Arion Bank Consolidated Financial Statements 2023

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Contents

Independent Auditor's report ................................................................................................................................................................

Consolidated Statement of Changes in Equity ......................................................................................................................................

Arion Bank in brief ................................................................................................................................................................................

Endorsement and statement by the Board of Directors and the CEO ....................................................................................................

Consolidated Statement of Financial Position .......................................................................................................................................

Consolidated Income Statement ...........................................................................................................................................................

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Arion Bank Consolidated Financial Statements 2023

Balance Sheet

Arion Bank's balance sheet grew by 4.1% from year-end 2022. Loans to customers increased by 6.3% from year-end, with an 8.2% increase in

corporate lending and 4.6% growth in loans to individuals, mainly mortgages. Deposits increased by 4.9%, primarily individuals and corporates.

Total equity amounted to ISK 199,301 million at the end of the year. The Group's capital ratio, as calculated under the Financial Undertakings

Volcanic activity in the vicinity of Grindavík

Following the events near Grindavík starting in November 2023, Arion Bank has offered to freeze the mortgages of its customers in Grindavík

and to waive interest and indexation on their loans until the end of April 2024. The Bank will continue to closely monitor developments in

Grindavík and do its utmost to support the local community. For futher information see disclosure in Note 44.

The Consolidated Financial Statements of Arion Bank for the year ended 31 December 2023 include the Consolidated Financial Statements of

Arion Bank ("the Bank") and its subsidiaries, together referred to as "the Group".

Income Statement

Net earnings amounted to ISK 25.7 billion, return on equity was 13.6% and earnings per share ISK 17.8. Core income, defined as net interest

resulting in a profit of ISK 1,366 million for the year 2023. Other income was strong due to the ISK 1.6 billion revaluation of the investment

property Blikastadir. Operating expenses, including operating expenses of the insurance operation, increased by 6.8% between years which is

below the rate of inflation. The cost-to-core income ratio was 44.7%, with expenses of the insurance operation included, compared with 45.0%

for 2022. Impairments were calculated at 12bps for the year, which is lower than expected for the Bank through the cycle but represents a

negative change from last year when net impairments were positive.

Arion Bank and its subsidiaries provide comprehensive financial services to the people of Iceland. Arion Bank’s role is to help those who want to

achieve success in Iceland and the Arctic through smart and reliable financial solutions which enhance financial health and create sustainable

value. 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.

Arion Bank provides services to individuals, corporates and investors in three business segments: Retail Banking, Corporate & Investment

app. The broad spectrum of digital services makes banking more convenient for customers and also makes the business more cost efficient.

The Bank is a leading service provider and advisor to corporate customers and investors and has been a key figure in reinvigorating the

Icelandic stock market.

Arion Bank has adopted a clear policy on sustainable operations and environmental and climate issues. A wide range of green financial

services, such as green car loans, deposits, corporate loans and mortgages, is available to its customers. Arion Bank has published a green

financing framework which addresses the Bank’s funding and lending activities. The Bank has pledged to use the capital it obtains on the credit

markets through the green financing framework in green loans to corporate and retail customers as defined in the framework.

Arion Bank is a financially robust bank which aspires to operate profitably in harmony with society and the environment. The Bank is committed

to paying competitive dividends and is listed on Nasdaq Iceland and Nasdaq Stockholm.

Arion Bank Consolidated Financial Statements 2023

tourism. Jobs related to the airlines have increased by 20.9% in a year, and travel companies and related services have seen a 19.3% rise in

jobs.

GDP growth has slowed down significantly after a period of strong growth in 2022. Domestic product was 3.8% lower in the third quarter of 2023

than the second quarter, and economic growth from the third quarter onwards measured a mere 1.7%. This trend is particularly attributable to

slumps in private consumption and investment, which in turn can be linked to the adoption of a tighter monetary stance. Private consumption

was down 1.7% year-over-year in the third quarter, and demand appears to be receding, illustrated by the fact that household card turnover was

5.2% lower in the fourth quarter than the same period the previous year. However, exports were up 1.8%, while imports were down 3%, meaning

that GDP growth is shifting from being driven by private consumption to being export driven, which is positive for the long-term economic

outlook.

Arion Bank's medium-term financial targets compared with the operational results for the year

beginning of the wage negotiations all parties seemed eager to reach a deal, and it appeared that wage increases would be moderate. However,

the tone has changed and it now seems likely that negotiations will result in high pay increases. Although wage increases are positive for

households, it could mean that policy rates are kept high for longer than they would have been otherwise. Arion Research thinks it unlikely that

policy rates will be cut before deals are reached on both the general and public sector labour markets. Therefore, there is little prospect of an

interest rate cut before May. The second major uncertainty concerns measures in response to the situation in Grindavík. How these measures

will be implemented is not yet clear, but the government has stated that no one will be forced to remain in Grindavík, suggesting that people will

receive some sort of compensation for their homes if they choose to move elsewhere. If the entire population of Grindavík, or a large

percentage of them, choose to buy a home elsewhere, it is very likely to have a considerable impact on the housing market, even if mitigation

measures are taken.

The foundations of the Icelandic economy remain strong despite its current sluggishness, and domestic demand can be expected to recover

Arion Bank Consolidated Financial Statements 2023

the right track. The Group’s core operations continued to perform strongly, and all key financial targets were achieved. Operations are

underpinned by the Group’s diverse business segments which complement each other through economic cycles, create integrated services for

customers and bring enhanced operating efficiency.

As in recent years, the operating environment underwent considerable changes in 2023, and the Group was able to call upon its diverse

revenue streams and sound infrastructure, yet also had the flexibility to respond to the shifting environment. The economy has been beset by

inflation and rising interest rates, and it is positive that goals are reached to bring this under control and to stabilize the economy in the near

term, with wage settlements playing a critical role in this respect. Volcanic activity on the Reykjanes Peninsula has also presented a major

challenge this year. The Group has worked closely with its customers in the affected area in this difficult period and will continue to do so as

events develop.

Arion Bank and Vördur have in place an incentive scheme which came into effect in 2021 for employees of Arion Bank and Vördur. The scheme

interests of employees with the long-term interests of the Bank. The share option plan was initially for five years and employees are entitled to

buy shares for up to ISK 1,500,000 each year. The purchase price is determined by the Bank’s average share price 10 days before the share

option agreement is signed.

On 1 March Arion Bank will host a capital markets day at its headquarters where the management will present the key strategic focuses within

the Group and refine its operating targets for the next few years.

In May 2023 Arion Bank issued €300 million senior preferred notes with a maturity of 3 years. The notes pay a coupon of 7.25% which

corresponds to a spread of 407bp over mid-swaps. The bonds attracted strong demand from a diverse group of investors on the international

bond market. Offers totalling approximately €600 million were received from in excess of 70 investors from more than 15 countries in Europe

and Asia. At the same time Arion Bank announced an invitation to holders of its outstanding €300 million senior notes due in May 2024 to tender

their notes.

The Group had 822 full-time equivalent positions at the end of the year, compared with 781 at the end of 2022.

Arion Bank Consolidated Financial Statements 2023

Arion Bank Consolidated Financial Statements 2023

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 social responsibility and sustainability are part of the Bank's day-to-day activities, its decision-making and processes. The Bank’s code of

ethics serves as a key to responsible decision-making at Arion Bank.

The Bank has a sustainability committee and the management of risk in connection with ESG factors was defined as part of the Bank’s risk

management system. The CEO is the chairman of the committee, whose role is to monitor the Bank’s performance in connection with its policy

and commitment 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 September Birna Hlín Káradóttir, who has been General Counsel at Arion Bank since 2019, took up the role of managing a new division,

Operation and Culture, which took over a range of projects which were previously the responsibility of other divisions. The new division also

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 in Iceland by 2040. Key performance indicators relating to ESG factors were added to the quarterly risk report to the

Board, and the Bank’s risk appetite with respect to these factors was defined.

Arion Bank has selected six UN Sustainable Development Goals which the Bank intends to focus on. These goals are 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 Consolidated Financial Statements 2023

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beginning of 2024. Earlier targets were reviewed with respect to the results achieved so far and new targets were added. The Bank’s targets are

reassessed annually with the aim always being to set higher targets.

The Bank issued its first comprehensive green financing framework in 2021 and has since then issued four green bonds based on the

The Bank’s credit policy places an emphasis on sustainability and the credit rules stipulate that ESG factors should be assessed when a credit

rating is required, or a company meets the conditions of Article 66d of the Annual Accounts Act.

The Bank’s updated targets state that the Bank is trying to reduce greenhouse gas emissions from its own activities by 80% by 2030, i.e. from

building premises and vehicles. At the end of 2023 the Bank had reduced these emissions by 75.5% compared with the reference year 2015.

The Bank has purchased verified carbon units to offset emissions for which the Bank is directly responsible and emissions from other activities,

such as business trips, waste and employee journeys to and from work.

Human Resources

In conjunction with the 2023 Annual and Sustainability Report, Arion Bank is publishing its second report on financed emissions which is based

on Partnership for Carbon Accounting Financials (PCAF) methodology. This involves emissions from the Bank’s lending and investments. The

report reveals that the emissions intensity of the Bank’s loan portfolio is similar between years but has improved slightly. Emissions intensity is

signatory to numerous treaties and declarations. For example, the Bank is a signatory to the UN Global Compact, the UN Principles for

Responsible Investment, the UN Principles for Responsible Banking and UN Women.

In 2023 the CEO of Arion Bank, Benedikt Gíslason, signed a CEO statement with the CEOs of almost 80 Nordic signatories to the Global

Compact expressing their support for the UN’s Global Compact's Ten Principles and Sustainable Development Goals, while upholding the

targets of the Paris Agreement and urging further action to reach these targets. The statement was released to coincide with COP28. At the end

of the year, the Bank also became a signatory to the Science Based Targets initiative (SBTi) and the UN-convened Net-Zero Banking Alliance, a

global group of banks committed to financing ambitious climate action.

In Iceland the Bank is a member of Festa – Center for Sustainability and 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 been a signatory to the City of Reykjavík and Festa’s Declaration on Climate Change since 2015 and has

Policy and environment and climate action

Arion Bank’s environment and climate targets until 2030:

Reduction of greenhouse gas emissions from own activities (Scopes 1 & 2) by 80% calculated from 2015 and remaining emissions will

be carbon offset.

Continuous efforts to get a more accurate picture of emissions from acquired goods and services (Scope 3) in the Bank’s activities.

Percentage of sustainable lending will be at least 20% of the Bank’s total loan book.

Targets on financed emissions should be validated by SBTi.

Aim for reductions in financed emissions in the sectors which have the most impact (Scope 3) in line with the net zero target by 2040.

The latest targets are published annually in the Bank’s report on financed emissions.