued but not yet effective
IFRS 17 Insurance Contracts
New standards, amendments to standards and interpretations have been issued but are not yet effective for the year ended 31 December
2021, and have not been applied in preparing these Consolidated Financial Statements. Relevant to the Group's reporting is IFRS 17
Insurance contracts.
IFRS 17 Insurance Contracts, is comprehensive new accounting standard for insurance contracts covering recognition and measurement,
presentation and disclosure. IFRS 17 applies to all types of insurance contracts (i.e., life, non-life, direct insurance and re-insurance). The
overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. IFRS
17 is effective for reporting periods beginning on or after 1 January 2023, with comparative figures required. This standard will be
applicable to the Group‘s subsidiary Vördur and based on analysis performed to assess the impacts of the implementation of the standard
it is considered to have minor impacts on the Statement of Comprehensive Income of the Group.
93
Arion Bank Consolidated Financial Statements 2021
Amounts are in ISK millions
Income Statement
2021 2020 2019 2018 2017
32,063 31,158 30,317 29,319 28,920
14,673 11,642 9,950 10,350 10,211
3,442 3,071 2,886 2,589 2,093
6,220 2,745 3,212 2,302 4,045
22 - 756 27 (927)
1,805 2,148 877 1,584 2,521
58,225 50,764 47,998 46,171 46,863
(14,638) (12,332) (14,641) (14,278) (13,602)
(11,237) (12,109) (12,222) (12,000) (9,291)
(25,875) (24,441) (26,863) (26,278) (22,893)
(1,516) (1,301) (2,984) (3,386) (3,172)
3,169 (5,044) (382) (3,525) 312
34,003 19,978 17,769 12,982 21,110
(6,782) (3,231) (3,714) (4,046) (5,966)
27,221 16,747 14,055 8,936 15,144
1,394 (4,278) (12,955) (1,159) (725)
28,615 12,469 1,100 7,777 14,419
Statement of Financial Position
Assets
69,057 42,136 95,717 83,139 139,819
30,272 28,235 17,947 56,322 86,609
936,237 822,941 773,955 833,826 765,101
225,657 227,251 117,406 114,557 109,450
6,560 6,132 7,119 7,092 6,613
668 891 852 818 760
9,463 9,689 8,367 6,397 13,848
2 2 2 90 450
16,047 16,811 43,626 48,584 8,138
19,901 18,618 16,864 13,502 16,966
1,313,864 1,172,706 1,081,855 1,164,327 1,147,754
Liabilities and Equity
5,000 13,031 5,984 9,204 7,370
655,476 568,424 492,916 466,067 462,161
5,877 5,240 2,570 2,320 3,601
7,102 4,262 4,404 5,119 6,828
16,935 16,183 28,631 26,337 -
37,151 32,714 32,697 30,107 57,062
356,637 298,947 304,745 417,782 384,998
35,088 36,060 20,083 6,532 -
1,119,266 974,861 892,030 963,468 922,020
193,925 197,672 189,644 200,729 225,606
673 173 181 130 128
194,598 197,845 189,825 200,859 225,734
1,313,864 1,172,706 1,081,855 1,164,327 1,147,754
Investment property ...................................................................................
Discontinued operations, net of tax ............................................................
Net earnings .................................................................................................
Net earnings from continuing operations ...................................................
Cash and balances with Central Bank ........................................................
Loans to credit institutions ..........................................................................
Loans to customers ....................................................................................
Financial instruments .................................................................................
Total equity ...............................................................................................
Liabilities associated with disposal groups held for sale .............................
Intangible assets ........................................................................................
Tax assets .................................................................................................
Valitor hf. was classified as disposal group held for sale in 2018, see Note 29.
Net impairment ...........................................................................................
Net financial income ...................................................................................
Investments in associates ..........................................................................
Earnings before income tax ........................................................................
Income tax expense ...................................................................................
Net interest income ....................................................................................
Bank levy ...................................................................................................
Other operating income ..............................................................................
Other operating expense ............................................................................
Net fee and commission income ................................................................
Operating income ........................................................................................
Salaries and related expense .....................................................................
Share of profit of associates and net impairment ........................................
Net insurance income ................................................................................
5-year overview
Assets and disposal groups held for sale ...................................................
Non-controlling interest ..............................................................................
Total Assets .................................................................................................
Total Liabilities and Equity ..........................................................................
Other liabilities ...........................................................................................
Borrowings .................................................................................................
Subordinated liabilities ...............................................................................
Shareholders' equity ...................................................................................
Due to credit institutions and Central Bank .................................................
Deposits .....................................................................................................
Financial liabilities at fair value ...................................................................
Tax liabilities ..............................................................................................
Total liabilities ..........................................................................................
Operating expenses .....................................................................................
Other assets ..............................................................................................
94
Appendix
Unaudited
1
Corporate Governance
Statement of Arion Bank
for 2021
Arion Bank (Arion Bank or the Bank) is an Icelandic
public limited company whose shares are listed on
Nasdaq Iceland and Nasdaq Stockholm. Here the
Board submits its Corporate Governance Statement
for 2021. Corporate governance is focused on
how responsibilities are allocated among the
various bodies of the Bank and how systems for
decision making are constructed, in accordance
with prevailing laws and regulations. Arion Bank’s
shareholders exercise governance principally by
electing the Board of Directors, which in turn appoint
the CEO and monitor the Bank’s conduct of business.
The CEO is responsible for the day-to-day operations
of the Bank and represents the Bank in all matters
concerning normal operations. The CEO must in
this respect comply with the relevant legislation,
the Bank’s Articles of Association and the policies
and instructions laid down by the Board. The CEO
is responsible for the implementation of the Bank´s
policies.
Fundamentals to corporate governance at Arion
Bank are, on the one hand, the Articles of
Association which are approved by shareholders,
and, on the other, policies and other documents
adopted by the Board of Directors. These include the
Board’
s Rules of Procedure, and the Rules of
Procedure of the Board’s Sub-Committees, and
policies regarding the Bank’s operations and
enterprise risk management
architecture. These policies are revised every year,
and whenever deemed necessary. Even more
important is the Bank’s corporate culture, strategy,
and operational procedures. Good corporate
governance and corporate culture helps to foster
open and honest relations between the Board of
Directors, shareholders, customers, and other
stakeholders, such as the Bank’s employees and
the public. Corporate governance also provides
the foundations for responsible management and
decision-making, with the objective of generating
sustainable long-term value creation. The Board of
Directors places great importance on good corporate
governance and re-evaluates its governance practices
regularly on the basis of recognized guidelines on
corporate governance.
A central part of governance for inancial institutions
involves managing risks which will invariably arise in
operations. Risk management is described further
in later in this statement, the Bank’s Annual Report
and in the Bank’s Pillar 3 report. Establishing and
maintaining eective risk management and controls
constitutes a key challenge in the Bank’s activity and
to the Bank’s overall soundness.
This Corporate Governance Statement is based on
the legislation, regulations and recognized guidelines
which are in force at the time the Bank’s inancial
statement is adopted by the Board of Directors.
2
Corporate Governance Statement of Arion bank
Excellence in corporate governance
Arion Bank has been recognized as a company which
has achieved excellence in corporate governance,
following a formal assessment based on the Icelandic
Guidelines on Corporate Governance issued by the
Icelandic Chamber of Commerce, SA – Business
Iceland and Nasdaq Iceland, initially in December
2015 and again in April 2019. This recognition was
granted following an in-depth assessment by an
independent party of corporate governance at the
Bank, including governance by the Board of Directors,
Sub-Committees and management.
Compliance with guidelines on good
corporate governance
When it comes to governance arrangements, Arion
Bank applies the European Banking Authority (EBA)
Guidelines on Internal Governance (EBA/GL/2017/11),
in line with requirements found in Regulation (EU)
1093/2010 and Act 24/2017, on European Financial
Supervision. EBA has published revised Guidelines on
Internal Governance (EBA/GL/2021/05), which apply
to the Bank’s operations as of 31 December 2021.
These Guidelines are available on the website of the
Financial Supervisory Authority of the Central Bank of
Iceland.
Furthermore, according to the Financial Undertakings
Act No. 161/2002 Arion Bank is obliged to comply with
recognized guidelines on corporate governance. The
Bank complies with the sixth edition of the Icelandic
Guidelines on Corporate Governance issued by
Iceland Chamber of Commerce, SA – Business Iceland
and Nasdaq Iceland, published in February 2021 and
in force as of 1 July 2021. According to the guidelines
a company shall state whether it has deviated from
the guidelines, if so, which parts and also explain why
it has done so.
The Bank complies with the guidelines with two
deviations:
Article 5.1.2. states that the rules of procedure of sub-
committees of the Board shall be posted on the Bank’s
website. The rules of the Board Credit Committee
have not been published on the Bank’s website with
respect to their nature.
The inal sub-paragraph of article 5.4.5 states that the
role of a remuneration committee shall include taking
an independent stance on the eect of wages on the
Company’s risk exposure and risk management, in
cooperation with the Company’s Audit Committee. In
line with, inter alia
, the EBA Guidelines on
Internal Governance and article 78(3) of the Act on
Financial Undertakings, this role falls to the Board’s
Remuneration Committee in cooperation with the
Board’s Risk Committee.
The role of the Nomination Committee at Arion Bank
is to promote good corporate governance and to
facilitate informed decision-making by shareholders
when selecting Board members to ensure that Board
members have wide and versatile qualiications and
experience. The Committee has an advisory role
regarding the election of Board members and makes a
proposal on their remuneration. At the Bank’s annual
general meeting on 16 March 2021, two members of
the Nomination Committee were appointed, Júlíus
Þorinnsson and Vitaliy Ardislamov. According to the
Rules of Procedure for the Nomination Committee, the
third member of the Committee shall be the Chairman
of the Board of Directors or another Board Member
appointed by the Board.
Legal framework for the Bank’s operation
Arion Bank is a inancial institution which operates in
accordance with the Financial Undertakings Act No.
161/2002. Acts of law which also apply to the Bank’s
operations include e.g. the Act on Markets for
Financial Instruments No. 115/2021, to Act on
Undertakings for Collective Investment in Transferable
Securities (UCITS) No. 116/2021 and Act on Alternative
Investment Fund Managers No. 45/2020, Act on
Payment Services No. 114/2021, Act on Measures
Against Money Laundering and Terrorist Financing No.
140/2018, Act on Consumer Mortgages No. 118/2016,
Consumer Loans Act No. 33/2013, Competition Act
No. 44/2005 and Public Limited Companies Act No.
2/1995.
Arion Bank is a strongly capitalized bank, the purpose
of which is to excel by oering smart and reliable
inancial solutions which create future value for our
customers, shareholders, and society as a whole. As
noted, the Bank is listed on Nasdaq Iceland and
Nasdaq Stockholm. The Bank has also issued inancial
instruments which have been admitted for trading on
regulated securities markets in Iceland and
Luxembourg. The Bank is, therefore, subject to the
disclosure requirements of issuers pursuant to the Act
on Markets for Financial Instruments and the rules of
the relevant stock exchanges.
The Financial Supervisory Authority of the Central
Bank of Iceland (FSA) supervises the operations of
Arion Bank in accordance with the provisions of Act
No. 87/1998 on the Oicial Supervision of Financial
Operations. Further information on the FSA and an
overview of the legal and regulatory framework
3
applicable to the Bank, as well as FSA guidelines and
guidelines issued by European Financial Supervisory
institutions, can be seen on the FSA’s website, www.
cb.is/inancial-supervision/.
Numerous other pieces of legislation apply to the operations of
inancial undertakings.
Internal controls, auditing and accounting
Internal control
The Bank is committed to the highest standards of
corporate governance and regards internal control
as an integral part of its risk management system. An
eective internal control system is built to mitigate
risk to acceptable levels by facilitating enlightened
decision making, thus supporting the Bank in
achieving its objectives and enabling the creation and
preservation of value.
The objective of the Bank’s system of internal controls
is to ensure:
• The Bank’s policies, objectives and plans are
achieved within set risk appetite and threshold.
• The actions of the Board of Directors,
management and employees comply with the
Bank’s policies, standards, processes and all
relevant laws and regulations.
• The Bank’s assets and resources, including
its people, systems, and data are adequately
protected.
• Data and information published either internally or
externally is accurate, reliable, and timely.
• The risks that are inherent in the Bank’s operations
are managed.
• Practical controls and processes have been
established that require and encourage the Board,
management, and employees to carry out their
duties and responsibilities in an eicient and
eective manner.
The key components of the internal control framework
are Control Environment, Risk Assessments, Control
Activities, Information and Communication, and
Monitoring Activities. These components are
interrelated with all operations of the Bank.
Control Environment includes the governance and
management function of the Bank, as well as the
attitude of senior management towards internal
control and its importance. The key principles relating
to control environment include:
• Integrity and ethical values
• The attitude of senior management and tone from
the top
• Organisational structure
• Assignment of authority and responsibility
• Employee skills, human resources policy and its
implementation.
Risk Assessment is a process of identifying internal
and external factors that can aect the objectives of
the Bank and assess their impact and importance.
It forms a basis for determining how risk should be
managed so that risk-taking is in accordance with risk
appetite.
Control Activities are the actions performed at all
levels within the Bank and are intended to mitigate
risks to acceptable levels while achieving objectives.
Information is necessary for the Bank to carry out
its internal control responsibilities. Communication
occurs both internally and externally and provides
the Bank with relevant, quality information needed to
carry out day-to-day controls. Monitoring Activities
are the ongoing or separate evaluations that are used
to ascertain whether each of the ive components of
internal controls is present and functioning.
Arion Bank looks to the Three Lines Model for
organizing internal controls. All lines work together
to contribute to the creation and protection of
value. Alignment of activities is achieved through
communication, cooperation, and collaboration. This
ensures the reliability, coherence, and transparency of
information needed for risk-based decision making.
The irst line is made up of people who have day-to-
day supervision of operations and its organization.
They are responsible for establishing and maintaining
eective internal controls and managing risk in
day-to-day operations. This involves identifying and
evaluating risk and putting in place appropriate
countermeasures to reduce risk. The irst line is
responsible for supervising the implementation of
internal rules and processes in compliance with
the law, regulations and the Bank’s strategy and it
must ensure that all actions are in compliance with
established procedures and that corrective action is
taken if any deiciencies are detected.
The second line is set up to ensure that the irst line
has established adequate internal controls
4
which work as intended. Risk Management and
Compliance are the main participants in the second
line, although other units may also be assigned
speciic monitoring roles.
The third line is Internal Audit, which provides
independent and objective assurance and advice on
the adequacy and e
ectiveness of governance, risk
management and controls, through systematic and
disciplined processes, expertise and insight. It reports
its indings to management and the Board of Directors
to promote and facilitate continuous improvement.
Internal audit is accountable to the Board of Directors,
as independence from management is critical to its
objectivity, authority, and credibility.
Compliance
Compliance is an independent control function which
reports directly to the CEO and works in accordance
with a special charter from the Board.
The main role of Compliance is to ensure that the
Bank has in place proactive measures to reduce
the risk of rules being breached in the course of
its activities. Compliance is also responsible for
coordinating the Bank’s measures against money
laundering and terrorist inancing to reduce the risk
of the Bank’s services being used for illegal purposes.
Furthermore, the Compliance Oicer has the role
of the Bank’s Data Protection Oicer. The Bank has
adopted a data protection statement which can be
seen on the Bank’s website.
The duties of Compliance are carried out under a
risk-based compliance plan approved by the Board
of Directors, including a monitoring and training
schedule for employees which addresses the laws
and rules under which the Bank operates. Compliance
provides the Board of Directors with a quarterly report
on its activities.
Further information can be found on the Bank’s
website.
Risk Management
A central feature of the activities of all inancial
companies is carefully calculated risk-taking
according to a predetermined strategy. Arion Bank
thus takes risk compatible with its risk appetite, which
is regularly reviewed and approved by the Board of
Directors. The Bank’s risk appetite, set by the Board,
is translated into exposure limits and targets that
are monitored by Risk Management. The Board is
responsible for Arion Bank’s internal capital adequacy
assessment process, the main objective of which is to
ensure that Arion Bank understands its risk proile and
has systems in place to assess, quantify and monitor
its total risk exposure.
The Bank’s Risk Management division is headed by the
Chief Risk Oicer. It is independent and centralized
Actions to achieve organizational objectives (including risk management) independent assurance
First line
Provision of products and
services, managing risk
Second line
Expertise, support, monitoring,
and challenge on risk-related
matters
Third line
Independent and objective
assurance and advice on all
matters related to the
achievement of objectives
Management Internal audit
Board of Directors
Accountability to stakeholders for organizational oversight
Integrity, leadership, and transparency
KEY: Accountability, reporting Delegation, direction
resources, oversight
Alignment, communication,
coordination, collaboration
5
and reports directly to the CEO and operates in
accordance with a special charter from the Board.
Risk Management comprises three departments
whose role is to analyze, monitor and regularly report
to the CEO and Board of Directors on the risks faced
by the Bank.
Further information on risk management and capital
management is contained in the Bank´s annual report
and the Bank’s risk report.
Internal Audit
The Internal Auditor is appointed by the Board of
Directors and reports directly to the Board. The Board
sets the Internal Auditor a charter which sets out the
responsibilities associated with the position and the
scope of the work. The role of the Internal Auditor
is to provide independent and objective assurance
and advice designed to add value and improve the
Bank’s operations. The scope of the audit is the Bank,
its subsidiaries and pension funds serviced by Arion
Bank.
The internal audit department will govern itself
by adherence to the mandatory elements of The
Institute of Internal Auditors’ International Professional
Practices Framework, including the Core Principles
for the Professional Practice of Internal Auditing,
the Code of Ethics, the International Standards for
the Professional Practice of Internal Auditing, and
the Deinition of Internal Auditing. The chief internal
auditor will report periodically to senior management,
the Bank’s Audit Committee and the Board of
Directors regarding the internal audit department’s
conformance to the Code of Ethics and the Standards.
Accounting and auditing
The Bank’s Finance division is responsible for
preparing the accounts and this is done in accordance
with the International Financial Reporting Standards
(IFRS). The Bank publishes its inancial statement on
a quarterly basis and management statements are
generally submitted to the Board ten times a year. The
Board Audit Committee examines the annual inancial
statement and interim inancial statements, while the
external auditors review and audit the accounts twice
a year. The Board Audit Committee gives its opinion
on the accounts to the Board of Directors, which then
approves and endorses the accounts.
Cornerstones and code of ethics
Arion Bank’s cornerstones is the name used to
describe the Bank’s core values. The cornerstones are
designed to provide guidance when making decisions
and in everything else employees say and do. They
refer to the Bank’s role, attitude, and conduct. Arion
Bank’s cornerstones are: We ind solutions, we make a
dierence, we get things done, and, we say what we
mean.
The management and employees of Arion Bank are
conscious of the fact that the Bank’s activities aect
dierent stakeholders and society at large. The
Bank’s code of ethics is designed to serve as a key to
responsible decision-making at Arion Bank. The code
of ethics is approved by the Board of Directors.
Sustainability Risk
Sustainability risk refers to the risk of certain
activities or practices compromising the ability of
future generations or segments of society to meet
their own needs, e.g. due to negative eects on the
environment, natural or cultural resources or social
conditions.
Sustainability risk is a driver of other risk types, such
as credit risk and market risk. It can materialize in
the short term, the medium term, and the long term.
Environmental risks comprise of transition risks and
physical risks and the Bank assesses both inside-out
risks (the impact from the Bank’s operations) and
outside-in risks (impact through the Bank’s credit and
investment portfolios).
Climate and environmental risks are assessed in the
Bank’s Internal Capital Adequacy Assessment Process
and considered in the Bank’s stress testing program.
Arion Bank has been a partner of Festa, the Icelandic
Center for Corporate Social Responsibility, for several
years and since 2014 has been a signatory to the CEO
Statement of Support for the Women’s Empowerment
Principles (UN Women and UN Global Compact). In
2015 the Bank signed the City of Reykjavík and Festa’s
Declaration on Climate Change and has published
its environmental accounts since 2016. Arion Bank
has been a signatory to the UN Global Compact,
the UN’s initiative to encourage businesses to adopt
sustainable and socially responsible practices, since
the end of 2016. The Bank has also complied with the
UN’s Principles for Responsible Banking (UN PRI) since
the end of 2017. In September 2019 the Bank became
a signatory to the UN Principles for Responsible
Banking (UN PRB), the goal of which is to align
banking with international goals and commitments
such as the UN Sustainable Development Goals and
the Paris Climate Agreement.
6
Arion Bank’s activities are governed by the provisions
of the Annual Accounts Act on non-inancial
reporting, which, among other things, apply to the
status and inluence of the company in respect of
environmental, social and human resources issues.
Non-inancial reporting in the annual report is based
on the Global Reporting Initiative, GRI Core and the
ESG reporting guide for the Nasdaq Nordic and Baltic
exchanges.
The Board of Directors has the ultimate responsibility
for ensuring eective management of sustainability
risk. The CEO establishes and maintains an
appropriate formal framework for managing and
mitigating sustainability risks. The framework must
be in accordance with the Bank’s risk appetite and
regulatory requirements.
Further information on sustainability at Arion Bank can
be found in the Bank’s 2021 Annual Report. Further
information can be found on the Bank’s website.
Board of Directors and committees
The main duty of the Board of Directors of Arion
Bank is to manage the Bank between shareholders’
meetings according to applicable laws, regulations,
and articles of association. The Board tends to those
operations of the Bank which are not considered part
of the day-to-day business, i.e. it makes decisions on
issues which are unusual or of a signiicant nature.
One of the Board’s main duties is to supervise the
Bank’s activities. The Board’s work, duties and role are
deined in detail in the rules of procedure of the Board
of Directors, which have been established on the
basis of the EBA Guidelines on Internal Governance,
Article 54 of the Financial Undertakings Act, Article 70
of the Public Limited Companies Act No. 2/1995, FSA
Guidelines No. 1/2010, and the articles of association
of the Bank. The rules of procedure of the Board of
Directors can be found on the Bank’s website.
The Board of Directors appoints a Chief Executive
Oicer who is responsible for the day-to-day
operations in accordance with a strategy set out
by the Board. The Board of Directors and the
Chief Executive Oicer shall carry out their duties
with integrity and ensure that the Bank is run in a
sound and reasonable manner in the interests of
the customers, the community, the shareholders
and the Bank itself, cf. Article 1 (1) of the Financial
Undertakings Act. The Chief Executive Oicer shall
ensure that the Board receives suicient support to
carry out its duties.
The Board of Directors is generally elected for a term
of one year at the Bank’s annual general meeting.
At Arion Bank’s annual general meeting on 16 March
2021, ive Directors and two Alternates were elected
to the Board of Directors.
The elected Board Directors have diverse
backgrounds and extensive skills, experience, and
expertise. When electing the Board care is taken to
ensure at least 40% representation of each gender
among directors and alternates. Currently the Board
consists of three men and two women.
Information on the independence of Directors is
published on the Bank’s website before the annual
general meeting or a shareholders’ meeting where a
Board member is to be elected. The minutes of the
annual general meeting and shareholders’ meetings
are also published on the Bank’s website.
The Board of Directors meets at least ten times a year.
In 2021 the Board met on 14 occasions. The Chairman
of the Board is responsible for ensuring that the Board
performs its role in an eicient and organized manner.
The Chairman chairs Board meetings and ensures
that there is enough time allocated to the discussion
of important issues and that strategy issues are
discussed thoroughly. The Chairman is not permitted
to undertake any other work for the Bank unless part
of the normal duties of the Chairman.
According to the Board’s Rules of Procedure the
Board is permitted to establish committees to
discuss particular areas of the Bank’s operations. No
later than one month following the annual general
meeting the Board appoints members to each
of its sub-committees and assesses whether it is
necessary to appoint external members to certain
committees in order to bring in a greater level of
expertise. One of the committee members in the
Board Audit Committee, Heimir Þorsteinsson, is not
a Board member and is independent of the Bank and
its shareholders. The Board sub-committees are as
follows
Board Audit Committee (BAC): The BAC´s main role is
to contribute to the high-quality statutory auditing of
the Bank and monitor the eectiveness of the Bank’s
internal quality control, risk management systems
and internal audit function, with regard to the Bank’s
inancial reporting. The Committee met ive times in
2021.
• Board Risk Committee (BRIC): The Committee’s
main role is, inter alia, to evaluate the Bank’s
risk policy and risk appetite and to have a
thorough knowledge of the risk assessments
and methods used to manage risk employed by
the Bank. Committee members should have the
7
 Paul Horner was appointed to the BAC on 15 April 2021. He has attended all BAC meetings since his appointment.
 Gunnar Sturluson was appointed to the BRIC on 15 April 2021. He has attended all BRIC meetings since his appointment.
 Liv Fiksdahl was appointed to the BAC on 15 April 2021. She has attended all BAC meeting since her appointment.
 Renier Lemmens left the Board of Directors at the Bank’s AGM in March 2021.
 Steinunn Kr. Þórðardóttir was member of the BCC until 15 April 2021. She attended all BCC meeting until she left the Committee.
 Steinunn Kr. Þórðardóttir was appointed to the BTC on 15 April 2021. She has attended all BAC meeting since her appointment.
 Heimir Þorsteinsson is certified public accountant and appointed as an external member of the BAC.
Sub-committees regularly inform the Board of their
activities. Furthermore, the Board has access to
all material used by the sub-committees and their
minutes.
Below is an overview of the attendance of individual
Directors and committee member.
The Board carries out an annual performance
appraisal, at which it assesses its work, the Board
composition with respect to experience and skills,
working procedures and methods, the performance
of the CEO, their achievements and the work of the
subcommittees with respect to the aforementioned.
This appraisal was last performed by the Board during
the period October to December 2021.
qualiications and experience necessary to be
able to discharge their duties including forming
the Bank’s risk policy and risk appetite. The
Committee met eight times in 2021.
• Board Credit Committee (BCC): Its main task is to
attend to credit issues which exceed the credit
limits of its sub-committees. The Committee met
ten times in 2021.
• Board Remuneration Committee (BRC):
The Committee’s main role is to prepare a
remuneration policy for the Bank on an annual
basis. It also advises the Board on remuneration
to the CEO, Managing Directors, the Compliance
Oicer and the Chief Internal Auditor, and on the
Bank’s incentive scheme and other work-related
payments. The Bank’s remuneration policy shall
be examined and approved by a shareholders’
meeting annually. The Committee met four times
in 2021.
• Board Tech Committee (BTC): The Board has setup
a temporary,
ad hoc, tech committee, whose main
role is to advice the Board of Directors and the
Bank’s Senior Management on the Bank’s near
to medium term development of the Bank’s IT
function, including IT strategy. The Committee met
ive times in 2021.
Board member Board
(14)
BAC
(5)
BRIC
(8)
BCC
(10)
BRC
(4)
BTC
(5)
Brynjólfur Bjarnason 1. Jan. - 31. Des. 14 5 - 10 4
-
Paul Horner 1. Jan. - 31. Des. 14 4 8 10 -
-
Gunnar Sturluson 1. Jan. - 31. Des. 14 5 5 10 -
-
Liv Fiksdahl 1. Jan. - 31. Des. 14 4 - - 4
5
Renier Lemmens 1. Jan. - 31. Des. 3 1 3 - -
2
Steinunn Kr. Þórðardóttir
′
1. Jan. - 31. Des. 14 - 8 4 -
3
Sigurbjörg Á. Jónsdóttir 1. Jan. - 31. Des. 3 1 - - 1
-
Þröstur Ríkharðsson 1. Jan. - 31. Des. - - - - -
-
Heimir Þorsteinsson 1. Jan. - 31. Des. - 5 - - -
-
8
Reports to/informs
Elected by/appointed by
Annual General Meeting External Auditor
Board of Directors
Nomination Committee
Chief Executive Officer
Internal Audit
Compliance
Risk management
Board Credit Committee Board Remuneration Committee
Board Audit Committee
Board Risk Committee
Executive Management
Committee
Asset and Liability
Committee
Operational Risk
Committee
Sustainability Committee
Arion Composition and Debt
Cancellation Committee
Arion Credit Committee
Retail Branch Credit
Committees
The Board of Directors of
Arion bank
Brynjólfur Bjarnason
Paul Horner
Gunnar Sturluson
Liv Fiksdahl
Steinu
nn Kristín Þórðardóttir
ARION BANK GOVERNANCE OVERVIEW
9
Brynjólfur Bjarnason,
Chairman
Brynjólfur was born in 1946. He was irst
elected as a Director at a shareholders’
meeting on 20 November 2014. He is
not a shareholder in Arion Bank and
is an independent Director. Brynjólfur
is Chairman of the Board, and sits on
the Board Remuneration Committee,
the Board Credit Committee and
the Board Audit Committee.
Brynjólfur graduated with an MBA from
the University of Minnesota in 1973 and a
cand. oecon. degree in business studies
from the University of Iceland in 1971.
He was managing director of the
Enterprise Investment Fund from 2012
to 2014. Between 2007 and 2010 he
was the chief executive oicer of
Skipti. Brynjólfur was chief executive
oicer of Síminn from 2002 to 2007
and chief executive oicer of Grandi
hf. from 1984 to 2002. Between 1976
and 1983 he was managing director
of the publisher AB bókaútgáfa. He
was also head of the economics
department of VSÍ from 1973 to 1976.
Brynjólfur has broad experience as a
director and has served on numerous
boards and been chairman of several.
Brynjólfur is an Alternate on the
Board of Fergusson ehf. and a board
member of Marinvest ehf. og ISAL hf.
Gunnar Sturluson
Gunnar was born
in 1967. He was irst
elected as a Director at a shareholders’
meeting on 9 August 2019. He is not
a shareholder of Arion Bank and is
an independent Director. Gunnar is a
member of the Board Credit Committee
and Chairman of the Board Audit
Committee.
Gunnar graduated as Cand. Jur from the
University of Iceland in 1992, gained an
LL.M. degree in Law from the University
in Amsterdam in 1995 and received a
license to practice before the District
Court in Iceland in 1993 and before the
Supreme Court in 1999.
Gunnar practiced law at the law irm
Mállutningsskrifstofan in 1992-1999 and
became partner in 1995. He joined
Logos Legal Services in 2000 as a
partner and was managing partner
in 2001-2013. Gunnar lectured in
competition law in 1995-2007 at the
University of Iceland, Faculty of Law.
Gunnar has held various directorships,
including the board of directors at
Gamma hf. in 2017-2019, chairman of
the board of directors of the Icelandic
National Broadcasting Service (RÚV)
2016-2017, director at the Nordic
Arbitration Center, president of the
International Federation of Icelandic
Horse Associations, chairman of the
board of directors of the Icelandic
Dance Company 2013-2016 and was
voted by the Icelandic parliament
to serve on the National Electoral
Commission in 2013-2017.
Paul Horner
Paul was born in 1962. He is no
t a
shareholder in Arion Bank and is an
independent candidate. Paul is Vice
Chairman of the Board, Chairman
of the Board Credit Committee and
member of the Board Risk Committee
and the Board Audit Committee.
Paul graduated with M.A. Honours in
music from the University of Oxford
in 1983 and is an associate of the
UK Chartered Institute of Bankers.
Paul has extensive experience of
Risk and General Management in
Retail, Commercial, Investment
and Private Banking, gained across
various International markets
Paul held various Executive and Risk
Management roles at Barclays PLC
between 1988 and 2003. In 2003 Paul
joined The Royal Bank of Scotland Group
and served as an Executive and Senior
Manager of Royal Bank of Scotland PLC
and was appointed to various senior Risk
and General Management Roles until
June 2019. In 2012 to 2017, Paul was the
Chief Risk Oicer of Coutts & Co Ltd.
and CEO of Coutts & Co Ltd, Zurich,
in 2016-2017. In 2018 Paul was Chief Risk
Officer of Ulster Bank DAC, Dublin, and a
Non-Executive Director at Coutts & Co
Ltd. in Zurich from 2018-2021.
Paul serves as on the board of AIB
Group P.L.C, and is member of the
AIB audit committee, operational
resilience committee and chairs the
risk committee. He serves on the Board
of LHV (UK) Ltd and as a member
of its risk, audit and nominations
committees. At the time of publication
of this statement, subject to pending
approval by the UK regulator, he will
also chair the risk committee.
10
Liv was born in 1965. She was irst
elected as a Director at Arion Bank’s
Annual General Meeting on 20 March
2019. She is not a shareholder in
Arion Bank and is an independent
Director. Liv is chairman of the Board
Remuneration Committee and the
Board Tech Committee and member
of the Board Audit Committee.
Liv holds a degree in Finance and
Management from Trondheim
Business School (today NTNU) in 1986.
In 2018, Liv completed programs
at Stanford University in Big Data,
strategic decisions and analysis,
and the Innovative Technology
Leader. She has also completed an
Advanced Management Program for
executives in management, innovation
and technology at Massachusetts
Institute of Technology.
Liv is a Vice President (associated) within
Financial Services at Capgemini Invent,
Norway, and serves on the boards of
Posten Norge AS and Intrum AB. Liv has
held various senior roles at DNB and
was part of the executive management
team for 10 years, and her most recent
role was as the Group EVP, CIO/COO,
for IT & Operations. Liv has a broad
experience from DNB and has held
dierent positions across the value-
chain within the bank. Before DNB she
had Key Account roles for corporate
clients within Danske Bank/Fokus
Bank, and Svenska Handelsbanken.
Liv has served on numerous boards,
including Scandinavian Airlines SAS
AB, BankAxept, Sparebankforeningen,
Doorstep, Finans Norge and
Trondheim Kommune Bystyret.
Steinunn was born in 1972. She was irst
elected as a Director at a shareholders’
meeting on 30th November 2017. She
is a shareholder in Arion Bank (her
shareholding is 12000 shares) and is
an independent Director. Steinunn
is the chairman of the Board Risk
Committee and a member of the
Board Remuneration Committee
and the Board Tech Committee.
Steinunn holds a master’s degree
in international management from
Thunderbird, Arizona, and a BA in
international business and politics
from University of South Carolina.
Steinunn is CFO of Arundo Analytics
AS in Oslo, Norway. Steinunn was
previously a partner and CEO of
Beringer Finance Norway in 2015-2017
and interim CEO of Beringer Finance
in Iceland and global head of food and
seafood in 2017. She founded Akton AS
and Acton Capital AS, a management
consulting and investment company
in Norway , where she worked with
investments and consulting in the
role of a managing director. Steinunn
worked at Íslandsbanki (later Glitnir)
as the managing director and head
of the bank’s UK operation and
prior to that she was an executive
director heading the International
Corporate Credit and Syndications.
Steinunn has previously held several
directorships in Europe and was a
board member of the Icelandic State
Financial Investment (ISFI). Steinunn
is the chairman of the board of
Acton Capital AS and Akton AS and
a board member of Cloud Insurance
AS. She is also a board member of
the Norwegian-Icelandic Chamber of
Commerce. Steinunn is a member of
the nomination committee of Síminn.
Steinunn Kristín
Thórdardóttir
Liv Fiksdahl
Alternate directors:
Sigurbjörg Ásta Jónsdóttir,
lawyer, and Þröstur Ríkharðsson,
Supreme Court attorney.
More information on the Board
of Directors can be found
on the Bank’s website.
Communication between
the shareholders and the
Board of Directors
The main venue at which the Board
and the Bank report information
to the shareholders and propose
decisions to be made is at legally
convened shareholders’ meetings.
The Bank provides an eective
and accessible arrangement
for communications between
shareholders and the Board of
Directors between those meetings.
Any information sensitive to the
market will be released through a
MAR press release. As part of the
investor relations program, Arion
Bank has also arranged quarterly
meetings where the CEO, CFO
and Investor Relations present the
interim inancial results.
11
Benedikt was born in 1974. Benedikt was appointed CEO on 1
July 2019.
Benedikt joined FBA (later Íslandsbanki) in 1998, held a variety
of managerial positions at Straumur-Burðarás, was managing
director of capital markets at FL Group and was managing
director of the investment banking division of MP Bank.
Benedikt worked as a senior advisor for Iceland’s Ministry
of Finance and Economic Aairs and was vice-chairman of
a government task force on the liberalization of the capital
controls between 2013 and 2016. He served on the board of
directors of Kaupthing from 2016 to 2018 and was an advisor
to Kaupthing on matters relating to Arion Bank. Benedikt was
elected to the Board of Directors of Arion Bank in September
2018 and served on the Board until his appointment as CEO.
Benedikt gained a C.Sc. in mechanical and industrial
engineering from the University of Iceland in 1998.
Chief Executive Oicer
Benedikt Gíslason
Executive Committee
The Bank’s Executive Committee consists of the
following people and the CEO:
• Ásgeir H. Reykjörð Gylfason, Deputy CEO and
Managing Director of Corporate and Investment
Banking
• Birna H. Káradóttir, General Counsel
• Ida Brá Benediktsdóttir, Managing Director of
Retail Banking
• Margrét Sveinsdóttir, Managing Director of
Markets
• Ólafur Hrafn Höskuldsson, Chief Financial Officer
• Steinunn Hlíf Sigurðardóttir, Managing Director of
Customer Experience
• Styrmir Sigurjónsson, Managing Director of
Information Technology & CTO
• Úlfar F. Stefánsson, Chief Risk Officer
More information on the Executive Committee can be
found on the Bank’s website.
Information on violations of laws and
regulations and legal cases
Arion Bank has not been denied registration,
authorization, membership or permission to conduct
certain business, activity or operations. The Bank
has not been subject to withdrawal, revocation or
dismissal of registration, authorization, membership
or permission. Information on the main legal cases
relating to Arion Bank can be found in the notes to
the annual inancial statement.
The Board of Directors annually reviews and approves the
Corporate Governance Statement. This Corporate Governance
Statement was examined and approved at a meeting of the Board
of Directors on 9 February 2022.
Arion Bank Ltd.
Borgartun 19
105 Reykjavik
Iceland
Id.: 581008-0150
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