Con
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2022
Arion Bank Consolidated Financial Statements 2022
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Contents
5-year overview .......................................................................................................................................................................................
Appendix (unaudited) ...............................................................................................................................................................................
Arion Bank in brief ...................................................................................................................................................................................
Consolidated Statement of Cash Flows ...................................................................................................................................................
Notes to the Consolidated Financial Statements ......................................................................................................................................
Endorsement and Statement by the Board of Directors and the CEO ......................................................................................................
Consolidated Statement of Changes in Equity .........................................................................................................................................
Consolidated Income Statement ..............................................................................................................................................................
Consolidated Statement of Comprehensive Income ................................................................................................................................
Consolidated Statement of Financial Position ..........................................................................................................................................
Independent Auditor's report ...................................................................................................................................................................
2
• Arion Bank provides services to households, corporates, institutions
and investors. The Bank has three business segments: Retail Bank-
ing, Corporate & Investment Banking (CIB), and Markets. The ser-
vice offering 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
with sales channels through CIB and Retail Banking
• Arion Bank plays an important role in the community through the
financing of progressive and sustainable initiatives. Sustainability is
a 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 sup-
ported by the Bank‘s app, which has been awarded the best banking
app in Iceland six years in a row. 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
• The Bank places a strong emphasis on customer experience, both in
digital and face-to-face services, and meeting the financial needs of
its customers via a customized product offering and quality financial
services which contribute to the success of customers and society
as a whole
13.7%
Return on equity
45.6%
Cost-to-core income
18.8%
CET1 ratio
Rating from S&P
Long term: BBB
Short term: A-2
Outlook: Stable
Q4 19
Rating from Moody‘s
Long term: Baa1
Deposit rating: A3
Outlook: Positive
Key figures 2022 2021
(ISK m)
Net earnings 25,416 28,615
ROE 13.7% 14.7%
Net interest margin 3.1% 2.8%
Cost to Core income ratio 45.6% 51.6%
Operating income / REA 6.7% 7.6%
31.12.2022 31.12.2021
Total assets 1,469,556 1,313,864
Loans to customers 1,084,757 936,237
Deposits 755,361 655,476
Borrowings 392,563 356,637
Total equity 188,331 194,598
Stage 3 gross 1.2% 1.9%
Leverage ratio 11.8% 12.7%
Number of employees 781 751
EUR/ISK 151.50 147.60
Arion Bank Consolidated Financial Statements 2022
About Arion Bank
Operations during the year
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.
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. It also places a focus on companies in the Arctic and businesses in the seafood
sector in Europe and North America.
Assets held for sale and discontinued operations
The operating results of the subsidiaries Valitor hf., Stakksberg ehf. and Sólbjarg ehf. were presented as discontinued operations as they have
all been classified as held for sale in these Financial Statements. As stated above Arion Bank sold its entire shareholding in Valitor at the end of
June 2022. Stakksberg's main assets, the plot of land and industrial facilities of the silicon plant at Helguvík, were transferred to Landey, Arion
Bank's property development company, at the end of the year and thus is no longer classified as an asset held for sale. Stakksberg had a
negative impact of ISK 0.5 billion in 2022 due to the impairment of the silicon plant and operating expenses. Sólbjarg has sold the vast majority
of its assets and at year-end the main asset is a 27.5% shareholding in Ferdaskrifstofa Íslands. Sólbjarg had a positive impact of ISK 0.4 billion
in 2022 and the main reason for this is the sale of the company’s underlying assets.
At the end of June 2022 Arion Bank sold its 100% shareholding in Valitor to Rapyd. The total consideration was ISK 14.6 billion (USD 112.5
million), resulting in a profit of ISK 5.6 billion, post cost of sale, which is recognized in the Income Statement. Transactions, mainly net fee and
commission, between Valitor and Arion Bank are included in the results from the third quarter, while previously these have been lost in
consolidation.
The Bank's balance sheet grew by 11.8% from year-end 2021. Loans to customers increased by 15.9% from year-end. The increase was 22.6%
in corporate lending and 10.6% in loans to individuals, mainly mortgages. Deposits increased by 15.2%. Total equity amounted to ISK 188,331
million at the end of December. The Group's capital ratio, as calculated under the Financial Undertakings Act No. 161/2002, was 24.0% at year-
end and the CET1 ratio was 18.8%, assuming ISK 16.0 billion dividend payment and buyback of own shares, 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 2022 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 25.4 billion for the year 2022 and return on equity was 13.7%. Earnings per share were ISK 17.06. Core income,
defined as net interest income, net commission income and net insurance income, increased by 17.5%, compared with the previous year. There
was strong growth in net interest income, compared with the previous year, mainly due to the increased base rate and 15.9% growth in the loan
book from year-end 2021. Diversified fee generating operations support continued momentum in net fee and commission income. Net insurance
income was affected by challenging conditions in 2022 and an unusually high volume in claims. Negative net financial income is affected by
difficult markets conditions in 2022. Operating expenses increase slightly between years despite higher inflation in 2022. The cost-to-core
income ratio in 2022 was 45.6%, compared with 51.6% 2021.
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.
Balance Sheet
4
Arion Bank Consolidated Financial Statements 2022
Endorsement and statement
by the Board of Directors and the CEO
Economic outlook
Outlook for the Bank
Arion Bank's medium-term financial targets compared with the operational results for the year.
The decision was made during the quarter, after extensive talks with the main stakeholders and potential operators, that the sale of Stakksberg
silicon plant at Helguvík was not thought likely to result in the recommissioning of the plant. Instead the idea is to develop current infrastructure
for other purposes. The company’s assets were also revalued and transferred to the Bank’s development company Landey, which has
extensive experience of such projects. There is considerable potential to redevelop this property and the existing infrastructure, partly due to its
location near the international airport and the harbour at Helguvík.
The Bank continued to perform strongly in its core operations in 2022, while the business was simplified and the focus refined with the sale of
the subsidiary Valitor. As in recent years, the operating environment has been complex and various external factors impacting financial
institutions have changed substantially. The shifting inflation environment resulted in rising interest rates and had a widespread impact on the
operating environment. Arion Bank is in a strong position due to its diversified operating model and robust infrastructure while it is also
sufficiently flexible to navigate the changing operating environment. It is important to regain balance in the economy and the union wage
negotiations plays a key role in this respect. It is therefore positive that important milestones have been reached in this respect recently.
One of the main areas of uncertainty in the Bank’s operating environment has been the funding markets, particularly the international markets
which play a key role in the Bank’s funding mix. In the second half of the year spreads on these market increased significantly for Icelandic
banks, and even though Arion Bank does not have any imminent maturities, the situation has fuelled uncertainty. It is therefore positive to see in
early 2023 spreads beginning to decrease and growing interest from investors in bonds issued by Icelandic banks. The banks are well placed
and have some of the highest capital ratios seen internationally and have robust liquidity. The Icelandic economy is also in a good position in
terms of energy production which is a critical consideration today. It is important that investors and funding bodies are aware of this situation
and the positive trend in interest spreads in recent weeks indicate that this is the case.
Despite the slightly brighter global economic outlook, uncertainty remains high with the risks tilted to the downside. Nevertheless, the Icelandic
economy is still set for strong growth in 2023, with domestic analysts expecting economic growth to be in the range of 2-3%, driven by tourism
and household consumption. The tourism industry has already gained its former strength, with tourist arrivals in 2H reaching 98% of 2H 2019.
The tourism industry is expected to forge ahead in 2023, with a growing number of tourists visiting the country and increasing export revenues.
Households are also in a favorable position, despite the continued record-breaking private consumption, thanks to a stronger than expected
growth of disposable income. As a result, the saving ratio is still well above its pre-pandemic average, which means that households can
maintain this high level of spending. In this context, it’s important to keep in mind that Icelandic households do not face the same cost-of-living
crisis as their European counterparts, as nearly every household relies on domestically produced renewable energy sources for heating and
electricity. Conditions on the labor market are also well suited for supporting continued private consumption growth, as unemployment is well
below its natural rate, staffing shortages at their highest since 2007 and substantial wage increases have been negotiated for a large part of the
private sector.
In many ways, the Icelandic economy is in an enviable position. According to preliminary figures from Statistics Iceland, GDP increased by 7.3%
between years in Q3 2022, outperforming our main trading partners and exceeding expectations by a significant margin. As in previous
quarters, growth was driven by exports, especially tourism which continued to gain strength, and record-breaking private consumption. The
tourism high season left its mark on the country’s foreign trade, with the current account turning into a surplus in Q3, for the first time since
2021. However, robust domestic economic activity, as well as continued development of the export sectors, has led to rapid imports growth,
resulting in one of the largest trade deficits since records began.
Although the Icelandic economy came relatively unscathed out of last year, the economic outlook remains uncertain. No country is an economic
island, not even Iceland, and the outlook will largely depend on fate of our main trading partners, many of which are facing subpar growth, even
recession. Quelling inflation has also proven to be difficult, despite further rate hikes by the Central Bank in Q4. The housing market is rapidly
cooling, but domestic inflationary pressures remain persistent and import prices continue to rise. Thus, further actions by the Central Bank are
still in the picture.
5
Arion Bank Consolidated Financial Statements 2022
Endorsement and statement
by the Board of Directors and the CEO
Employees
Funding and liquidity
Capital adequacy and dividends
The Group had 781 full-time equivalent positions at the end of the year, compared with 751 at the end of 2021.
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
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 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 2022, in part or in full, is whether the Bank’s return on equity in relevant year is higher than the weighted ROE
of the Bank’s main competitors. Stefnir has a special incentive scheme where other criteria are used as a basis. Arion Bank has also in place
share option plan for all employees of the Bank, and the subsidiaries Vördur and Stefnir, which is considered 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 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 July 7, the FSA published the result of the Supervisory Review and Evaluation Process (SREP) for Arion Bank, based on financial
information at year-end 2021. The additional capital requirement under Pillar 2 is set at 3.5% of total risk-weighted exposure amount (REA),
which was an increase of 0.3pp from the previous year. On 29 September 2022, the countercyclical buffer in Iceland rose from 0% to 2% based
on a decision made by the Icelandic Financial Stability Committee a year earlier. In light of this, Arion Bank’s total capital requirement is 20.8%
of REA and the CET1 capital requirement 15.8%.
In terms of funding and liquidity management the year was characterized by the Bank’s strong liquidity position and continued deposit growth.
The Bank’s liquidity position was above the required minimum and the liquidity ratio at the end of 2022 was 158%, with the minimum
requirement being 100%. The Bank’s solid liquidity position is due to funding on the wholesale markets, while deposits increased by 15.2%, from
ISK 655 billion to ISK 755 billion.
Arion Bank’s dividend policy states that the Bank aims to pay 50% of net earnings in dividends and that additional dividend 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 aims to maintain capital adequacy ratios 150-250bps above total regulatory requirements. The Bank has released equity through
dividend payments and the purchase of own shares to meet this objective. In March 2022, the Bank paid dividends of ISK 22.5 billion, or ISK 15
per share, on the basis of the authority given by the Annual General Meeting. Following the completion of the sale of Valitor, the Bank received
the approval of the FSA for a buyback program of up to ISK 10 billion. Based on this, the Bank initiated a process to purchase own shares for
ISK 5 billion in September 2022 and ISK 2 billion in December. At the reporting date, ISK 0.8 billion remained of the approved program. In
February 2023, the Board of Directors approved a further buyback of ISK 2.4 billion. These amounts are deducted from CET1 capital as
foreseeable dividend and buyback.
The Bank had one ISK denominated covered bond series maturing in 2022 in addition to smaller international issues.
The capital position of Arion Bank is very strong and will remain so for the foreseeable future. This underpins the Bank’s ability to support its
customers and the Icelandic economy as it faces new risks stemming from geopolitical tensions, volatile commodity prices, rising interest rates
and inflation.
The Group’s capital adequacy ratio on 31 December 2022 was 24.0% and the CET1 ratio 18.8%, where foreseeable dividends and buybacks
are deducted. In December 2022, the Bank issued Tier 2 capital instruments in the amount of ISK 11 billion, thus fully utilizing the Bank’s Tier 2
capacity. As the Bank’s Additional Tier 1 capacity is not fully utilized, approximately ISK 5.6 billion of CET1 capital is supplemented to meet the
Tier 1 capital requirement.
Following on from the updated business plan which was approved by the Board of Directors at the end of the year, it was decided to review the
Group’s financial targets. The main change was that costs and operating income to REA will both be based on core income which does not take
into account net financial income or other income besides core income. Such a change would make the target more focused as financial income
can be volatile. The target on lending growth has also been removed due to the uncertainties in the external operating environment and the
importance of being flexible in this respect.
In 2022 Arion Bank issued its second green bond on the international market in the amount of €300 million. The proceeds were used to
refinance a maturity of an equal size in March 2023. At the same time the Bank bought back outstanding bonds maturing in 2023 for €144
million.
Arion Bank increased an existing euro denominated covered bond issue by €200 million in March 2022 at terms equivalent to 0.37% over
interbank rates.
In May 2022 S&P Global Ratings upgraded its rating of the Bank’s covered bonds from A- to A with a stable outlook. The Bank now has the
same rating for its covered bonds as the Icelandic government. In July 2022 S&P Global Ratings affirmed its rating of BBB/A-2 with a stable
outlook. In July 2022 Moody’s Investors Services issued for the first time a rating of Baa1 as an issuer rating and a rating of A3 for deposits for
Arion Bank. Both ratings carry a positive outlook.
The proposed dividend for the year 2022, which will be subject to the approval of the annual general meeting on 15 March 2023, corresponds to
ISK 8.5 per share or around ISK 12.5 billion, net of own shares. 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.
6
Arion Bank Consolidated Financial Statements 2022
Endorsement and statement
by the Board of Directors and the CEO
Group ownership
Risk management
Governance
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.
There are five Board sub-committees: The Board Audit Committee, the Board Risk Committee, the Board Credit Committee, the Board
Remuneration Committee and the Board Tech 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.
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.
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 Bank’s operations
and key focus areas going forward. The next capital markets day is expected to be held in Q4 2023.
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 2022, 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. All Directors and 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%.
At the end of December 2022 Gildi lífeyrissjódur was the largest shareholder in Arion Bank with a shareholding of 9.77%. Arion Bank owned
3.01% of its own shares at the end of 2022, see Note 36. The number of shareholders has grown from around 11,287 at the beginning of the
year to 12,059 at the end of the year. Further information on Arion Bank's shareholders can be found in Note 37. At the AGM in March 2022 a
motion was passed to reduce the company's share capital by ISK 150 million at nominal value, by cancelling the company's own shares. The
reduction took place on 4 April 2022.
The Bank’s REA increased by ISK 71 billion in 2022. REA for the loan portfolio increased by ISK 84.1 billion, as loans to customers grew by ISK
148.5 billion. The sale of Valitor reduced the Group’s REA by ISK 18.3 billion, primarily due to lower operational risk and credit risk. Reduced
equity positions in the trading book and banking book result in lower REA and are expected to contribute to a lower Pillar 2 requirement in 2023.
REA due to counterparty credit risk and credit valuation adjustment has however increased markedly in 2022.
The Central Bank of Iceland’s Resolution Authority approved the resolution plan of Arion Bank on 26 April 2022. With the approval of the
resolution plan, the Resolution Authority decided on the minimum required own funds and eligible liabilities (MREL), in accordance with the Act
on Resolution of Credit Institutions and Investment Firms, No. 70/2020. On 29 September, the Resolution Authority issued Arion Bank’s MREL
requirement based on the financial position at year-end 2021. The requirement as a percentage of REA is 23.0%. The Bank is in full compliance
with this requirement.
7
Arion Bank Consolidated Financial Statements 2022
Endorsement and statement
by the Board of Directors and the CEO
Sustainability and non-financial reporting
The Bank’s human resources policy involves creating a positive and motivational working environment and supporting its employees. There is a
strong emphasis on attracting and retaining outstanding employees and helping them develop professionally and personally. The Bank has
adopted a learning and development policy designed to make employees improve and maintain their knowledge and skills and to ensure they
are always well informed and know the laws and rules applicable to their area of work. Employees are also encouraged to show initiative and
take responsibility for their own knowledge and skills.
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 action plan places greater emphasis on balancing gender ratios at the Bank, not just at management level but
throughout different job families, committees and business units.
The Bank has had an equal pay system and equal pay certification since 2015. In 2018 it 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 2022 the Bank underwent an
equal pay audit which revealed an unexplained gender pay gap of 0.4%, with women receiving higher pay. The Bank’s target is for the result of
the equal pay audit to be less than 1%. One of the Bank’s equality goals set out in the 2021-2024 action plan is to reduce the median value of
total salary payments to men compared with total salary payments to women to below 1.3. Good progress has been made in this respect and in
mid-year the median value was 1.29 compared with 1.43 in 2021.
There is zero tolerance of bullying, gender-based or sexual harassment or other types of violence at Arion Bank. The Bank has an anti-bullying
team which is responsible for overseeing the Bank’s policy, procedures and training in connection with tackling bullying, gender-based or sexual
harassment or violence.
Arion Bank has adopted an environment and climate policy and set goals in this area. 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 on to financing projects which relate to sustainable development and green infrastructure. In 2021 the Bank published a comprehensive
green financing framework and has since then held four green bond issues based on the framework, two of which were in 2022. Green deposits
continued to grow in 2021, and there was a significant increase in loans to buy vehicles which run on 100% renewables.
The Bank’s credit policy places an 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. In
2023, we will continue to make environment, social and governance (ESG) factors more important when assessing loans. At the end of 2022,
12.5% 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 the implementation of EU taxonomy in Iceland. The Bank hopes that this figure will grow even faster and that the
number of green corporate loans will increase.
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 social responsibility and sustainability are part of the Bank's day-to-day activities, its decision-making and processes.
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 find solutions. The Bank’s code of ethics also serves as a key to responsible decision-making at Arion Bank.
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 has extensive partnerships in the field of sustainability and social responsibility, both in Iceland and abroad, and is a 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 2021 Arion Bank became a signatory to the Partnership for Carbon Accounting Financials (PCAF). This is 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. At the end of 2022 Arion Bank published its first report on financed emissions which is based on
PCAF methodology. Assessing and disclosing GHG emissions which are financed through lending and investments is a prerequisite for the
Bank’s ability able to set targets on reducing emissions, and this is the next step.
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 2022 Pillar 3 Risk Disclosures is based on these
recommendations amongst other things. It contains an analysis of the Bank’s loan portfolio in respect of climate risk. The Bank formally became
a signatory to TCFD in February 2022.
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
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 Bank has also signed a
declaration of intent concerning the Equality Scale, an initiative created by the Association of Icelandic Businesswomen (FKA).
8
Arion Bank Consolidated Financial Statements 2022
Endorsement and statement
by the Board of Directors and the CEO
At the beginning of 2022 Arion Bank published its first impact and allocation report for the Bank’s green financing framework. The report
specifies the allocation of funds 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 projects at Arion Bank. Deloitte provided 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 aims to publish the 2022 impact and
allocation report in the first half of 2023.
The Bank’s targets in environment and climate issues include reducing greenhouse gas emissions from own activities by 55% by 2030, i.e.
emissions from the Bank’s business premises and vehicles. At the end of 2022 the Bank had reduced these emissions by 55.6% 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.
Arion 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 addition to the CEO, the sustainability committee includes the
managing directors of Retail Banking, Corporate & Investment Banking, Markets, Customer Experience and Finance. The Chief Risk Officer, the
Head of Corporate Communications and Sustainability, and the Sustainability Officer attend meetings but do not have voting rights. Meetings
are also attended by representatives of Stefnir and Vörður as required.
In 2022 Arion Bank received the rating “outstanding” in the ESG assessment performed by the Icelandic ratings agency Reitun, for the third year
in succession. The Bank received 90 points out of a possible 100, placing it in category A3. The rating is based on the Bank’s performance in
ESG factors in its operations. The Bank performs well above average in all categories. A total of 35 issuers have been rated by Reitun. In 2022
Arion Bank was also rated by the international ratings agency Sustainalytics, which specializes in rating risk related to ESG factors. The rating
was positive and Sustainalytics considers the Bank to be one of the best performing banks globally in this area. The Bank scored 12 points on a
scale from 0-100, with a lower score signifying lower risk. Sustainalytics therefore believes there is minimal risk of significant financial damage
due to ESG factors at the Bank. Arion Bank is in the top 6% of more than 1,000 banks worldwide which have been rated by Sustainalytics and in
the top 4% of 400 regional banks.
Arion Bank’s activities are governed by the provisions of the Annual Accounts Act on non-financial reporting, Article 66 d. Information in the
2022 annual and sustainability report has been prepared and published in accordance with the Global Reporting Initiative standard, GRI
Standards, 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 and the 10 Principles of the UN
Global Compact are also used a reference. The UN Sustainable Development Goals are also referred to. For the third time the Bank is reporting
on the progress made in implementing the UN Principles for Responsible Banking.
Deloitte is providing an opinion with limited assurance on non-financial reporting by Arion Bank in 2022 which is presented in accordance with
the Global Reporting Initiative, GRI Standards and the Nasdaq ESG Reporting Guide. Deloitte also provides an opinion with limited assurance
on the Bank’s progress report to PRB.
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 15 February 2023: arsskyrsla2022.arionbanki.is.
The Bank has adopted a risk policy on sustainability which is approved by the Board of Directors and 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 in Iceland by 2040. Key performance indicators relating to ESG factors were added to the monthly risk report to the
Board and the Bank’s risk appetite with respect to these factors was defined.
At the beginning of 2022 a special risk assessment of ESG factors at the Bank was made, and the assessment was reviewed at the beginning
of 2023. The main social risks relate to employee equality and diversity, disclosure on social factors and relations with stakeholders. The main
environmental risks were insufficient action in environmental and climate issues in connection with goods and services at the Bank, employees’
compliance with the Bank’s environment and climate policy and the risk of greenwashing. The assessment revealed that the main governance
risks were anti-money laundering measures and know-your-customer, data protection and ESG reporting. The management of these risk at the
Bank was 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 2022 Pillar 3 Risk Disclosures.
In recent years Arion Bank has been recognized as a company which had 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 2022
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
In our opinion, the Consolidated Financial Statements of Arion Bank hf. for the year 2022 with the file name RIL4VBPDB0M7Z3KXSF19-2022-
12-31-en.zip is prepared, in all material respects, in compliance with the ESEF Regulation.
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 2022 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, 8 February 2023
Paul Richard Horner, Vice Chairman
Chief Executive Officer
Benedikt Gíslason
Gunnar Sturluson
Liv Fiksdahl
Board of Directors
The Consolidated Financial Statements of Arion Bank for the year ended 31 December 2022 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 2022 and its financial position as at 31 December 2022. 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.
10
Arion Bank Consolidated Financial Statements 2022
Opinion
Basis for Opinion
Key Audit Matters
Impairment charges for loans and provisions for guarantees
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 1,091,673 million at 31
December 2022, and the total allowance account for the Group
amounted to ISK 7,371 million (including off-balance positions) at 31
December 2022.
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 58 and about loan
impairment charges and provisions for guarantees in notes 15 and
43.
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.
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, 2022, 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, as applicable, in the Act on Annual
Accounts, the Act on Financial Undertakings and rules on accounting for credit institutions.
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 2022 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
Independent Auditor's report
How the matter was addressed in the audit
11
Arion Bank Consolidated Financial Statements 2022
Independent Auditor's report
Reliability of information from IT systems relevant to financial reporting
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 Group’s financial reporting is highly dependent on IT systems
supporting the overall financial reporting process, due to the
significant number of transactions processed through various
systems needed to support the Group’s operations.
In the process of preparing the consolidated financial statements the
Group uses data from number of complex IT systems. The accuracy
and completeness of transactions is important to support the
reliability of financial reporting.
Due to the importance of data from IT systems to support the
financial reporting we consider their reliability a key audit matter.
The procedures performed to respond to the key audit matter included
the following, amongst others;
• We obtained an understanding of the Group’s IT systems and
environment that support the overall financial reporting process
• We reviewed the design, implementation and effectiveness of
control activities, as appropriate, related to access management,
change management, accuracy of key automated calculations and
operation for the systems considered important for the audit. Deloitte
IT audit specialists were involved in the audit
• For IT systems that are outsourced and are relevant to the audit we
obtained and assessed the ISAE 3402 report issued by the service
organisation
Key Audit Matters
How the matter was addressed in the audit
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, as applicable, in the
Act on Annual Accounts, the Act on Financial Undertakings and rules on accounting for credit institutions, 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.
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.
12
Arion Bank Consolidated Financial Statements 2022
Independent Auditor's report
•
•
•
Report on other legal and regulatory requirements
Report on European single electronic format (ESEF Regulation)
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, 8 February 2023
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. Deloitte has provided to the audit committee written confirmation that Deloitte is independent of Arion banki hf.
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 2022 with the file name RIL4VBPDB0M7Z3KXSF19-2022-12-31-
en.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.
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 ehf. was appointed auditor of Arion Bank hf. By the general meeting of shareholders on 16 March 2022. 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 2022 with the file name RIL4VBPDB0M7Z3KXSF19-2022-12-
31-en.zip is prepared, in all material respects, in compliance with the ESEF Regulation.
Gunnar Thorvardarson
13
Arion Bank Consolidated Financial Statements 2022
Amounts are in ISK millions
Consolidated Income Statement
Notes 2022 2021
83,591 53,958
(43,314) (21,895)
7
40,277 32,063
18,728 16,706
(2,663) (2,033)
8
16,065 14,673
9 2,614 3,442
10 (3,095) 6,220
26 270 22
11 1,067 1,805
856 11,489
57,198 58,225
12 (15,856) (14,638)
13 (11,055) (11,237)
(26,911) (25,875)
14 (1,749) (1,516)
15 144 3,169
28,682 34,003
16 (9,809) (6,782)
18,873 27,221
17 6,543 1,394
25,416 28,615
Attributable to
25,440 28,605
(24) 10
25,416 28,615
Earnings per share 18
17.06 17.96
16.14 16.93
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 .........................................................................................................................
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) .............................................
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 ...................................................................................................................................
14
Arion Bank Consolidated Financial Statements 2022
Amounts are in ISK millions
Consolidated Statement of Comprehensive Income
Notes 2022 2021
25,416 28,615
(999) (2,131)
10 1,553 335
554 (1,796)
(676) 21
(122) (1,775)
25,294 26,840
Attributable to
25,318 26,830
(24) 10
25,294 26,840
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 ........................................................................................................................
and reclassification from OCI equity reserve, transferred to the Income Statement .....................................
Exchange difference on translating foreign subsidiaries ................................................................................
Total comprehensive income ........................................................................................................................
Shareholders of Arion Bank ...........................................................................................................................
Non-controlling interest ..................................................................................................................................
Net change in fair value of financial assets carried at fair value through OCI, net of tax ................................
The accompanying Notes are an integral part of these Consolidated Financial Statements
Net realized gain on financial assets carried at FV through OCI, net of tax,
15
Arion Bank Consolidated Financial Statements 2022
Amounts are in ISK millions
Consolidated Statement of Financial Position
Assets Notes
19 114,118 69,057
20 45,501 30,272
21 1,084,757 936,237
22-24 193,329 225,657
24 7,862 6,560
26 787 668
27 8,783 9,463
28 135 2
29 61 16,047
30 14,223 19,901
1,469,556 1,313,864
Liabilities
23 11,697 5,000
23 755,361 655,476
23 20,997 5,877
28 10,303 7,102
29 - 16,935
31 42,973 37,151
23,32 392,563 356,637
23,33 47,331 35,088
1,281,225 1,119,266
Equity 36
13,372 22,684
10,672 12,838
163,638 158,403
187,682 193,925
649 673
188,331 194,598
1,469,556 1,313,864
2021
2022
Cash and balances with Central Bank ......................................................................................................
Loans to credit institutions .......................................................................................................................
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 .................................................................................................
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 ......................................................................................................................................
Tax liabilities ............................................................................................................................................
16
Arion Bank Consolidated Financial Statements 2022 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
1,518 21,166 99 828 7,245 3,166 1,124 (1,937) 1,637 676 158,403 193,925 673 194,598
25,440 25,440 (24) 25,416
(999) (999) (999)
recl. from OCI equity reserve ......... 1,553 1,553 1,553
(676) (676) (676)
- - - - - - - 554
-
(676) 25,440 25,318 (24) 25,294
(22,489) (22,489) (22,489)
(58) (9,793) (9,851) (9,851)
279 279 279
4 349 (38) 315 315
1 184 185 185
(937) (1,225) (122) 2,284 - -
1,466 11,906 339 828 6,308 1,941 1,002 (1,383) 1,637 - 163,638 187,682 649 188,331
The accompanying Notes are an integral part of these Consolidated Financial Statements
Consolidated Statement of Changes in Equity
Total
share-
Net earnings ......................................
Restricted reserves
Equity 1 January 2022 .....................
Share option vested ........................
Incentive scheme ............................
Share option charge ........................
Dividend paid ..................................
Net change in fair value ....................
Translation difference ........................
Total comprehensive income .........
Purchase of treasury shares ...........
Net realized loss transf. to P/L and
Transactions with owners
Changes in reserves .......................
Equity 31 December 2022 ...............
17
Arion Bank Consolidated Financial Statements 2022 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
1,718 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 (2,366) - -
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
Total
share-
Equity 1 January 2021 .....................
Increase in non-controlling interest ..
Net earnings ......................................
Net change in fair value ....................
Net realized loss transferred to P/L ...
Translation difference ........................
Total comprehensive income .........
Share option charge ........................
Restricted reserves
Changes in reserves .......................
Equity 31 December 2021 ...............
Transactions with owners
Purchase of treasury shares ...........
Warrants sold ..................................
Dividend paid ..................................
18
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Operating activities
2022 2021
25,416 28,615
(30,399) (32,006)
181 3,163
(123,341) (105,988)
33,902 4,783
81,536 90,642
32,502 54,566
10,463 (1,440)
66,516 41,866
(33,006) (15,883)
363 95
(6,741) (3,942)
57,392 64,471
Investing activities
16,841 356
(90) (111)
(416) (1,005)
1,085 1,045
(357) (581)
17,063 (296)
Financing activities
12,100 -
- 828
315 -
(9,851) (28,647)
(22,489) (2,857)
(19,925) (30,676)
54,530 33,499
90,678 58,284
4,923 (1,105)
150,131 90,678
Cash and cash equivalents
114,118 69,057
43,433 28,156
(7,420) (6,535)
150,131 90,678
The accompanying Notes are an integral part of these Consolidated Financial Statements
Proceeds from sale of property and equipment ..........................................................................................................
Acquisition of property and equipment ........................................................................................................................
Mandatory reserve deposit with Central Bank .............................................................................................................
Cash and cash equivalents ......................................................................................................................................
Bank accounts ............................................................................................................................................................
Net cash from (to) investing activities ....................................................................................................................
Purchase of treasury stock .........................................................................................................................................
Dividend paid to shareholders of Arion Bank ..............................................................................................................
Net cash used in financing activities ......................................................................................................................
Net increase 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 ......................................................................................................................................
* Interest paid includes interest credited to deposit accounts at the end of the year.
Cash and balances with Central Bank ........................................................................................................................
Proceeds from issued warrants ..................................................................................................................................
Proceeds from vested share options ..........................................................................................................................
Consolidated Statement of Cash flows
Net earnings ...............................................................................................................................................................
Non-cash items included in net earnings ....................................................................................................................
Changes in operating assets and liabilities
Issued subordinated liabilities .....................................................................................................................................
Interest received .........................................................................................................................................................
Interest paid * .............................................................................................................................................................
Other 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 ..............................................................................................................................................................
Dividend received .......................................................................................................................................................
Income tax paid ..........................................................................................................................................................
Net cash from operating activities ..........................................................................................................................
Acquisition of associates ............................................................................................................................................
Acquisition of intangible assets ...................................................................................................................................
Proceeds from sale of subsidiary and associates .......................................................................................................
19
Arion Bank Consolidated Financial Statements 2022
page page
General information Offsetting financial assets and financial liabilities .............. 42
Basis of preparation .......................................................... 21 Investment in associates .................................................. 42
Going concern assumption ............................................... 21 Intangible assets ............................................................... 43
Significant accounting estimates and judgments Tax assets and tax liabilities ............................................. 44
in applying accounting policies ....................................... 21 Assets and disposal groups held for sale
The Group ........................................................................ 22 and associated liabilities ................................................ 45
Other assets ..................................................................... 46
Operating segment reporting Other liabilities .................................................................. 46
Operating segments ......................................................... 23 Borrowings ........................................................................ 47
Subordinated liabilities ...................................................... 48
Quarterly statements Liabilities arising from financial activities ........................... 48
Operations by quarters ..................................................... 26 Pledged assets ................................................................. 48
Equity ............................................................................... 49
Notes to the Consolidated Income Statement
Net interest income ........................................................... 27 Other information
Net fee and commission income ....................................... 28 Shareholders of Arion Bank .............................................. 51
Net insurance income ....................................................... 28 Legal matters .................................................................... 52
Net financial income ......................................................... 29 Events after the reporting period ....................................... 52
Other operating income .................................................... 29
Personnel and salaries ..................................................... 30 Off Balance sheet information
Other operating expense ................................................... 31 Commitments ................................................................... 53
Bank levy .......................................................................... 31 Assets under management and under custody .................
53
Net impairment ................................................................. 31
Income tax expense .......................................................... 31 Related party
Discontinued operations held for sale, net of income tax .. 33 Related party .................................................................... 53
Earnings per share ........................................................... 33
Risk management disclosures
Notes to the Consolidated Statement of Credit risk ......................................................................... 55
Financial Position Market risk ........................................................................
67
Cash and balances with Central Bank ............................... 34 Liquidity and Funding risk ................................................. 73
Loans to credit institutions ................................................ 34 Capital management ......................................................... 77
Loans to customers .......................................................... 34 Operational risk ................................................................. 79
Financial instruments ........................................................ 34 Sustainability risk .............................................................. 80
Financial assets and financial liabilities .............................
35
Fair value hierarchy ..........................................................
37 Significant accounting policies 81
Notes to the Consolidated Financial Statements
Contents
20
Arion Bank Consolidated Financial Statements 2022 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 judgements 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 141.80 and 151.50 for
EUR (31.12.2021: USD 129.75 and EUR 147.60).
The Group 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 2021.
- 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 58;
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 2022
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 8 February
2023.
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 2022 Amounts are in ISK millions
3. Significant accounting estimates and judgements in applying accounting policies, continued
Impairment of financial assets
Macroeconomic outlook
Impairment of intangible assets
Revaluation of investment properties
4. The Group
Shares in the main subsidiaries in which Arion Bank holds a direct interest
Currency 2022 2021
ISK 100.0% 100.0%
ISK 100.0% 100.0%
ISK 51.0% 51.0%
ISK 100.0% 100.0%
ISK 100.0% 100.0%
ISK - 100.0%
ISK 100.0% 100.0%
ISK 100.0% 100.0%
Valitor hf., Dalshraun 3, Hafnarfjördur, Iceland .................................................
Payment solutions
VISA Ísland ehf., Borgartún 19, Reykjavík, Iceland ..........................................
Eignabjarg ehf., Borgartún 19, Reykjavík, Iceland ............................................
Holding company
SRL slhf., Borgartún 19, Reykjavík, Iceland .....................................................
Real estate
Leiguskjól ehf., Bjargargata 1, Reykjavík, Iceland ............................................
Rental guarantee
Stefnir hf., Borgartún 19, Reykjavík, Iceland ....................................................
Asset management
Holding company
Landey ehf., Borgartún 19, Reykjavík, Iceland .................................................
Real estate
Notes to the Consolidated Financial Statements
Equity interest
Operating activity
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 for stages 1 and 2 are recalculated for each asset, the
calculations are based on PD, LGD and EAD models. Stage 3 calculations are based on LGD and EAD parameters. 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 five 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 58.
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 economic outlook in Iceland is generally positive, despite the effects of the war in Ukraine and the challenges that European
economies face. In Iceland, electricity and heating are almost exclusively generated from local renewable sources and the country is a net
commodities exporter. Tourism has been strong in 2022 although the peak from 2018 is not expected to be matched until 2024. In line with
this, it is expected that the unemployment rate will continue to decrease and that GDP growth will be strong over the coming years. Private
consumption grew very strongly in 2021, by 7.6%, and a slower growth is expected in the coming years, also due to the persistence of
inflation. The growth in housing prices is also expected to slow down in the second half of 2022 and in the coming years due to increased
supply and increased cost of borrowing although demand is also expected to remain strong from demographic considerations.
SRL slhf. sold its entire shareholding in Landey ehf. to Arion Bank at year end. Landey ehf. holds a 51% shareholding in its subsidiary
Arnarland ehf. and recognizes minority interest accordingly.
Vördur tryggingar hf., Borgartún 19, Reykjavík, Iceland ...................................
Insurance
On 30 June 2022 Arion Bank sold its entire shareholding in the subsidiary Valitor hf. Valitor was classified as held for sale in accordance
with IFRS, see Notes 17 and 29.
Stakksberg ehf. and Sólbjarg ehf., the subsidiaries of the holding company Eignabjarg ehf., are classified as held for sale in accordance
with IFRS 5, see Note 29.
22
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
Operating segment reporting
5. Operating segments
Markets & Stefnir
Corporate & Investment Banking (CIB)
Retail Banking
Treasury
Other subsidiaries
Supporting units
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.
Subsidiaries include the subsidiaries Landey ehf., 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 Stakksberg and Sólbjarg (both subsidiaries of Eignabjarg) are
classified as disposal groups held for sale in accordance with IFRS 5.
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´s and provides full range lending and insurance products,
including guarantees, deposit accounts, payment solutions, and a variety of value-added digital solutions. The Corporate portfolio
composition is diversified between sectors, customers and currencies which include international exposures, partly through syndicates with
other Icelandic or international banks.
Arion Bank‘s Corporate Finance works closely with Corporate Banking and provides the Bank’s clients with comprehensive financial
advisory services, with a key focus on M&A advisory, private placements, IPOs and other offerings of securities.
Retail Banking provides a diverse range of financial services in 13 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.
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, Premia Service, 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. Markets 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 comprehensive financial services to companies and investors with focus on meeting the needs of
each client, both in Iceland and internationally. The division is divided into Corporate Banking and Corporate Finance.
In line with the Group’s progression focuses on holistic customer journey optimization introduced a key part of the vision is to bring Vördur
insurance company closer to the Bank for a more focused bancassurance offering. In 2022 the operation of Vördur has been split into
individuals and corporates and is presented as such as part of Corporate & Investment Banking and Retail banking, respectively.
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.
Treasury is responsible for the Bank's funding, liquidity and asset-and-liability management. Treasury oversees the internal funds‘s transfer
pricing and manages the relationship with investors, credit rating agencies and financial institutions. Market making activities in domestic
securities and FX as well as FX brokerage sits within Treasury.
23
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
5. Operating segments, continued
Retail Subsidi- Supporting
2022 CIB Banking aries excl. units
Markets including including Stefnir and elimi-
Income Statement and Stefnir insurance insurance Treasury and Vördur nations Total
3,033 20,086 19,677 (2,363) (65) (91) 40,277
5,768 5,350 4,730 728 (592) 81 16,065
- 40 2,642 - (2) (66) 2,614
(44) (103) (642) (2,819) 685 (172) (3,095)
1,234 - - - (1) (963) 270
11 114 136 2 53 751 1,067
10,002 25,487 26,543 (4,452) 78 (460) 57,198
(2,282) (2,641) (5,398) (646) (279) (15,665) (26,911)
(2,001) (3,786) (7,881) (1,257) (31) 14,956 -
(67) (557) (817) (319) - 11 (1,749)
- 546 185 - 373 (960) 144
5,652 19,049 12,632 (6,674) 141 (2,118) 28,682
4,264 27,989 45,879 (21,466) 898 (366) 57,198
5,738 (2,502) (19,336) 17,014 (820) (94) -
10,002 25,487 26,543 (4,452) 78 (460) 57,198
Balance Sheet
622 445,748 638,916 90 74 (693) 1,084,757
32,204 7,886 19,362 134,729 1,869 (2,721) 193,329
6,333 4,456 8,597 121,362 23,530 27,192 191,470
56,949 - - 293,393 - (350,342) -
96,108 458,090 666,875 549,574 25,473 (326,564) 1,469,556
84,395 271,929 330,393 72,979 - (4,335) 755,361
2,783 16,536 18,827 451,460 8,145 28,113 525,864
- 92,465 257,877 - - (350,342) -
87,178 380,930 607,097 524,439 8,145 (326,564) 1,281,225
8,930 77,161 59,777 25,135 17,328 - 188,331
Bank levy ................................................................
Notes to the Consolidated Financial Statements
Internal assets ........................................................
Total assets ...........................................................
Deposits ..................................................................
Other external liabilities ...........................................
Internal liabilities .....................................................
Total liabilities .......................................................
Allocated equity ....................................................
Net interest income .................................................
Net fee and commission income .............................
Net insurance income .............................................
Net financial income ................................................
Share of profit of associates ....................................
Other operating income ...........................................
Operating income ..................................................
Operating expenses ................................................
Allocated expenses .................................................
Net impairment .......................................................
Earnings (loss) before income tax .......................
Net seg. rev. from ext. customers ...........................
Net seg. rev. from other segments ..........................
Operating income ..................................................
Loans to customers ................................................
Financial instruments ..............................................
Other external assets ..............................................
24
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
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 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
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.
Comparative figures have not been restated based on new approach in disclosing Vördur as part of Corporate & Investment Banking and
Retail Banking instead of a separate segment.
25
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
Notes to the Consolidated Income Statement
Quarterly statements
6. Operations by quarters, unaudited
2022 Q1 Q2 Q3 Q4 Total
9,528 9,804 10,421 10,524 40,277
3,552 4,539 4,002 3,972 16,065
5 1,086 690 833 2,614
991 (2,911) (1,332) 157 (3,095)
203 23 41 3 270
235 719 62 51 1,067
14,514 13,260 13,884 15,540 57,198
(3,540) (3,843) (3,100) (5,373) (15,856)
(2,661) (2,806) (2,710) (2,878) (11,055)
(6,201) (6,649) (5,810) (8,251) (26,911)
(393) (416) (444) (496) (1,749)
(495) 186 42 411 144
7,425 6,381 7,672 7,204 28,682
(1,703) (3,488) (2,803) (1,815) (9,809)
5,722 2,893 4,869 5,389 18,873
96 6,819 (6) (366) 6,543
5,818 9,712 4,863 5,023 25,416
2021
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
Net interest income ........................................................................................
Net fee and commission income ....................................................................
Net insurance income ....................................................................................
Net financial income .......................................................................................
Net impairment ..............................................................................................
Salaries and related expense .........................................................................
Operating expenses .....................................................................................
Earnings before income tax ........................................................................
Net earnings from continuing operations ...................................................
Bank levy .......................................................................................................
Operating expenses .....................................................................................
Other operating expense ................................................................................
Income tax expense ......................................................................................
Discontinued operations, net of tax ................................................................
Net earnings .................................................................................................
Net interest income ........................................................................................
Net fee and commission income ....................................................................
Net insurance income ....................................................................................
Net financial income .......................................................................................
Share of profit of associates ...........................................................................
Operating income .........................................................................................
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.
Operating income .........................................................................................
Share of profit of associates ...........................................................................
Other operating income ..................................................................................
Salaries and related expense .........................................................................
Other operating expense ................................................................................
Other operating income ..................................................................................
Discontinued operations, net of tax ................................................................
Net earnings .................................................................................................
Bank levy .......................................................................................................
Net impairment ..............................................................................................
Earnings before income tax ........................................................................
Income tax expense ......................................................................................
Net earnings from continuing operations ...................................................
26
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
7. Net interest income
2022 Amortized Fair value Fair value
Interest income
cost thr. P/L thr. OCI Total
3,334 - - 3,334
218 80 - 298
76,761 - - 76,761
- 383 2,542 2,925
- 13 - 13
260 - - 260
80,573 476 2,542 83,591
Interest expense
(22,751) - - (22,751)
(18,027) - - (18,027)
(2,338) - - (2,338)
(198) - - (198)
(43,314) - - (43,314)
37,259 476 2,542 40,277
2021
Interest income
573 - - 573
73 49 - 122
49,044 - - 49,044
- 610 2,642 3,252
- 777 - 777
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
Interest spread
2022 2021
3.1% 2.8%
Interest spread (the ratio of net interest income to the average carrying amount of interest bearing assets) ...........
Interest income ................................................................................................................
Borrowings ........................................................................................................................
Interest expense ..............................................................................................................
Cash and balances with Central Bank ...............................................................................
Other .................................................................................................................................
Securities ..........................................................................................................................
Securities ..........................................................................................................................
Deposits ............................................................................................................................
Loans to credit institutions .................................................................................................
Interest income ................................................................................................................
Net interest income .........................................................................................................
Other .................................................................................................................................
Borrowings ........................................................................................................................
Deposits ............................................................................................................................
Net interest income .........................................................................................................
Cash and balances with Central Bank ...............................................................................
Subordinated liabilities .......................................................................................................
Effect from hedge accounting ............................................................................................
Interest expense ..............................................................................................................
Other .................................................................................................................................
Loans to customers ...........................................................................................................
Loans to credit institutions .................................................................................................
Net interest income calculated using the effective interest rate method were ISK 83,331 million during the year (2021: ISK 49,739 million).
Other .................................................................................................................................
Subordinated liabilities .......................................................................................................
Loans to customers ...........................................................................................................
Effect from hedge accounting ............................................................................................
27
Arion Bank Consolidated Financial Statements 2022 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
5,433 (596) 4,837 5,430 (552) 4,878
3,156 (43) 3,113 2,565 (40) 2,525
4,298 - 4,298 4,686 - 4,686
1,520 (105) 1,415 1,461 (113) 1,348
3,443 (1,187) 2,256 1,777 (520) 1,257
878 (732) 146 787 (808) (21)
18,728 (2,663) 16,065 16,706 (2,033) 14,673
9. Net insurance income
2022 2021
Earned premiums, net of reinsurers' share
15,579 14,032
(617) (486)
(741) (644)
14,221 12,902
Claims incurred, net of reinsurers' share
(9,882) (8,186)
291 157
(2,129) (1,374)
113 (57)
(11,607) (9,460)
2,614 3,442
Combined ratio
99.2% 93.2%
Premiums written ......................................................................................................................................................
Premiums written, reinsurers' shares ........................................................................................................................
Change in provision for unearned premiums ............................................................................................................
Earned premiums, net of reinsurers' share .........................................................................................................
Claims paid ..............................................................................................................................................................
Claims paid, reinsurers' share ..................................................................................................................................
Change in provision for claims ..................................................................................................................................
Changes in provision for claims, reinsurers' share ....................................................................................................
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.
Claims incurred, net of reinsurers' share ............................................................................................................
Net insurance income ............................................................................................................................................
Combined ratio .........................................................................................................................................................
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 .............................................
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.
2021
2022
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.
Capital markets and corporate finance .......................................
28
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
10. Net financial income
2022 2021
(510) 6,589
14 -
(908) (216)
(2,098) (453)
407 300
(3,095) 6,220
Net (loss) gain on financial assets and financial liabilities mandatorily measured at fair value through profit or loss
(1,104) 5,126
(654) 1,246
1,248 217
Net (loss) gain on financial assets and financial liabilities
(510) 6,589
Net loss on fair value hedge of interest rate swap
(14,855) (2,262)
13,947 2,046
(908) (216)
Net realized loss on financial assets carried at fair value through OCI and reclassification from OCI equity reserve
11. Other operating income 2022 2021
722 542
129 227
26 545
(2) 28
192 463
1,067 1,805
Net gain on assets held for sale
141 259
(12) (32)
129 227
at fair value through profit or loss ...........................................................................................................................
Gain on prepayments of borrowings .........................................................................................................................
Net loss on fair value hedge of interest rate swap ....................................................................................................
reclassification from OCI equity reserve ...............................................................................................................
Net gain on disposal of assets ..................................................................................................................................
Net gain on assets held for sale ...............................................................................................................................
Fair value changes on investment property ..............................................................................................................
Other income ............................................................................................................................................................
Other operating income .........................................................................................................................................
Income from real estates and other assets ...............................................................................................................
Expense related to real estates and other assets .....................................................................................................
Net gain on assets held for sale ............................................................................................................................
Net realised gain on investment property ..................................................................................................................
Net realized loss on financial assets carried at fair value through OCI and
Net (loss) gain on financial assets and financial liabilities mandatorily measured
Equity instruments ....................................................................................................................................................
During the second quarter of 2022, the Bank identified an immaterial error in accounting for certain treasury bonds, classified at fair value
through OCI. From Q3 2019 the accounting for these bonds has not been correct due to an implementation of a new system module at that
time. The effective interest rate on these bonds was not correctly accounted for during this period which resulted in understated OCI,
overstated income statement but with net zero effect on total equity. Management evaluated the impacts of the error for prior periods, both
individually and in the aggregate, and determined that the correction of this error was not material to any of its previously issued financial
statements for the impacted periods on either a quantitative or qualitative basis. This has also been evaluated by the Bank’s external
auditors as well as by independent third-party advisors. The impact is considered immaterial for these applicable accounting periods with
the Net Interest Margin impacted by 0bps to 10bps in a single quarter. The accumulative impact from Q3 2019 is ISK 1.9 billion which is
now being reclassified from OCI to retained earnings through net financial income. Split between years, ISK 517 million from 2019-2020,
ISK 1,042 million from 2021 and 321 million from Q1 2022. The impact in Q2 on net earnings after tax is ISK 1.4 billion but with zero effect
Real estates and other assets classified as assets held for sale are generally the result of foreclosures on companies and individuals.
mandatorily measured at fair value through profit or loss ................................................................................
Net loss on fair value hedge of interest rate swap ...............................................................................................
Debt instruments ......................................................................................................................................................
Derivatives ...............................................................................................................................................................
Fair value change of interest rate swaps designated as hedging instruments ...........................................................
Fair value change on bonds issued by the Group attributable to interest rate risk ....................................................
Net foreign exchange gain ........................................................................................................................................
Net financial income ...............................................................................................................................................
29
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
12. Personnel and salaries
2022 2021
Number of employees
759 758
781 751
Salaries and related expenses
10,812 10,216
1,236 1,215
279 99
1,789 1,692
1,740 1,577
- (161)
15,856 14,638
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 ................. 12.4 9.1 1.8 23.4 11.8 6.8 1.7 20.3
Paul Richard Horner, Vice Chairman ......... 12.2 10.3 - 22.5 10.9 7.0 - 17.9
Gunnar Sturluson, Director ......................... 6.2 8.6 1.2 16.0 5.9 7.0 1.0 13.9
Liv Fiksdahl, Director .................................. 9.4 9.6 - 19.0 8.1 7.7 - 15.8
Steinunn Kristín Thórdardóttir, Director ...... 9.1 8.6 1.5 19.2 8.1 7.0 1.3 16.3
Renier Lemmens, Director until 16.3.2021 . - - - - 2.5 1.5 0.3 4.3
Alternate directors of the Board .................. 0.3 0.6 0.1 1.0 0.7 1.4 0.1 2.3
Total remuneration ............................ 49.6 46.8 4.6 101.0 48.0 38.5 4.4 90.9
Remuneration to key management personnel
Performance- Performance-
based Pension based Pension
Salaries payments contribution Total Salaries payments contribution Total
Benedikt Gíslason, CEO ............................ 67.2 9.1 10.9 87.2 61.0 - 8.8 69.8
Eight members of the ................................. -
Executive Committee (7 until 6.9.2021) 321.7 24.5 49.2 395.4 279.8 3.5 39.9 323.2
Former members of the Executive Comm. 28.9 13.9 6.2 49.0 32.0 2.0 4.6 38.6
Total remuneration ............................ 417.8 47.4 66.4 531.6 372.8 5.5 53.3 431.6
The 2022 Annual General Meeting of the Bank held on 16 March 2022 approved the monthly salaries for 2022 for the Chairman, Vice
Chairman and for other Board Members of amounts ISK 1,050,000, ISK 787,500 and ISK 525,000 (2021: ISK 981,400; 736,200; 490,900)
respectively. It was also approved that the salary of Alternate Board Members would be ISK 262,500 (2021: ISK 248,600) per meeting, up
to a maximum of ISK 525,000 (2021: ISK 490,900) per month. Board members residing outside of Iceland receive ISK 320,000 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 210,000 (2021: ISK 196,300) per month for each committee they serve on and the Chairman of the board committees ISK
315,000 (2021: ISK 255,000).
Share-based payment expenses ..............................................................................................................................
Defined contribution pension plans ..........................................................................................................................
Capitalization of salaries due to implementation of core systems .............................................................................
Salaries and related expenses ...............................................................................................................................
Salary-related expenses ...........................................................................................................................................
Board Members receive remuneration for their involvement in board committees. In addition to 13 Board meetings (2021: 14) during the
year 5 Board Credit Committee meetings (2021: 11), 6 Board Audit Committee meetings (2021: 5), 8 Board Risk Committee meetings
(2021: 8), 5 Board Remuneration Committee meetings (2021: 4) and 4 Board Tech committee meetings (2021: 6) were held.
2022
2021
** 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.
2022
Performance based payments in 2021 are deferred payments based on the Group's performance in 2017.
Full-time equivalent positions at the end of the year .................................................................................................
Salaries ....................................................................................................................................................................
Incentive scheme .....................................................................................................................................................
Average number of full-time equivalent positions during the year .............................................................................
2021
30
Arion Bank Consolidated Financial Statements 2022 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 2022 2021
4,429 4,686
1,083 937
680 718
3,006 2,414
138 558
505 565
118 128
1,096 1,231
11,055 11,237
Auditor's fee
168 151
15 9
6 15
189 175
Auditor's fee ............................................................................................................................................................
Audit and review of the Consolidated Financial Statements for the relevant fiscal year ............................................
Depositors' and Investors' Guarantee Fund ..............................................................................................................
Depreciation of property and equipment ...................................................................................................................
Depreciation of right of use asset .............................................................................................................................
Other audit related services for the relevant fiscal year ............................................................................................
Other services from auditors ....................................................................................................................................
Amortization of intangible assets ..............................................................................................................................
Other operating expenses ......................................................................................................................................
IT expenses ..............................................................................................................................................................
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 each fiscal year 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, in part or in full, is whether the Bank’s return on equity 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.
In 2022 the Group made a provision of ISK 1,606 million (2021: ISK 1,580 million) for the incentive scheme, including salary-related
expenses. At the end of the year the Group's accrual for the incentive scheme payments amounted to ISK 1,997 million (31.12.2021: ISK
1,638 million).
Arion Bank has in place a share option plan for all employees of the Bank, Vördur and Stefnir, approved at the Banks annual general
meeting. A total expense of ISK 279 million was recognised in the Income Statement during the year (2021: ISK 45 million). Estimated
remaining expenses due the share option contracts are ISK 384 million and will be expensed over the next four years. For further
information on the share option program, see Note 36.
Professional services ...............................................................................................................................................
Housing expenses ....................................................................................................................................................
Other administration expenses .................................................................................................................................
31
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
14. Bank levy
15. Net impairment
2022 2021
Net impairment on financial instruments and value changes on loans
(158) 2,538
8 -
137 71
157 560
144 3,169
Net impairment by customer type
321 917
(177) 2,151
- 101
144 3,169
16. Income tax expense 2022 2021
8,669 6,607
1,140 175
9,809 6,782
Reconciliation of effective tax rate
28,682 34,003
20.0% 5,736 20.0% 6,801
6.6% 1,903 4.1% 1,411
0.4% 103 0.1% 24
4.5% 1,300 (4.3%) (1,455)
1.2% 350 0.9% 303
1.2% 353 (1.0%) (350)
0.2% 64 0.1% 48
34.2% 9,809 19.9% 6,782
Corporates ...............................................................................................................................................................
Financial institutions .................................................................................................................................................
The Bank levy is 0.145% on total debts excluding tax liabilities, in excess of ISK 50 billion. The tax is assessed on Financial Undertakings
but non-financial subsidiaries are exempt from this tax.
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 during the year.
Earnings before income tax ...............................................................................................
Net impairment on loans to customers and financial institutions ...............................................................................
Other changes ...................................................................................................................
Tax exempt revenues / loss ...............................................................................................
Non-deductible taxes (Bank levy) ......................................................................................
Tax incentives not recognized in the Income Statement ....................................................
Net impairment .......................................................................................................................................................
Current tax expense .................................................................................................................................................
Net impairment on other financial instruments at FVOCI ..........................................................................................
Additional 6% tax on Financial Undertakings .....................................................................
Other value changes of loans - corporates ...............................................................................................................
Other value changes of loans - individuals ...............................................................................................................
Net impairment .......................................................................................................................................................
Individuals ................................................................................................................................................................
Tax exempt revenues / loss consist mainly of profit / loss from equity positions.
Financial undertakings pay 6% additional tax on taxable profit exceeding ISK 1 billion.
Deferred tax expense ...............................................................................................................................................
Income tax expense ................................................................................................................................................
Income tax using the Icelandic corporate tax rate ..............................................................
2022
2021
Non-deductible expenses ..................................................................................................
Effective tax rate ..............................................................................................................
32
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
17. Discontinued operations held for sale, net of income tax
2022 2021
6,690 1,415
(147) (21)
6,543 1,394
6,656 903
(504) (211)
391 702
6,543 1,394
18. Earnings per share
2022 2021 2022 2021 2022 2021
18,897 27,211 6,543 1,394 25,440 28,605
1,491 1,593 1,491 1,593 1,491 1,593
1,576 1,690 1,576 1,690 1,576 1,690
12.67 17.08 4.39 0.88 17.06 17.96
11.99 16.10 4.15 0.82 16.14 16.93
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.
operations
operations
For further information about Valitor hf., Stakksberg ehf. and Sólbjarg ehf., see Note 29.
Basic earnings per share (ISK) ................................................
Diluted earnings per share (ISK) .............................................
Net gain from discontinued operations held for sale .................................................................................................
Income tax expense .................................................................................................................................................
including warrants and options (millions) ................................
Discontinued
Net earnings attributable to the shareholders of Arion Bank .......
Weighted average number of outstanding shares (millions) .......
Operating effects of Sólbjarg are mainly due to a sale of assets held by the company. Operating effects of Stakksberg are due to fair value
changes of underlying assets.
Weighted average number of outstanding shares
Discontinued operations held for sale, net of income tax ...................................................................................
Valitor hf. ..................................................................................................................................................................
Stakksberg ehf. ........................................................................................................................................................
Continued
At the end of June 2022 Arion Bank sold its entire shareholding in Valitor hf. The financial effects from the sale, less cost to sell, was ISK
5.6 billion and was recognized in the Income Statement. The net profit from Valitor's operation was ISK 627 million during the first six
months of 2022 whereas Valitor's positive contribution to the Group, after taking into account the Group's eliminations, was ISK 1,088
million. For the first six months of 2022 operating income of Valitor was ISK 3,322 million, or ISK 3,822 million after taking into account the
Group's eliminations.
Net Earnings
Sólbjarg ehf. .............................................................................................................................................................
Discontinued operations held for sale, net of income tax ...................................................................................
33
Arion Bank Consolidated Financial Statements 2022 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 2022 2021
3,877 3,556
102,821 58,966
7,420 6,535
114,118 69,057
20. Loans to credit institutions 2022 2021
43,433 28,156
2,068 2,116
45,501 30,272
21. Loans to customers
Gross Gross Gross
carrying Book carrying Book carrying Book
2022 amount value amount value amount value
14,893 14,369 33,369 32,571 48,262
46,940
14,304 14,155 1,838 1,792 16,142 15,947
514,007 513,605 60,528 60,424 574,535 574,029
- - 29,227 28,893 29,227 28,893
4,107 4,089 4,163 4,131 8,270 8,220
36,835 36,153 378,402 374,575 415,237 410,728
584,146 582,371 507,527 502,386 1,091,673 1,084,757
2021
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
22. Financial instruments 2022 2021
138,174 151,852
17,733 25,063
9,516 2,905
27,906 45,837
193,329 225,657
Mortgage loans ...........................................................................
Bonds and debt instruments .....................................................................................................................................
Further analysis of loans is provided in Risk management disclosures.
Total
Loans to customers ..................................................................
Capital lease ..............................................................................
Loans to customers ..................................................................
Mandatory reserve deposit with Central Bank ...........................................................................................................
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%.
Cash with Central Bank ............................................................................................................................................
Cash and balances with Central Bank ...................................................................................................................
Loans to credit institutions ....................................................................................................................................
Cash on hand ...........................................................................................................................................................
Other loans ...............................................................................................................................................................
Bank accounts ..........................................................................................................................................................
Individuals
Mortgage loans ...........................................................................
Credit cards ................................................................................
Securities used for economic hedging ......................................................................................................................
Overdrafts ..................................................................................
Construction loans ......................................................................
Other loans .................................................................................
The total book value of pledged loans that were pledged against amounts borrowed was ISK 305 billion at the end of the year (31.12.2021:
ISK 267 billion). Pledged loans comprised mortgage loans to individuals.
Construction loans ......................................................................
Overdrafts ..................................................................................
Other loans .................................................................................
Corporates
Derivatives ...............................................................................................................................................................
Financial instruments .............................................................................................................................................
Credit cards ................................................................................
Shares and equity instruments with variable income ................................................................................................
Capital lease ..............................................................................
34
Arion Bank Consolidated Financial Statements 2022 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
114,118 - - 114,118
43,433 - 2,068 45,501
1,084,757 - - 1,084,757
1,242,308 - 2,068 1,244,376
Bonds and debt instruments
- 115,806 21,390 137,196
- - 978 978
- 115,806 22,368 138,174
Shares and equity instruments with variable income
- - 6,429 6,429
- - 9,709 9,709
- - 1,595 1,595
- - 17,733 17,733
Derivatives
- - 9,448 9,448
- - 68 68
- - 9,516 9,516
Securities used for economic hedging
- - 3,890 3,890
- - 24,016 24,016
- - 27,906 27,906
Other financial assets
5,255 - - 5,255
3,412 - - 3,412
8,667 - - 8,667
1,250,975 115,806 79,591 1,446,372
Financial liabilities
11,697 - - 11,697
755,361 - - 755,361
392,563 - - 392,563
47,331 - - 47,331
- - 11 11
- - 4,730 4,730
- - 16,256 16,256
10,099 - - 10,099
1,217,051 - 20,997 1,238,048
Due to credit institutions and Central Bank ........................................................................
Derivatives ........................................................................................................................
Borrowings * ......................................................................................................................
Loans ................................................................................................................................
Accounts receivable ..........................................................................................................
Loans to credit institutions .................................................................................................
Derivatives .......................................................................................................................
Shares and equity instruments with variable income ...................................................
Financial liabilities ..........................................................................................................
Unlisted .............................................................................................................................
Bonds and debt instruments ..........................................................................................
Other financial liabilities .....................................................................................................
* Including effect from hedge accounting derivatives.
Bonds and debt instruments, listed ....................................................................................
Securities used for economic hedging ..........................................................................
Other financial assets ........................................................................................................
OTC derivatives ................................................................................................................
Shares and equity instruments with variable income, listed ...............................................
2022
Listed ................................................................................................................................
Bond funds with variable income, unlisted .........................................................................
Listed ................................................................................................................................
Loans to customers ...........................................................................................................
Derivatives used for hedge accounting ..............................................................................
Unlisted .............................................................................................................................
Short position in equity used for economic hedging ...........................................................
Derivatives used for hedge accounting ..............................................................................
Cash and balances with Central Bank ...............................................................................
Financial assets ...............................................................................................................
Other financial assets .....................................................................................................
Deposits ............................................................................................................................
Subordinated liabilities * ....................................................................................................
35
Arion Bank Consolidated Financial Statements 2022 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
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
Financial liabilities ..........................................................................................................
Derivatives used for hedge accounting ..............................................................................
Subordinated liabilities * ....................................................................................................
Financial assets ...............................................................................................................
Other financial assets .....................................................................................................
Deposits ............................................................................................................................
Derivatives ........................................................................................................................
Securities used for economic hedging ..........................................................................
Borrowings * ......................................................................................................................
Derivatives .......................................................................................................................
Loans ................................................................................................................................
Other financial assets ........................................................................................................
Shares and equity instruments with variable income, listed ...............................................
Due to credit institutions and Central Bank ........................................................................
Accounts receivable ..........................................................................................................
Unlisted .............................................................................................................................
Loans to credit institutions .................................................................................................
Bonds and debt instruments, listed ....................................................................................
Bonds and debt instruments ..........................................................................................
Listed ................................................................................................................................
Derivatives used for hedge accounting ..............................................................................
Shares and equity instruments with variable income ...................................................
OTC derivatives ................................................................................................................
Bond funds with variable income, unlisted .........................................................................
Listed ................................................................................................................................
Cash and balances with Central Bank ...............................................................................
2021
Loans to customers ...........................................................................................................
Unlisted .............................................................................................................................
Other financial liabilities .....................................................................................................
* Including effect from hedge accounting derivatives.
36
Arion Bank Consolidated Financial Statements 2022 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
18,898 9,967 28,865
96,908 9,319 106,227
- 3,082 3,082
115,806 22,368 138,174
21,001 7,561 28,562
112,824 8,325 121,149
- 2,141 2,141
133,825 18,027 151,852
24. Fair value hierarchy
Level 1 Level 2 Level 3 Total
- 2,068 - 2,068
135,126 2,946 102 138,174
5,214 10,587 1,932 17,733
- 9,448 - 9,448
- 68 - 68
27,906 - - 27,906
- - 7,862 7,862
168,246 25,117 9,896 203,259
11 - - 11
- 4,730 - 4,730
- 16,256 - 16,256
11 20,986 - 20,997
Short position in equity used for economic hedging ...........................................................
Financial and insurance activities ..........................................................................................................
Assets at fair value ..........................................................................................................
Derivatives ........................................................................................................................
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 3.6 billion at the end of the year (31.12.2021: ISK 8.6 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 ..............................................................................
Derivatives used for hedge accounting ..............................................................................
Bonds and debt instruments ..............................................................................................
Shares and equity instruments with variable income .........................................................
Securities used for economic hedging ...............................................................................
2022
Liabilities at fair value .....................................................................................................
2021
Corporates ............................................................................................................................................
Investment property ...........................................................................................................
2022
Public sector .........................................................................................................................................
Bonds and debt instruments at fair value .........................................................................................
Liabilities at fair value
Loans to credit institutions .................................................................................................
37
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
24. Fair value hierarchy, continued
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
Methods for establishing fair value
Shares and equity instruments with variable income .........................................................
Derivatives used for hedge accounting ..............................................................................
Liabilities at fair value
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.
Derivatives used for hedge accounting ..............................................................................
Level 1: Fair value established from quoted market prices
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.
Investment property ...........................................................................................................
Assets at fair value ..........................................................................................................
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.
Derivatives ........................................................................................................................
Transfers from Level 1 to Level 2 amounted to ISK 1,098 million during the year. There was no transfer from Level 2 to Level 1 (2021:
Transfers from Level 1 to Level 2 ISK 172 million and transfers from Level 2 to Level 1 ISK 122 million).
Bonds and debt instruments ..............................................................................................
Liabilities at fair value .....................................................................................................
Level 2: Fair value established using valuation techniques with observable market information
Securities used for economic hedging ...............................................................................
Assets at fair value
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.
2021
Derivatives ........................................................................................................................
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.
Loans to credit institutions .................................................................................................
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.
Fair value of assets and liabilities
38
Arion Bank Consolidated Financial Statements 2022 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
6,560 97 3,808 10,465
26 6 135 167
49 - 29 78
(7) (1) (1,907) (1,915)
1,234 - - 1,234
- - (133) (133)
7,862 102 1,932 9,896
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
Line items where effects of Level 3 assets are recognized in the Income Statement
- 6 135 141
24 - - 24
24 6 135 165
- 12 664 676
573 - - 573
573 12 664 1,249
Disposal ............................................................................................................................
Other operating income .....................................................................................................
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.
Balance at the beginning of the year .................................................................................
Disposals ...........................................................................................................................
Other operating income .....................................................................................................
Balance at the end of the year ........................................................................................
Net fair value changes .......................................................................................................
2021
Transfers from held for sale assets ...................................................................................
Additions ...........................................................................................................................
Net financial income ..........................................................................................................
Effects recognized in the Income Statement .................................................................
Net fair value changes .......................................................................................................
Balance at the end of the year ........................................................................................
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.
Financial assets
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.
2022
2021
Additions ...........................................................................................................................
2022
Net financial income ..........................................................................................................
Effects recognized in the Income Statement .................................................................
Investment
property
Transfers out of Level 3 .....................................................................................................
39
Arion Bank Consolidated Financial Statements 2022 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)
114,118 114,118 -
45,501 45,501 -
1,084,757 1,017,671 (67,086)
8,667 8,667 -
1,253,043 1,185,957 (67,086)
Financial liabilities not carried at fair value
11,697 11,697 -
755,361 755,361 -
392,563 381,426 11,137
47,331 48,310 (979)
10,099 10,099 -
1,217,051 1,206,893 10,158
Financial assets not carried at fair value
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)
Derivatives Notional
value
Assets Liabilities
73,127 2,383 168
246,965 68 16,256
93,206 2,737 3,540
5,668 277 19
36,057 3,694 975
5 357 28
455,028 9,516 20,986
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
16 - -
342,624 2,905 5,877
Derivatives ...........................................................................................................................................
Interest rate and exchange rate agreements .........................................................................................
Borrowings ............................................................................................................................................
Financial assets not carried at fair value ...........................................................................................
Fair value
Borrowings ............................................................................................................................................
Deposits ................................................................................................................................................
Other financial assets ...........................................................................................................................
Other financial liabilities ........................................................................................................................
Due to credit institutions and Central Bank ............................................................................................
Other financial liabilities ........................................................................................................................
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 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.
Fair value hedge of interest rate swap ..................................................................................................
Forward exchange rate agreements ......................................................................................................
Interest rate and exchange rate agreements .........................................................................................
Share swap agreements .......................................................................................................................
Bond swap agreements ........................................................................................................................
Loans to credit institutions ....................................................................................................................
Subordinated liabilities ..........................................................................................................................
Financial liabilities not carried at fair value ......................................................................................
Fair value hedge of interest rate swap ..................................................................................................
Cash and balances with Central Bank ...................................................................................................
Other financial assets ...........................................................................................................................
2022
Cash and balances with Central Bank ...................................................................................................
Deposits ................................................................................................................................................
Share swap agreements .......................................................................................................................
2021
Derivatives ...........................................................................................................................................
Options - purchased agreements, listed ................................................................................................
Financial liabilities not carried at fair value ......................................................................................
Forward exchange rate agreements ......................................................................................................
Subordinated liabilities ..........................................................................................................................
Loans to customers ..............................................................................................................................
Financial assets not carried at fair value ...........................................................................................
2022
Loans to credit institutions ....................................................................................................................
Options - purchased agreements, unlisted ............................................................................................
Loans to customers ..............................................................................................................................
Due to credit institutions and Central Bank ............................................................................................
2021
Options - purchased agreements, unlisted ............................................................................................
Bond swap agreements ........................................................................................................................
40
Arion Bank Consolidated Financial Statements 2022 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
2022
Assets Liabilities
changes
20,680 68 - (747)
45,451 - 2,332 (1,933)
14,180 - 908 (1,103)
75,752 - 7,986 (6,911)
45,451 - 4,151 (3,321)
45,451 - 879 (840)
68 16,256 (14,855)
- - - (122)
44,280 802 - (463)
44,280 - 151 (301)
12,975 298 - (526)
44,280 - 350 (388)
44,280 - 402 (462)
1,100 903 (2,262)
Hedged borrowings and subordinated liabilities Gain (loss)
Book
on FV
value
Assets Liabilities
changes
20,672 156 - 13
43,181 2,363 - 1,930
13,396 1,001 - 1,024
66,231 7,765 - 6,927
41,404 3,973 - 3,288
44,557 792 - 766
229,441 16,050 - 13,947
- - - (106)
41,491 119 - 461
44,021 293 - 306
13,224 - 82 526
43,624 382 - 391
43,681 455 - 468
186,041 1,249 82 2,046
1-5 years
1-5 years
Interest rates swaps - USD .........................................................
Interest rates swaps - EUR .........................................................
Interest rates swaps - EUR .........................................................
EUR 300 million - issued 2022 - 2 years ............................................................................
USD 100 million - issued 2020 - Perpetual ........................................................................
fair value
Accumulated
Interest rates swaps - USD .........................................................
Hedged borrowings and subordinated liabilities ...........................................................
EUR 500 million - issued 2021 - 5 years ............................................................................
EUR 300 million - issued 2021 - 4 years ............................................................................
EUR 300 million - issued 2021 - 4 years ............................................................................
Interest rates swaps - EUR .........................................................
Interest rates swaps - EUR .........................................................
Interest rates swaps - EUR .........................................................
Fair value
Interest rates swaps - EUR .........................................................
Hedged borrowings and subordinated liabilities ...........................................................
EUR 300 million - issued 2020 - 4 years ............................................................................
EUR 500 million - issued 2017/18 - 5 years .......................................................................
1-5 years
1-5 years
1-5 years
1-5 years
EUR 300 million - issued 2021 - 5 years ............................................................................
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 84-
100%.
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 EUR 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 59.
2022
USD 100 million - issued 2020 - Perpetual ........................................................................
1-5 years
Interest rates swaps - EUR .........................................................
Interest rates swaps - EUR .........................................................
1-5 years
0-3 mth
2021
-
Interest rates swaps - EUR .........................................................
1-5 years
EUR 300 million - issued 2020 - 4 years ............................................................................
EUR 300 million - issued 2018 - 5 years ............................................................................
Maturity
date
2021
EUR 300 million - issued 2018 - 5 years ............................................................................
1-5 years
Interest rates swaps - EUR .........................................................
41
Arion Bank Consolidated Financial Statements 2022 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
2022
nettings liabilities Sheet, net liabilities received potential angements Sheet, net
Reverse repurchase agreements ......... 17,781 (10,212) 7,569 10,212 - 17,781 - 7,569
Derivatives .......................................... 842 - 842 (42) - 800 8,674 9,516
Total assets ........................................ 18,623 (10,212) 8,411 10,170 - 18,581 8,674 17,085
2021
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
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
2022
nettings assets Sheet, net assets pledged potential angements sheet
Repurchase agreements ..................... - (10,212) (10,212) 10,212 - - - (10,212)
Derivatives .......................................... 18,298 - 18,298 (42) - 18,256 2,689 20,987
Total liabilities ................................... 18,298 (10,212) 8,086 10,170 - 18,256 2,689 10,775
2021
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
26. Investments in associates
2022 2021
668 891
90 111
(241) (356)
270 22
787 668
The Group's interest in its principal associates
33.4% -
49.0% -
23.0% 23.0%
35.3% 35.3%
- 25.4%
Reiknistofa bankanna hf., Katrínartún 2, Reykjavík, Iceland .....................................................................................
SER eignarhaldsfélag ehf., Borgartún 19, Reykjavík ................................................................................................
In 2022 the subsidiary Eignabjarg ehf. invested in the associated company Háblær ehf.
Liabilities subject to netting
arrangements
Audkenni hf., Borgartún 31, Reykjavík, Iceland ........................................................................................................
Arion Bank sold its entire shareholding in Audkenni hf. The sale generated a profit of ISK 152 million and is recognized in the Income
Statement. In March 2022 Arion Bank invested in Bílafrágangur ehf. and holds a 33.4% shareholding.
Bílafrágangur ehf., Lágmúli 5, Reykjavík, Iceland .....................................................................................................
Investment in associates .......................................................................................................................................
Carrying amount at the beginning of the year ...........................................................................................................
Disposals ..................................................................................................................................................................
Share of profit of associates and profit from sale ......................................................................................................
Financial liabilities subject to enforceable master netting arrangements and similar arrangements
Háblær ehf., Sudurlandsbraut 18, Reykjavík, Iceland ...............................................................................................
Financial assets subject to enforceable master netting arrangements and similar arrangements
Netting potential not
recognized in the
Balance Sheet
Assets subject to netting
arrangements
Reverse repurchase agreements and repurchase agreements are recognized within the line items Financial instruments and Due to credit
institutions and Central Bank respectively.
Acquisitions / increased share capital .......................................................................................................................
Assets not
subject to
Netting potential not
recognized in the
Balance Sheet
42
Arion Bank Consolidated Financial Statements 2022 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
2022
Goodwill structure Software Total
669 2,383 607 5,804 9,463
61 - - 355 416
- - (60) (1,036) (1,096)
730 2,383 547 5,123 8,783
2021
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
Impairment testing
Discount and growth rates
Discount Growth Discount Growth
rates rates rates rates
14.3% 4.0% 13.0% 2.5%
14.3% 4.0% 13.0% 2.5%
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 2022
(2021: nil).
Amortization ...................................................................................................
Additions ........................................................................................................
Goodwill
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.
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.
Amortization method ...................................................................
Internally generated or acquired ................................................
Customer relationship
and related agreements
Acquired and internally
generated
Amortization ...................................................................................................
Acquired
Goodwill related to the insurance operation is recognized among assets in the operating segments Corporate & Investment Banking and
Retail Banking (2021: recognized in the operating segment Vördur) and in 2022 Leiguskjól acquired a subsidiary including ISK 61 million in
goodwill wich is recognized in the operating segment Other subsidiaries, see Note 5.
Intangible assets ..........................................................................................
Additions ........................................................................................................
Intangible assets ..........................................................................................
Insurance operation ...........................................................................................................
2022
Asset Management operation ............................................................................................
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.
2021
Useful lives .................................................................................
Software
and infrastructure
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.
Balance at the beginning of the year ..............................................................
agreements
Impairment test
Undefined
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
Balance at the beginning of the year ..............................................................
Additions, capitalized salaries ........................................................................
43
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
28. Tax assets and tax liabilities
Assets Liabilities Assets Liabilities
- 8,471 - 6,543
135 1,832 2 559
135 10,303 2 7,102
Deferred tax assets and tax liabilities are attributable to the following:
- - 2 -
- (999) - (728)
- (510) 562 -
27 (294) 57 (259)
2 (80) - (191)
157 - - -
186 (1,883) 621 (1,178)
(51) 51 (619) 619
135 (1,832) 2 (559)
Recognized
Recognized
Changes in deferred tax assets and tax liabilities through
in profit or
At 1 Jan.
equity loss
At 31 Dec.
2 - (2) -
(728) - (271) (999)
562 - (1,072) (510)
(202) - (65) (267)
(191) - 113 (78)
- - 157 157
(557) - (1,140) (1,697)
26 - (24) 2
(542) - (186) (728)
613 - (51) 562
(120) 350 (432) (202)
(438) - 247 (191)
(461) 350 (446) (557)
Deferred foreign exchange differences ..............................................................................
Current tax ........................................................................................................................
Financial assets .................................................................................................................
Investment property and property and equipment ..............................................................
Other assets and liabilities .................................................................................................
Foreign currency denominated assets and liabilities ..........................................................
Tax loss carry forward .......................................................................................................
Set-off of deferred tax assets together with tax liabilities of the same taxable entities ........
Financial assets .................................................................................................................
Tax assets and tax liabilities ...........................................................................................
Deferred tax ......................................................................................................................
Foreign currency denominated assets and liabilities ..........................................................
Change in deferred tax assets and tax liabilities ...........................................................
Other assets and liabilities .................................................................................................
Investment property and property and equipment ..............................................................
Investment property and property and equipment ..............................................................
Deferred tax related to foreign exchange gain ...................................................................
Other assets and liabilities .................................................................................................
Foreign currency denominated assets and liabilities ..........................................................
2022
Change in deferred tax assets and tax liabilities ...........................................................
Deferred foreign exchange differences ..............................................................................
2021
Tax loss carry forward .......................................................................................................
The Group has ISK 12 million (31.12.2021: ISK 235 million) of tax losses carried forward which is not reflected in a tax asset by the Group.
These losses relate to subsidiaries that have a history of losses 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 2 million (2021: ISK 47 million).
2021
2022
Financial assets .................................................................................................................
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.
44
Arion Bank Consolidated Financial Statements 2022 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 2022 2021
- 12,294
- 1,548
- 1,671
- 15,513
61 500
- 34
61 16,047
Liabilities associated with disposal groups held for sale
- 15,564
- 1,371
- 16,935
Valitor hf.
Stakksberg ehf., a subsidiary of Eignabjarg ehf.
Sólbjarg ehf., a subsidiary of Eignabjarg ehf.
Valitor hf. ..................................................................................................................................................................
Real estate ...............................................................................................................................................................
Sólbjarg ehf. is a holding company of the former TravelCo hf. tour operator group which included Terra Nova Sól ehf., Heimsferdir ehf. and
TravelCo Nordic/Bravo Tours. In the first quarter of 2020 Sólbjarg completed the sale of Terra Nova Sól ehf., in the fourth quarter the sale of
its 59.4% share in the Danish operator Bravo Tours 1998 A/S and in the second quarter of 2022 the sale of all operations, brand, and
domain of Heimsferdir ehf. Sólbjarg is a minority shareholder in Ferdaskrifstofa Íslands ehf. through its ownership in Heimbjarg ehf. (former
Heimsferdir ehf.). The holding is held for sale with zero book value.
Stakksberg ehf. is a company owned by Arion Bank, which in early 2018 took over the operations of the silicon plant at Helguvík following
the bankruptcy of the previous owner, United Silicon hf. Since then Stakksberg has devised a remedial action plan for the plant and has
sought suitable buyers able to operate the plant in a responsible manner. After consulting the appropriate authorities, a new environmental
impact assessment based on the remedial action plan was completed and the plant attracted considerable interest from investors. Arion
Bank has always stipulated that prospective buyers had to be dependable companies with extensive experience of operating silicon plants.
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. ..................................................................................................................................................................
Disposal groups held for sale ................................................................................................................................
Sólbjarg ehf. .............................................................................................................................................................
Arion Bank's shareholding in the subsidiary Valitor hf. was 100%. In accordance with IFRS 5 Non-current assets and disposal groups held
for sale, Valitor was classified as asset held for sale in these Consolidated Financial Statements. In 2022 Arion Bank sold its entire
shareholding in Valitor with a profit of ISK 5.6 billion, post cost of sale, which is recognised in the Income Statement.
Stakksberg ehf. ........................................................................................................................................................
At the beginning of 2022 the Bank entered exclusive talks with PCC which has operated a silicon plant at Bakki in northern Iceland and
maintained good relations with the local community. The Bank believed that PCC possessed the necessary expertise and experience to
successfully run the plant at Helguvík. Representatives of PCC and Arion Bank agreed that a prerequisite for recommencing silicon
production at Helguvík was that it would be done with the consent of the authorities and residents of Reykjanesbær. After having presented
its ambitious plans to various stakeholders, PCC concluded that there was not a basis to continue negotiations on the acquisition by PCC of
the silicon plant.
Liabilities associated with disposal groups held for sale ....................................................................................
Other assets .............................................................................................................................................................
Assets and disposal groups held for sale .............................................................................................................
As a result, Arion Bank considers it unlikely that the plant will be restarted for silicon production and will now seek to sell the existing
infrastructure at Helguvík, either to be transported elsewhere and/or to be used for the purpose of developing other activities at the site.
Discussions are being held with several prospective parties, both Icelandic and international. As this is now considered a development plot
and not a sale of a silicon metal plant, Stakksberg’s main assets, the plot of land and industrial facilities at Helguvík, were transferred to
Landey, Arion Bank’s real estate development company, at the end of the year. These assets were correspondingly revalued as such and
are now valued at ISK 1,230 million within Landey. Remaining assets within Stakksberg are mostly raw materials and other minor operating
assets which are valued at zero.
45
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
30. Other assets
2022 2021
3,787 4,298
745 823
5,255 5,104
860 5,113
117 1,281
3,459 3,282
14,223 19,901
Property and equipment Real Equip- Total Total
estate ment 2022 2021
3,967 7,977 11,944 12,072
- 357 357 583
(433) (89) (522) (711)
3,534 8,245 11,779 11,944
(1,883) (5,764) (7,647) (7,281)
(79) (426) (505) (565)
112 48 160 200
(1,850) (6,142) (7,992) (7,646)
1,684 2,103 3,787 4,298
Right-of-use asset 2022 2021
823 754
213 185
(215) -
41 18
(117) (134)
745 823
31. Other liabilities
1,013 818
1,844 1,259
- 138
21,023 18,170
117 1,281
2,637 810
1,761 1,516
4,776 4,200
1,590 1,476
449 711
970 878
6,793 5,894
42,973 37,151
Prepaid income ........................................................................................................................................................
Bank levy .................................................................................................................................................................
Withholding tax .........................................................................................................................................................
Impairment of off-balance items ...............................................................................................................................
Other assets ............................................................................................................................................................
Depreciation ......................................................................................................................
Accounts payable .....................................................................................................................................................
Sundry assets ..........................................................................................................................................................
Accumulated depreciation at the beginning of the year ......................................................
Gross carrying amount at the end of the year ...............................................................
Depositors' and Investors' Guarantee Fund ..............................................................................................................
Accounts receivable .................................................................................................................................................
Investment for life assurance policyholders where risk is held by policyholder ..........................................................
Additions ...........................................................................................................................
Gross carrying amount at the beginning of the year ............................................................
Technical provision for life assurance policyholders were investment risk is held by policyholder .............................
Right-of-use asset ..................................................................................................................................................
Disposals ...........................................................................................................................
Lease agreements terminated ..................................................................................................................................
Balance at the beginning of the year ........................................................................................................................
Accrued expenses ....................................................................................................................................................
Unsettled securities trading ......................................................................................................................................
Other liabilities .......................................................................................................................................................
Property and equipment ..................................................................................................
New lease agreements .............................................................................................................................................
Indexation .................................................................................................................................................................
Depreciation .............................................................................................................................................................
Right of use asset .....................................................................................................................................................
Property and equipment ...........................................................................................................................................
Unsettled securities trading ......................................................................................................................................
Technical provision ...................................................................................................................................................
Lease liability ............................................................................................................................................................
Sundry liabilities .......................................................................................................................................................
Disposals ...........................................................................................................................
Accumulated depreciation at the end of the year ..........................................................
The official real estate value (Registers Iceland) amounted to ISK 4,152 million at the end of the year (2021: ISK 4,097 million) and the
insurance value amounts to ISK 7,680 million (2021: ISK 7,489 million).
46
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
31. Other liabilities, continued
Technical provision Technical Reinsurers' Total Technical Reinsurers' Total
provision share 2022 provision share 2021
10,455 (371) 10,084 9,473 (110) 9,363
3,168 (90) 3,078 2,021 (64) 1,957
13,623 (461) 13,162 11,494 (174) 11,320
7,400 (15) 7,385 6,676 (12) 6,664
21,023 (476) 20,547 18,170 (186) 17,984
Lease liability 2022 2021
878 787
215 183
(34) -
69 31
31 20
(189) (143)
970 878
32. Borrowings
First Maturity
Currency, original nominal value issued Maturity type Terms of interest
ARION CB 22, ISK 31,720 million ........ 2015 2022 At maturity - 31,508
ARION CB 24 ISK 28,900 million ......... 2019 2024 At maturity 25,736 26,004
ARION CBI 25, ISK 37,940 million ....... 2017 2025 At maturity 47,184 43,341
ARION CBI 26 ISK 17,080 million ........ 2019 2026 At maturity 19,219 17,747
ARION CBI 29, ISK 27,200 million ....... 2014 2029 At maturity 35,602 29,902
ARION CBI 48, ISK 11,680 million ....... 2018 2048 Amortizing 11,828 11,017
ARION CB EUR 500 million * .............. 2021 2026 At maturity 66,231 43,624
ARION CB 27, ISK 8,100 million .......... 2022 2027 At maturity 7,058 -
212,858 203,143
NOK 750 million .................................. 2019 2022 At maturity - 11,096
SEK 150 million ................................... 2019 2022 At maturity - 2,159
NOK 250 million .................................. 2017 2023 At maturity 3,671 3,757
EUR 300 million * ................................ 2018 2023 At maturity 20,672 41,491
EUR 300 million * ................................ 2020 2024 At maturity 43,181 44,021
NOK 250 million .................................. 2017 2027 At maturity 3,680 3,766
EUR 300 million Green * ...................... 2021 2025 At maturity 41,404 43,680
ARION 26 1222 Green (ISK 5,760m) ... 2021 2026 At maturity 5,382 3,524
ARION 24 1020 Green (ISK 6,020m) ... 2022 2024 At maturity 6,062 -
EUR 300 million Green * ...................... 2022 2024 At maturity 44,557 -
NOK 550 million .................................. 2022 2025 At maturity 7,952 -
SEK 230 million ................................... 2022 2025 At maturity 3,144 -
179,705 153,494
392,563 356,637
Fixed, 6.00% ..................................
Fixed, 1.00% .................................
Fixed, 0.625 % ...............................
Floating, OIBOR 3M +2.35% ..........
Floating, STIBOR 3M +2.35% ........
Fixed, CPI linked, 3.00% ................
Fixed, CPI linked, 2.50% ................
Floating, NIBOR +1.82% ................
Statutory covered bonds ........................................................................................................................................
Fixed, 5.50% ..................................
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.
Floating, REIBOR 3M +0.70% ........
Floating, 3 month STIBOR +1.33% .
Provision for unearned premiums ...............................................
Fixed, EUR 0.05% ..........................
Fixed, CPI linked, 3.50% ................
Lease agreements terminated ..................................................................................................................................
Lease payments .......................................................................................................................................................
Indexation .................................................................................................................................................................
Fixed, 4.70% ..................................
Fixed, 3.02% .................................
Fixed, 4.875% ................................
Fixed, 3.40% .................................
Lease liability ..........................................................................................................................................................
Fixed, 6.50% ..................................
Claims reported and loss adjustment expenses ..........................
Own technical provision ..........................................................
Fixed, CPI linked, 2.00% ................
Claims incurred but not reported .................................................
Claims outstanding ..................................................................
Balance at the beginning of the year ........................................................................................................................
The book value of listed bonds was ISK 393 billion at the end of the year (31.12.2021: ISK 357 billion). The market value of those bonds
was ISK 381 billion (31.12.2021: ISK 367 billion). The Group repurchased own debts amounting to ISK 28 billion during the year with a net
gain of ISK 14 million recognized in the Income Statement (2021: nil).
Senior unsecured bonds ........................................................................................................................................
Fixed, 0.375% ...............................
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.
Interest expense .......................................................................................................................................................
New and amended lease agreements .......................................................................................................................
47
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
33. Subordinated liabilities
First call
Currency, original nominal value Issued Maturity date Terms of interest 2022 2021
SEK 500 million ................................... 2018 2028 22 Nov '23 6,822 7,174
NOK 300 million .................................. 2019 2029 9 Jul '24 4,383 4,461
SEK 225 million ................................... 2019 2029 20 Dec '24 3,066 3,232
ARION T2I 30 ISK 4,800 million .......... 2019 2030 4 Jan '25 5,841 5,337
ARION T2 30 ISK 880 million .............. 2019 2030 4 Jan '25 908 907
EUR 5 million ....................................... 2019 2031 6 Mar '26 772 752
ARION T2I 33 9,860 million ................. 2022 2033 15 Dec '28 9,894 -
ARION T2 33 2,240 million .................. 2022 2033 15 Dec '28 2,249 -
33,935 21,863
ARION AT1 USD 100 million * ............ 2020 Perpetual 26 Mar '25 13,396 13,225
13,396 13,225
47,331 35,088
34. Liabilities arising from financial activities
2022 Cash Interest Foreign Effect
At 1 Jan.
flows expenses exchange from hedge
At 31 Dec.
102,007 (814) 12,640 - - 113,833
57,512 (27,114) 2,396 - - 32,794
43,624 26,690 386 2,515 (6,984) 66,231
149,970 17,949 2,044 4,278 (5,980) 168,261
3,524 7,359 561 - - 11,444
5,337 9,651 747 - - 15,735
907 2,182 68 - - 3,157
15,619 (596) 643 (623) - 15,043
13,225 (867) 880 1,149 (991) 13,396
391,725 34,440 20,365 7,319 (13,955) 439,894
35. Pledged assets
Pledged assets against liabilities 2022 2021
328,811 287,449
3,591 8,560
332,402 296,009
(70,850) (43,182)
17,029 864
278,581 253,691
The Group has issued covered bonds amounting to ISK 45 billion that can be used for repo borrowings at the Central Bank of Iceland, the
European Central Bank or sold if market conditions are favorable (31.12.2021: ISK 35 billion). Pledged assets against those covered bonds
are ISK 54 billion (31.12.2021: ISK 42 billion).
Liabilities arising from financial activities...............................
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 ......................................................................................................
Fixed, 6.25% ...................................
Fixed, 3.24% ..................................
Pledged assets against liabilities ..........................................................................................................................
Assets against repoed issued bonds ........................................................................................................................
Fixed, CPI linked, 4.95% ................
Thereof pledged assets against issued covered bonds held by the Bank .................................................................
Fixed, CPI linked, 3.875% ..............
Covered bonds in ISK - CPI linked..............................................
Covered bonds in ISK..................................................................
Covered bonds in FX...................................................................
Senior unsecured bonds in FX.....................................................
Senior unsecured bonds in ISK...................................................
Subordinated bond CPI T2 linked................................................
Subordinated bond T2 ISK..........................................................
Subordinated bond AT1 FX.........................................................
Fixed, 6.75% ..................................
Floating, 3 month STIBOR +3.10% ..
Floating, 3 month STIBOR +3.70% ..
Tier 2 subordinated liabilities ................................................................................................................................
Subordinated liabilities ..........................................................................................................................................
Additional Tier 1 and Tier 2 subordinated liabilities are eligible as regulatory capital under the Icelandic Financial Undertakings Act No.
161/2002.
Pledged assets against liabilities on balance .......................................................................................................
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 the borrowings was ISK 213 billion at period end (31.12.2021: ISK 203
billion).
* 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 23.
Floating, NIBOR +3.65% .................
Assets, pledged as collateral against loans from the Central Bank, credit institutions and short positions ................
Additional Tier 1 subordinated liabilities .............................................................................................................
Non-cash changes
Fixed, 9.25% ..................................
Subordinated bond T2 FX............................................................
48
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
36. Equity
Share capital and share premium
Share Own Share Total Share Own Share Total
capital shares premium 2022 capital shares premium 2021
Balance at the beginning of the year ... 1,660 (142) 21,166 22,684 1,730 (11) 49,612 51,331
Share capital reduction ........................ (150) 150 - - (70) 70 - -
Purchase of treasury shares ................ - (58) (9,793) (9,851) - (201) (28,446) (28,647)
- 4 349 354 - - - -
- 1 184 185 - - - -
Balance at the end of the year .......... 1,510 (45) 11,907 13,372 1,660 (142) 21,166 22,684
Own shares / issued share capital ....... 3.01% 8.54%
Share options
Number Exercise
of shares Exercise price
(in ths.) year (ISK)
13,520 2023-2026 95.5
10,620 2023-2026 181.7
4,425 2023-2026 181.7
2,317 2023-2026 170.9
30,882
According to the Bank's Articles of Association, total share capital amounts to ISK 1,510 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 shareholders'
meetings.
At the AGM in March 2022 a motion was passed to reduce the Bank’s share capital by ISK 150 million at nominal value, totalling 150 million
shares, by cancelling the company’s own shares. The reduction was effective 4 April 2022. The company’s share capital was reduced from
ISK 1,660 million to ISK 1,510 million at nominal value, divided into an equal number of shares and with one vote attached to each share. At
the AGM in March 2021 a motion was passed to reduce the Bank’s share capital by ISK 70 million. The reduction was effective 20 April
2021.
The following share option contracts are in existence at year end.
In accordance with the Bank's dividend policy and based on a share buyback programs authorized by the Financial Supervisory Authority of
the Central Bank of Iceland (FSA) Arion Bank bought back own shares for ISK 9,851 million in 2022. On 5 September 2022 the FSA
authorized a buyback program which amounts up to a total of 57.3 million shares or up to ISK 10 billion. In 2022 Arion Bank management
decided to launch 70% of the buyback program and approved by the Board of Directors. The Program will end no later than 15 March 2023.
Based on a share buyback program authorized by the FSA and which was launched in October 2021, Arion Bank bought back own shares
for ISK 4,269 million during the first quarter of 2022. In March 2022 the programme was concluded. Buybacks in 2021 were based on
authorisation from the FSA from 2020 and 2021.
Arion Bank has in place a share option plan for all employees of the Bank, Vördur and Stefnir, approved at the Banks annual general
meeting, under which employees may be granted options to purchase ordinary shares. The annual maximum purchase price for each
employee is ISK 1.5 million, in line with Article 10 of the Income Tax Act no. 90/2003, at an exercise price determined by the Bank’s
average share price 10 days prior to issue date. 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.
Issued in 2022 (ISK 1,500,000) - employees of subsidiaries .................................................................
Share option vested .............................
Issued in 2022 (ISK 1,500,000) - employees of Arion Bank ...................................................................
Incentive scheme .................................
Issued in 2021 (ISK 600,000) - employees of Arion Bank .....................................................................
Issued in 2022 (ISK 900,000) - employees of Arion Bank .....................................................................
49
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
36. Equity, continued
Weighted Weighted
Number
average
Number
average
of shares
contract
of shares
contract
(in ths.) rate (in ths.) rate
19,728 95.5 - -
17,362 180.3 19,728 95.5
(2,916) 95.5 - -
(3,292) 95.5 - -
30,882 143.2 19,728 95.5
Warrants
2021
Outstanding share options at the end of the year .........................................................
Share options exercised - weighted average share price of ISK 187.6 at date of exercise .
Share options forfeited ......................................................................................................
Movements in share options during the year.
Outstanding at the beginning of the year ...........................................................................
2022
The fair value of the employee stock options granted is measured by using the Black-Scholes model.
To meet the Bank's obligations on the basis of the share option plan, the Bank will issue new share capital or deliver treasury shares. Arion
Bank has no legal or constructive obligation to repurchase or settle the options in cash.
All outstanding share options, if exercised, represent approximately 2.0% of the total issued shares.
Share options granted .......................................................................................................
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.
No share options are exercisable at year end. Next exercise periods are in February and May 2023.
50
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
Other information
37. Shareholders of Arion Bank 2022 2021
9.77% 8.83%
9.53% 9.10%
9.14% 8.81%
5.20% 4.73%
4.05% 2.88%
3.69% 2.35%
3.47% 3.16%
3.17% 2.88%
3.02% 2.71%
3.01% 8.54%
2.44% 2.22%
2.38% 2.22%
2.27% 0.00%
1.92% 1.23%
1.82% 2.20%
1.47% 1.33%
1.43% 0.97%
1.21% 0.70%
1.08% 1.07%
1.00% 0.78%
0.87% 1.31%
0.15% 0.91%
0.00% 1.19%
0.00% 1.26%
27.94% 28.62%
100.0% 100.0%
Number Number
of shares of shares
- 12,000 - 12,000
- 13,000 - 13,000
1,006,482 2,506,283 992,953 2,300,000
4,945,258 787,751 4,482,724 1,633,076
Gildi lífeyrissjódur .....................................................................................................................................................
Warrants /
options
Benedikt Gíslason, CEO ....................................................................................................
Lífsverk Pension fund ...............................................................................................................................................
Sjóvá tryggingar .......................................................................................................................................................
Other shareholders with less than 1% shareholding .................................................................................................
Eight members of the Executive Committee (2021: eight) .................................................
At the end of the year the Group's employees held a shareholding of 0.65% in Arion Bank (31.12.2021: 0.51%). The Board of Directors and
the members of the Bank's Executive Committee shareholding is as follows:
Steinunn Kristín Thórdardóttir, Director ..............................................................................
2021
Bóksal ehf. ...............................................................................................................................................................
Alternate directors of the Board .........................................................................................
Lífeyrissjódur starfsmanna ríkisins ...........................................................................................................................
2022
Íslandsbanki hf. ........................................................................................................................................................
Kvika Asset Management .........................................................................................................................................
Akta sjódir ................................................................................................................................................................
Frjálsi lífeyrissjódurinn ..............................................................................................................................................
Stapi lífeyrissjódur ....................................................................................................................................................
Arion banki hf. ..........................................................................................................................................................
Lífeyrissjódur verzlunarmanna ..................................................................................................................................
Hvalur hf. ..................................................................................................................................................................
MainFirst Bank AG ...................................................................................................................................................
Kvika banki hf. ..........................................................................................................................................................
Almenni lífeyrissjódur ...............................................................................................................................................
Landsbréf hf. ............................................................................................................................................................
Landsbankinn hf. ......................................................................................................................................................
Vanguard ..................................................................................................................................................................
Festa lífeyrissjódur ...................................................................................................................................................
Stodir hf. ..................................................................................................................................................................
Stefnir funds .............................................................................................................................................................
Brú lífeyrissjódur .......................................................................................................................................................
Birta lífeyrissjódur .....................................................................................................................................................
Other members of the Board of Directors do not hold shares or warrants in Arion Bank.
Warrants /
options
51
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
38. Legal matters
Contingent liabilities
Legal proceedings regarding damages
Consumer Association‘s class-action lawsuit
Administrative fine from Central Bank of Iceland
Other legal proceedings
39. Events after the reporting period
The Consumer Association of Iceland sent a letter to Arion Bank, Íslandsbanki and Landsbankinn in April 2020 urging the banks to review
its contractual terms on variable rate mortgages to individuals. The letter called for revised terms and compensation to borrowers who,
according to the Association, have suffered damage. The Association’s argument 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 was 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. With a judgment in April 2022 FSA was acquitted. The Bank has appealed the ruling.
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 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 1,200 individuals. One case has been filed against the Bank
and with a judgement of the District Court of Reykjavík on the 7th of February 2023 the Bank was acquitted. The plaintiffs will appeal the
judgement. Considering the District Court’s judgement as well as an outside opinion commissioned by the Bank on its legal position the
Bank has 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 the letter, concluding that no
changes were required and that the Association’s arguments 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 arguments.
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. The lawsuit is 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. In September 2022 the
District Court dismissed the claims. EC-Clear appealed the dismissal but with a ruling in January 2023 the Court of Appeal rejected the
District Court’s ruling and ruled that the case should be heard on its merits by the District Court. 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.
52
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
Off balance sheet information
40. Commitments
2022 2021
20,312 15,858
57,259 63,108
105,888 108,691
183,459 187,657
41. Assets under management and under custody
1,298,289 1,351,573
1,067,052 1,148,203
Related party
42. Related party
2022 2021 2022 2021
64 138 71 -
2 1 - 530
66 139 71 530
(1,111) (279) (155) (10)
- (4) (27) (301)
(1,111) (284) (182) (311)
10 25 1 -
(13) (1) (2) (1)
14 328 1 -
- - (101) (308)
- 92 - -
(2) - (1,414) (1,471)
9 444 (1,515) (1,780)
Interest expenses ..............................................................................................................
Commission income ..........................................................................................................
Commission expenses ......................................................................................................
Other income .....................................................................................................................
Other expenses .................................................................................................................
Net income .......................................................................................................................
Total liabilities .................................................................................................................
Interest income ..................................................................................................................
For information on the associated companies, see Note 26.
Arion Bank defines related party as shareholders with significant influence over the Group, the key management personnel and the Group's
associated companies.
Shareholders with significant influence are shareholders that have the power to participate in the finanical and operating decisions of Arion
Bank but do not control those policies. At the end of the period no shareholder was defined as related party with an influence over the
Group (31.12.2021: none).
Key management
personnel
Total assets ......................................................................................................................
Deposits ............................................................................................................................
Other liabilities ...................................................................................................................
Loans ................................................................................................................................
Other assets ......................................................................................................................
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.
Assets under management .......................................................................................................................................
Unused overdrafts ....................................................................................................................................................
Financial guarantees ................................................................................................................................................
Associated
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.
Undrawn loan commitments .....................................................................................................................................
companies
The key management personnel includes the Board of Directors and the Executive Committee of Arion Bank, as are their close family
members and legal entities controlled by them. For compensation, pension and other transactions with the Board of Directors and the
Executive Committee, see Notes 12 and 37.
Financial guarantees, unused credit facilities and undrawn loan commitments
Assets under management represent the total market value of the financial assets which the Group manages on behalf of its customers.
Financial guarantees, unused credit facilities and undrawn loan commitments ...............................................
Assets under custody ...............................................................................................................................................
53
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Risk management disclosures
Notes to the Consolidated Financial Statements
The Board of Directors is ultimately responsible for the Bank's risk management framework and for ensuring that satisfactory risk policies
and governance for controlling the Group's risk exposure are in place. Each subsidiary is responsible for its own risk management
framework but adheres to the Bank's ownership policies which outline the Group's internal control policy, risk appetite and reporting
mechanisms. The Board sets the risk appetite for the Bank, and in some cases the Group, 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 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) approves certain proposals for credit origination, debt cancellation, underwriting and investments, while the Board
of Directors is the supreme authority for cases which entail deviations from risk appetite or strategy. On the management level the CEO has
established six 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. Finally, the Executive Risk Committee (ERCO), chaired by the
CRO, oversees the implementation of risk policies, ensures that the Bank's limit framework adheres to the risk appetite, reviews the Bank's
ICAAP, ILAAP and stress testing, and approves economic scenarios, credit models and specific provisions under IFRS9. The Executive
Committee is concerned with business and strategic risk.
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) and to the Board of Directors.
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'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; and Credit Analysis, which supports the Bank's credit transaction process and participates in credit decisions. The Bank's Chief
Security Officer and the Bank's Risk Officer for Pension Funds 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, business risk and sustainability 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 and fund management.
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 exposures, 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 ensures that the exposure to risk remains within acceptable levels.
Further information on risk management and capital adequacy is provided in the Annual Financial Statements for 2022, in the Pillar 3 Risk
Disclosures for 2022 and in the quarterly Additional Pillar 3 Risk Disclosures. These documents are available on the Bank's website,
www.arionbank.com.
54
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. 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, valuation model, 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 action is taken to remedy insufficient collateral coverage where the underlying agreement provides for
such remedies. Collateral value is reviewed to ensure the adequacy of the allowance for impairment losses. Collateral values shown 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 loans 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.
55
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. Credit risk, continued
Maximum Cash and Real Other Total
2022
exposure securities estate Vessels collateral collateral
114,118 - - - - -
43,433 - - - - -
1,084,757 26,494 798,632 51,751 105,483 982,360
582,371 517 531,783 16 18,960 551,276
513,605 9 513,564 - 32 513,605
68,766 508 18,219 16 18,928 37,671
502,386 25,977 266,849 51,735 86,523 431,084
105,304 916 101,801 - 368 103,085
55,208 211 41,181 47 2,493 43,932
91,427 1,126 14,306 49,535 13,038 78,005
24,622 110 1,441 - 14,822 16,373
85,005 30 51,741 - 26,856 78,627
41,378 23,059 6,423 - 7,470 36,952
44,154 295 25,658 - 13,243 39,196
14,058 87 1,128 1,043 3,199 5,457
19,155 132 11,049 1,104 3,975 16,260
10,576 11 2,107 6 173 2,297
11,499 - 10,014 - 886 10,900
8,667 - - - - -
20,312 2,378 3,872 37 3,288 9,575
163,147 - - - - -
115,806 - - - - -
96,908 - - - - -
18,898 - - - - -
1,550,240 28,872 802,504 51,788 108,771 991,935
2021
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
463,458 22 463,402 - 34 463,458
63,040 690 17,686 15 15,105 33,496
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
Maximum exposure to credit risk and collateral held against different types of financial instruments subject to the impairment requirements
of IFRS 9
Mortgages .....................................................................................
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 ...............................................................................
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 .......................................
Construction ..................................................................................
Other .............................................................................................
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 .................................................................
Construction ..................................................................................
Mortgages .....................................................................................
Other .............................................................................................
56
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. Credit risk, continued
LTV ratio for residential mortgage lending
2022
2021
2022
2021
172,790 90,080 1,817 831
91,201 57,359 511 594
90,224 95,531 826 989
86,856 123,985 408 1,084
69,629 89,446 429 663
2,111 3,902 153 303
1,171 3,559 118 75
25 33 - -
514,007 463,895 4,262 4,539
2022
2021
2022
2021
429,186 357,042 3,530 3,319
64,839 79,505 507 819
15,424 20,989 128 237
3,743 4,579 62 106
503 854 19 47
287 893 16 11
25 33 - -
514,007 463,895 4,262 4,539
Collateral for financial assets in stage 3
Collateral repossessed
More than 100% ............................................................................................................
Not classified .................................................................................................................
Thereof credit
impaired loans
Gross carrying amount at the end of the year ...........................................................
Less than 55% ...............................................................................................................
55-70% ..........................................................................................................................
70-80% ..........................................................................................................................
80-90% ..........................................................................................................................
90-100% ........................................................................................................................
90-100% ........................................................................................................................
80-90% ..........................................................................................................................
More than 100% ............................................................................................................
Not classified .................................................................................................................
Gross carrying amount at the end of the year ...........................................................
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 nil (31.12.2021: ISK 422 million) and nil in other assets (31.12.2021: ISK 34 million).
The assets are held for sale, see Note 29.
The following table gives an alternative representation of the loan to value profile of the mortgage portfolio. Here, each exposure is split into
pieces and each piece is placed into the appropriate LTV bucket. A single exposure can therefore be spread between several rows in the
table (loan-splitting approach).
The following table describes the loan to value (LTV) and impairment status of the Group's residential mortgage portfolio. LTV is calculated
as the ratio of the total exposure of individual borrowers to the value of the pledged real estate without adjusting for possible costs of
obtaining and selling the collateral. An exposure to a particular borrower appears in a single row in the table (whole-loan approach). As of
30.9.2022, the Bank has adopted a new real estate valuation model, which replaces the government tax value and is used when the
observed market value becomes older than 2 years. The new model gives an estimate of current value on a monthly basis.
70-80% ..........................................................................................................................
60-70% ..........................................................................................................................
Thereof credit
Less than 50% ...............................................................................................................
50-60% ..........................................................................................................................
impaired loans
At the end of the year, the gross carrying amount of assets in stage 3 was ISK 12,903 million (31.12.2021: ISK 17,703 million) with ISK
10,627 million in collateral (31.12.2021: ISK 14,421 million), thereof ISK 9,434 million in real estate (31.12.2021: 12,875 million).
57
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. Credit risk, continued
Large exposures
No.
Gross Net Gross Net
11.5% 11.5% <10% <10%
10.3% 10.3% 11.5% 11.4%
21.8% 21.8% 11.5% 11.4%
Credit quality
2 ....................................................................................................................................
Sum of large exposure gross and net > 10% .............................................................
2022
2021
1 ....................................................................................................................................
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. The legal maximum for individual large exposures is 25% of Tier 1
capital, net of eligible credit risk mitigation.
The Group had two large exposures at the end of the year. At year end 2021 the Group had one large exposure.
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 58.
The following tables show financial instruments subject to the impairment requirements of IFRS 9 broken down by rating scale, where risk
class 5, DD, represents exposures in default. 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.
58
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. Credit risk, continued
Credit quality profile for financial instruments subject to IFRS 9 impairment requirements
Financial
Cash and Loans to instru-
2022
balances credit ments at
Loans to credit institutions, securities and cash
with CB FVOCI
114,118 43,433 115,811
- - -
114,118 43,433 115,811
- - (6)
114,118 43,433 115,805
Loans to customers
Stage 1 Stage 2 Stage 3 POCI Total
394,307 1,681 - - 395,988
316,636 3,157 - 115 319,908
196,778 35,275 - 53 232,106
85,101 44,415 - 14 129,530
- - 12,561 341 12,902
1,239 - - - 1,239
994,061 84,528 12,561 523 1,091,673
(2,334) (1,519) (2,932) (131) (6,916)
991,727 83,009 9,629 392 1,084,757
Loans to customers - Individuals
293,411 1,552 - - 294,963
203,585 2,749 - 115 206,449
41,795 13,064 - 53 54,912
11,301 10,325 - 14 21,640
- - 5,861 161 6,022
160 - - - 160
550,252 27,690 5,861 343 584,146
(445) (287) (1,043) - (1,775)
549,807 27,403 4,818 343 582,371
Loans to customers - Corporates
100,896 129 - - 101,025
113,051 408 - - 113,459
154,983 22,211 - - 177,194
73,800 34,090 - - 107,890
- - 6,700 180 6,880
1,079 - - - 1,079
443,809 56,838 6,700 180 507,527
(1,889) (1,232) (1,889) (131) (5,141)
441,920 55,606 4,811 49 502,386
Loan commitments, guarantees and unused credit facilities
109,205 23 - - 109,228
60,752 9,110 271 - 70,133
4,094 4 - - 4,098
174,051 9,137 271 - 183,459
(351) (93) (5) - (449)
173,700 9,044 266 - 183,010
Nominal less loss allowance ....................................................................
Loss allowance ............................................................................................
Risk class 5 - (DD) ......................................................................................
Unrated .................................................................................................
Loss allowance ............................................................................................
Book value .................................................................................................
Gross carrying amount .......................................................................
Loss allowance ......................................................................................
Unrated .................................................................................................
Risk class 0 - (Grades AAA to A-) ...............................................................
Gross carrying amount .......................................................................................................................
Loss allowance .....................................................................................................................................
Gross carrying amount .......................................................................
Nominal ......................................................................................................
Risk class 2 - (Grades BB+ to BB-) .............................................................
Unrated .......................................................................................................
Risk class 1 - (Grades BBB+ to BBB-) ..................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ......................................................
Book value ...........................................................................................................................................
Risk class 2 - (Grades BB+ to BB-) .......................................................
Investment grade ..................................................................................................................................
Risk class 5 - (DD) ................................................................................
Risk class 1 - (Grades BBB+ to BBB-) ..................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ................................................
Unrated .......................................................................................................
Risk class 5 - (DD) ................................................................................
Risk class 0 to 1 (Grades AAA to BBB-) ......................................................
Risk class 2 to 4 (Grades BB+ to CCC-) .....................................................
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-) .........................................................
Loss allowance ......................................................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ................................................
institutions
59
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. Credit risk, continued
Financial
Cash and Loans to instru-
2021
balances credit ments at
Loans to credit institutions, securities and cash
with CB institutions 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 - Corporates
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 2 - (Grades BB+ to BB-) .......................................................
Risk class 1 - (Grades BBB+ to BBB-) ........................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ......................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ................................................
Risk class 5 - (DD) ................................................................................
Risk class 5 - (DD) ................................................................................
Book value ...........................................................................................
Loss allowance ............................................................................................
Nominal less loss allowance ....................................................................
Gross carrying amount .......................................................................
Risk class 3 to 4 - (Grades B+ to CCC-) ................................................
Book value ...........................................................................................
Risk class 1 - (Grades BBB+ to BBB-) ..................................................
Risk class 5 - (DD) ......................................................................................
Unrated .................................................................................................
Nominal ......................................................................................................
Unrated .................................................................................................
Book value .................................................................................................
Risk class 0 - (Grades AAA to A-) .........................................................
Risk class 0 - (Grades AAA to A-) .........................................................
Loss allowance ............................................................................................
Unrated .......................................................................................................
Gross carrying amount .............................................................................
Non-investment grade ...........................................................................................................................
Gross carrying amount .......................................................................................................................
Loss allowance .....................................................................................................................................
Risk class 2 - (Grades BB+ to BB-) .............................................................
Risk class 0 - (Grades AAA to A-) ...............................................................
Book value ...........................................................................................................................................
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-) .......................................................
Loss allowance ......................................................................................
Investment grade ..................................................................................................................................
60
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. Credit risk, continued
Gross Gross Gross
Carrying Loss Carrying Loss Carrying Loss Book
2022 amount allowance amount allowance amount allowance value
273,362 (6) - - - - 273,356
550,252 (445) 27,872 (287) 6,022 (1,043) 582,371
486,371 (116) 23,373 (125) 4,262 (160) 513,605
63,881 (329) 4,499 (162) 1,760 (883) 68,766
443,809 (1,889) 56,838 (1,232) 6,880 (2,020) 502,386
94,680 (213) 8,668 (87) 2,609 (353) 105,304
51,280 (401) 4,161 (74) 252 (10) 55,208
81,810 (193) 9,633 (137) 368 (54) 91,427
21,372 (81) 3,410 (99) 49 (29) 24,622
68,357 (321) 16,508 (499) 1,904 (944) 85,005
33,478 (247) 8,244 (171) 79 (5) 41,378
41,992 (128) 2,286 (32) 42 (6) 44,154
13,877 (73) 205 (6) 61 (6) 14,058
16,183 (136) 2,421 (110) 1,385 (588) 19,155
10,323 (42) 299 (4) - - 10,576
10,457 (54) 1,003 (13) 131 (25) 11,499
(2,340) 84,710 (1,519) 12,902 (3,063) 1,358,113
2021
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
Information and communication technology ........
Wholesale and retail trade ..................................
Financial and insurance activities .......................
Construction .......................................................
Sector split, gross carrying value and loss allowance for financial instruments subject to IFRS 9 impairment requirements
Mortgages ..........................................................
Information and communication technology ........
Wholesale and retail trade ..................................
Loans to corporates ...............................................
Balance at the end of the year .............................
Stage 3
Real estate activities ...........................................
Fishing industry ..................................................
Industry, energy and manufacturing ....................
Transportation ....................................................
Stage 1
Stage 2
Other ..................................................................
Loans to individuals ................................................
Loans to credit instit., securities & cash ..................
1,267,423
Financial and insurance activities .......................
Real estate activities ...........................................
Industry, energy and manufacturing ....................
Services .............................................................
Transportation ....................................................
1,091,979
Services .............................................................
Public Sector ......................................................
Agriculture and forestry .......................................
Loans to credit instit., securities & cash ..................
Loans to individuals ................................................
Mortgages ..........................................................
Other ..................................................................
Public Sector ......................................................
Agriculture and forestry .......................................
Balance at the end of the year .............................
Loans to corporates ...............................................
Construction .......................................................
Fishing industry ..................................................
61
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. Credit risk, continued
2022
Impairment loss allowance *
Stage 1 Stage 2 Stage 3 POCI Total
(1,606) (1,897) (4,824) (1) (8,328)
(1,213) 929 284 - -
310 (891) 581 - -
42 169 (211) - -
1,178 (121) (1,065) 1 (7)
(2,192) (265) (1,048) (131) (3,636)
795 457 2,120 (166) 3,206
1 7 1,226 166 1,400
(2,685) (1,612) (2,937) (131) (7,365)
(6) - - - (6)
(2,691) (1,612) (2,937) (131) (7,371)
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
Write-offs
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:
New financial assets, originated or purchased .............................................
* 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.
**** Loss allowance for all assets other than cash, bonds and loans to credit institutions.
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.
Transfers to Stage 3 (credit impaired financial assets) ..........................
Write-offs *** ...............................................................................................
Impairment loss allowance **** ................................................................
Total impairment loss allowance ..............................................................
Derecognitions and maturities .....................................................................
The amount after net remeasurements of loss allowance written off during the year.
Net remeasurement of loss allowance ** .....................................................
Transfers to Stage 2 (lifetime ECL) .......................................................
Transfers of financial assets between impairment stages
Derecognitions and maturities
Transfers to Stage 1 (12-month ECL) ...................................................
Include purchases and originations and reflect the allowance related to assets newly recognized during the year.
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 ...........................................................
Transfers of financial assets:
** During the year the loss allowance balance for stage 3 loans was raised by ISK 528 million due to unwinding of interest income.
Impairment loss allowances for assets only carrying 12-month ECL ............
*** During the year an amount of ISK 910 million was written off but is still subject to enforcement activities subject to Icelandic law.
62
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. Credit risk, continued
Impairment loss allowance for loans to customers
Stage 1 Stage 2 Stage 3 POCI Total
(1,313) (1,806) (4,480) (1) (7,600)
(1,044) 760 284 - -
289 (870) 581 - -
41 168 (209) - -
921 41 (777) 1 186
(1,683) (196) (1,048) (131) (3,058)
454 377 1,491 (166) 2,156
1 7 1,226 166 1,400
(2,334) (1,519) (2,932) (131) (6,916)
Impairment loss allowance for loans to customers - Individuals
(492) (246) (1,151) (1) (1,890)
(525) 326 199 - -
92 (148) 56 - -
18 138 (156) - -
581 (378) (474) 1 (270)
(241) (74) (75) - (390)
121 86 272 - 479
1 7 286 - 294
(445) (289) (1,043) - (1,775)
Impairment loss allowance for loans to customers - Corporates
(821) (1,560) (3,329) - (5,710)
(520) 434 85 - (1)
197 (722) 525 - -
23 29 (53) - (1)
340 419 (303) - 456
(1,441) (123) (973) (131) (2,668)
333 291 1,219 (166) 1,677
- - 940 166 1,106
(1,889) (1,232) (1,889) (131) (5,141)
Impairment loss allowance for loan commitments, guarantees and unused credit facilities
(293) (91) (344) - (728)
(169) 169 - - -
21 (21) - - -
1 1 (2) - -
257 (162) (288) - (193)
(509) (69) - - (578)
341 80 629 - 1,050
(351) (93) (5) - (449)
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 ...............................................
Derecognitions and maturities .........................................................
Net remeasurement of loss allowance .............................................
Total loss allowance for loans to customers .....................................
Balance at the beginning of the year .....................................................
Derecognitions and maturities ...............................................................
Write-offs ..............................................................................................
Transfers to Stage 2 (lifetime ECL) ...........................................
Transfers to Stage 2 (lifetime ECL) .................................................
Transfers to Stage 1 (12-month ECL) .............................................
Transfers to Stage 3 (credit impaired financial assets) ..............
Transfers to Stage 3 (credit impaired financial assets) ....................
Transfers of financial assets
New financial assets, originated or purchased .......................................
Net remeasurement of loss allowance .............................................
Write-offs ........................................................................................
Transfers to Stage 2 (lifetime ECL) ...........................................
Transfers to Stage 1 (12-month ECL) .......................................
Net remeasurement of loss allowance ...................................................
Total loss allowance for loan commit., guarantees, unused facilities
New financial assets, originated or purchased .................................
Derecognitions and maturities ...............................................................
New financial commitments originated ..................................................
Total loss allowance for loans to corporates ..............................
Transfers to Stage 3 (credit impaired financial assets) ..............
New financial assets, originated or purchased .................................
Derecognitions and maturities .........................................................
Transfers to lifetime ECL .................................................................
Transfers to Stage 1 (12-month ECL) .......................................
63
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. 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 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)
Write-offs *** ...............................................................................................
Balance at the beginning of the year ...........................................................
New financial assets, originated or purchased .............................................
Balance at the beginning of the year .....................................................
Transfers to Stage 2 (lifetime ECL) .......................................................
Transfers to Stage 3 (credit impaired financial assets) ....................
Transfers of financial assets:
**** Loss allowance for all assets other than cash, bonds and loans to credit institutions.
Derecognitions and maturities .....................................................................
Write-offs ..............................................................................................
Net remeasurement of loss allowance ...................................................
Derecognitions and maturities ...............................................................
Transfers to Stage 1 (12-month ECL) .............................................
Transfers to Stage 1 (12-month ECL) .......................................
Transfers of financial assets
Transfers to Stage 2 (lifetime ECL) ...........................................
Transfers to Stage 2 (lifetime ECL) .................................................
Derecognitions and maturities .........................................................
Transfers of financial assets:
Total loss allowance for loans to individuals ..............................
Balance at the beginning of the year ...............................................
Write-offs ........................................................................................
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 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) ..........................
Net remeasurement of loss allowance ** .....................................................
Transfers to Stage 1 (12-month ECL) ...................................................
Impairment loss allowance **** ................................................................
Impairment loss allowances for assets only carrying 12-month ECL ............
** During the year the loss allowance balance for stage 3 loans was raised by ISK 468 million due to unwinding of interest income.
Net remeasurement of loss allowance .............................................
New financial assets, originated or purchased .......................................
Transfers to Stage 3 (credit impaired financial assets) ..............
New financial assets, originated or purchased .................................
Total loss allowance for loans to customers .....................................
64
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. Credit risk, continued
Stage 1 Stage 2 Stage 3 POCI Total
Impairment loss allowance for loans to customers - Corporates
(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)
Macroeconomic forecast
2023 2024 2025
3.8% 3.8% 4.0%
3.3% 1.4% 4.0%
2.0% 2.7% 2.7%
2.1% 2.6% 2.4%
2023 2024 2025 2023 2024 2025
2.8% 3.1% 3.4% 6.7% 5.5% 4.4%
5.4% 4.1% 6.7% -0.4% -1.4% 3.1%
4.1% 3.5% 3.0% -1.1% 2.9% 3.0%
3.3% 3.1% 2.6% -0.6% 2.9% 2.6%
Sensitivity analysis
GDP ..........................................................................................
Net remeasurement of loss allowance ...................................................
Derecognitions and maturities .........................................................
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 65%, pessimistic 25% and optimistic 10% (31.12.2021: base case 60%, pessimistic 20% and optimistic 20%). The
macroeconomic forecast and scenario probability weights is done by the Bank’s Chief Economist and approved by the Bank’s Executive
Risk Committee. The following table shows values used for IFRS 9 impairment calculations.
New financial commitments originated ..................................................
Private consumption .................................................................
Derecognitions and maturities ...............................................................
Base case
Transfers of financial assets
Transfers to Stage 1 (12-month ECL) .......................................
Balance at the beginning of the year ...............................................
Transfers to 12-month ECL ............................................................
Balance at the beginning of the year .....................................................
Net remeasurement of loss allowance .............................................
New financial assets, originated or purchased .................................
Transfers to Stage 3 (credit impaired financial assets) ..............
Transfers
Total loss allowance for loans to corporates ..............................
Write-offs ........................................................................................
Transfers to Stage 2 (lifetime ECL) ...........................................
Pessimistic
Private consumption .............................................................................................................................
Unemployment rate ...............................................................................................................................
Housing prices ......................................................................................................................................
Housing prices ..........................................................................
GDP ......................................................................................................................................................
Transfers to lifetime ECL .................................................................
Transfers to credit impaired .............................................................
Total loss allowance for loan commit., guarantees, unused facilities
Optimistic
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 3.1 billion and
ISK 8.4 billion for the optimistic, base case and pessimistic scenarios, respectively. At year end 2021 the corresponding calculated loss
allowance was ISK 1.8 billion, ISK 3.3 billion and ISK 5.9 billion, respectively.
Unemployment rate ..................................................................
65
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
43. Credit risk, continued
Forbearance
Gross Gross Gross Gross
carrying Loss carrying Loss carrying Loss carrying Loss
2022
amount
a
l
allowance
Gross
carrying
allowance
Gross carrying
amount
allowance
Gross
carrying
Loss
allowance
Individuals ........................................... - - 7,948 (42) 2,254 (257) 10,202 (299)
Companies .......................................... - - 16,815 (606) 3,529 (1,259) 20,344 (1,865)
Tourism ............................................. - - 13,100 (563) 2,511 (1,065) 15,611 (1,628)
Other than tourism ............................ - - 3,715 (43) 1,018 (194) 4,733 (237)
Total .................................................... - - 24,763 (648) 5,783 (1,516) 30,546 (2,164)
2021
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)
Groups with special focus due to the Covid-19 pandemic
Covid-19 Recipient
of
related governmen
t
Thereof
Tourism payment sponsored All focus secured by
31.12.2022
moratoria loans groups real estate
4,251 - 63 4,312 3,968
11,976 - 3,120 14,554 14,369
5,659 - 2,952 6,015 2,291
6,842 - 79 6,848 382
134 - 285 341 91
46,612 - 16,715 47,224 39,595
1,548 - 1,001 2,540 1,151
77,022 - 24,215 81,834 61,847
(2,152) - (1,331) (2,213)
74,870 - 22,884 79,621
31.12.2021
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
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.
Stage 1
Gross carrying amount .............................................................................
Real estate and construction .......................................................................
At the onset of the Covid-19 pandemic, three groups of customers were identified as a focus for an assessment of the impact of the
pandemic on the Group; i) Tourism; where there was a high probability of impact due to public health restrictions; ii) Customers which had
active Covid-19 related payment moratoria in the 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; the last remaining Covid-19 related payment moratoria expired in Q3 2022. 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.
Stage 2
Stage 3
Individuals ...................................................................................................
dependent
Total
Loss allowance ............................................................................................
Transportation .............................................................................................
Gross carrying amount .............................................................................
Book value .................................................................................................
Individuals ...................................................................................................
Real estate and construction .......................................................................
At the beginning of the Covid-19 pandemic, 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.
Services ......................................................................................................
Transportation .............................................................................................
Book value .................................................................................................
Industry, energy and manufacturing ............................................................
Wholesale and retail trades .........................................................................
Other sectors ..............................................................................................
Loss allowance ............................................................................................
Book value of Covid-19 impacted loans was ISK 79,621 million or 7.3% of loans to customers (31.12.2021: ISK 75,385 million and 8.1%).
Services ......................................................................................................
Wholesale and retail trades .........................................................................
Industry, energy and manufacturing ............................................................
Other sectors ..............................................................................................
66
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
44. Market risk
Interest rate risk
Interest rate risk
2022
Up to 3 3-12 1-5 5-10 Over 10
Assets
months months years years years Total
114,118 - - - - 114,118
45,501 - - - - 45,501
662,473 101,121 239,995 4,342 9,740 1,017,671
79,754 43,433 7,181 5,682 2,124 138,174
23 1,890 664 1,313 3,890
146,604 14,240 8,464 - - 169,308
1,048,450 158,817 257,530 10,688 13,177 1,488,662
Liabilities
11,697 - - - - 11,697
753,439 1,922 - - - 755,361
153,489 23,097 6,442 - - 183,028
35,373 3,411 298,896 32,446 11,300 381,426
- 6,819 29,387 12,104 - 48,310
953,998 35,249 334,725 44,550 11,300 1,379,822
94,452 123,568 (77,195) (33,862) 1,877 108,840
Due to credit institutions and Central Bank ...............................
Assets ......................................................................................
Deposits ...................................................................................
Net interest gap ......................................................................
Loans to credit institutions ........................................................
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 9.6%, has
exceeded the Central Bank’s target of 2.5% since June 2020 and is expected to remain over the target throughout 2023. The Central Bank
has responded by increasing interest rates by 525bps from its lowest value of 75bps at the start of 2021. From the second half of 2021 to
the start of 2022, this resulted in a sharp increase in demand for non-indexed fixed rate mortgages with corresponding increase in interest
rate risk. The risk exposure has been receding over the course of 2022 as the duration of these loans shortens.
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.
Balances with Central Bank ......................................................
Loans to customers ..................................................................
Derivatives ................................................................................
Subordinated liabilities ..............................................................
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 fair value hedging for its foreign denominated fixed rate borrowings. For domestic rates, longer fixing periods
are more common.
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.
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.
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.
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.
Bonds and debt instruments .....................................................
Bonds and debt instruments used for hedging ..........................
Derivatives ................................................................................
Liabilities .................................................................................
Borrowings ...............................................................................
67
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
44. Market risk, continued
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
41,898 63,023 39,435 6,133 1,363 151,852
- 81 6,351 3,868 3,743 14,043
66,977 13,645 137,214 3,766 - 221,602
782,901 184,356 418,275 18,687 16,230 1,420,449
Liabilities
5,000 - - - - 5,000
655,476 - - - - 655,476
206,663 13,639 1,049 - - 221,351
11,308 34,217 275,315 34,665 11,965 367,470
- - 35,860 - - 35,860
878,447 47,856 312,224 34,665 11,965 1,285,157
(95,547) 136,499 106,051 (15,978) 4,265 135,291
NPV change in the banking book -100 bps +100 bps -100 bps +100 bps
(1,994) 2,782 (2,250) 2,418
(1,106) 886 2,308 (2,322)
(36) 32 338 (461)
NPV change in the trading book
173 (156) 93 (85)
211 (199) (41) 43
(38) 38 74 (74)
NII change
(947) 947 (881) 85
(2,022) 981 (3,808) 774
(83) 71 (12) 15
Balances with Central Bank ......................................................
Derivatives ................................................................................
Loans to credit institutions ........................................................
Liabilities .................................................................................
Sensitivity analysis of interest rate risk
2021
ISK, CPI index-linked .....................................................................................................
ISK, CPI index-linked .....................................................................................................
Deposits ...................................................................................
Net interest gap ......................................................................
2022
Assets ......................................................................................
Due to credit institutions and Central Bank ...............................
ISK, Non index-linked ....................................................................................................
ISK, Non index-linked ....................................................................................................
Foreign currencies .........................................................................................................
ISK, CPI index-linked .....................................................................................................
Bonds and debt instruments .....................................................
Bonds and debt instruments used for hedging ..........................
Subordinated liabilities ..............................................................
ISK, Non index-linked ....................................................................................................
Borrowings ...............................................................................
Derivatives ................................................................................
Loans to customers ..................................................................
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 deposit interest rates. Changes were made to the NII calculations in 2022, for the reference date. The
interest rate shifts in both directions take account of the floor on interest rates so that when the floor has an effect then the shifts are
restricted.
Foreign currencies .........................................................................................................
Foreign currencies .........................................................................................................
68
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
44. Market risk, continued
Indexation risk
2022
Up to 1 1 to 5 Over 5
Assets, CPI index-linked
year years years Total
8,525 37,589 210,878 256,992
5,208 3,435 9,684 18,327
13,733 41,024 220,562 275,319
Liabilities, CPI index-linked
89,217 20,240 3,493 112,950
336 67,836 45,661 113,833
- - 15,735 15,735
1,121 251 1,393 2,765
1,889 1,520 - 3,409
92,563 89,847 66,282 248,692
(76,941) (47,303) 154,280 30,036
(1,889) (1,520) - (3,409)
(78,830) (48,823) 154,280 26,627
(77,727) (52,007) 144,954 15,220
2021
Assets, CPI index-linked
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
Assets, CPI index-linked .............................................................................................
Liabilities, CPI index-linked .........................................................................................
Net off-balance sheet position ........................................................................................
Net on-balance sheet position ........................................................................................
Other .............................................................................................................................
* Consolidated situation as per EU Regulation No 575/2013 (CRR)
Assets, CPI index-linked .............................................................................................
CPI balance for prudential consolidation, excluding insurance operations * ..........
Off-balance sheet position .............................................................................................
Deposits ........................................................................................................................
CPI balance ..................................................................................................................
Liabilities, CPI indexed linked .....................................................................................
Borrowings .....................................................................................................................
Financial instruments .....................................................................................................
Loans to customers .......................................................................................................
Deposits ........................................................................................................................
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.
Financial instruments .....................................................................................................
Off-balance sheet position .............................................................................................
Loans to customers .......................................................................................................
Net on-balance sheet position ........................................................................................
CPI balance ..................................................................................................................
CPI balance for prudential consolidation, excluding insurance operations * ..........
Borrowings .....................................................................................................................
Subordinated liabilities ...................................................................................................
Other .............................................................................................................................
Subordinated liabilities ...................................................................................................
Book value and maturity profile of indexed assets and liabilities
Net off-balance sheet position ........................................................................................
69
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
44. Market risk, continued
Currency risk
Breakdown of assets and liabilities by currency
2022
Financial assets
ISK EUR USD GBP DKK NOK Other Total
112,744 593 257 127 85 43 269 114,118
Loans to credit institutions ................... 1,414 11,884 23,809 3,444 553 1,270 3,127 45,501
Loans to customers ............................. 888,036 114,378 51,053 1,551 27,965 146 1,628 1,084,757
Financial instruments ........................... 107,687 62,878 3,443 88 372 18,817 44 193,329
Other financial assets .......................... 8,239 274 123 11 4 - 1 8,652
Financial assets ................................. 1,118,120 190,007 78,685 5,221 28,979 20,276 5,069 1,446,357
Financial liabilities
Due to credit inst. and Central Bank ..... 9,777 252 231 9 2 - 1,426 11,697
Deposits .............................................. 662,541 35,413 46,102 3,058 3,023 3,099 2,125 755,361
Financial liabilities at fair value ............. 1,784 16,970 2,008 1 1 195 38 20,997
Other financial liabilities ....................... 5,799 1,234 1,775 257 223 589 222 10,099
Borrowings ........................................... 158,071 216,045 - - - 15,303 3,144 392,563
Subordinated liabilities ......................... 18,891 772 13,396 - - 4,383 9,889 47,331
Financial liabilities ............................. 856,863 270,686 63,512 3,325 3,249 23,569 16,844 1,238,048
Net on-balance sheet position .............. 261,257 (80,679) 15,173 1,896 25,730 (3,293) (11,775)
Net off-balance sheet position .............. (51,950) 81,095 (15,967) (1,950) (25,649) 3,161 11,260
Net position * ...................................... 209,307 416 (794) (54) 81 (132) (515)
Non-financial assets
Investment property ............................. 7,862 - - - - - - 7,862
Investments in associates .................... 787 - - - - - - 787
Intangible assets .................................. 8,783 - - - - - - 8,783
Tax assets ........................................... 135 - - - - - - 135
Assets and disposal groups
held for sale ...................................... 61 - - - - - - 61
Other non financial assets ................... 5,275 128 66 86 - 11 6 5,572
Non-financial assets .......................... 22,903 128 66 86 - 11 6 23,199
Non-financial liabilities and equity
Tax liabilities ........................................ 10,303 - - - - - - 10,303
Other non-financial liabilities ................ 32,816 51 6 - 1 - - 32,874
Shareholders' equity ............................ 187,682 - - - - - - 187,682
Non-controlling interest ........................ 649 - - - - - - 649
Non-financial liabilities and equity ... 231,450 51 6 - 1 - - 231,508
Management reporting
of currency risk ** ........................... 760 493 (734) 32 80 (121) (509)
** 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.
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.
Cash and balances with CB ..................
70
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
44. Market risk, continued
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)
* 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 ..................
71
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
44. Market risk, continued
Sensitivity analysis for currency risk
Currency -10% +10% -10% +10%
(49) 49 (111) 111
73 (73) 426 (426)
(3) 3 (33) 33
(8) 8 (109) 109
12 (12) 5 (5)
51 (51) 28 (28)
Equity risk
Sensitivity analysis for equity risk
Equity -10% +10% -10% +10%
(165) 165 (266) 266
(477) 477 (414) 414
(430) 430 (662) 662
Derivatives
GBP ...............................................................................................................................
USD ...............................................................................................................................
2022
Banking book - listed .....................................................................................................
EUR ...............................................................................................................................
NOK ...............................................................................................................................
2021
DKK ...............................................................................................................................
Other .............................................................................................................................
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.
2022
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 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 ......................................................................................................
2021
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.
72
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
45. Liquidity and Funding risk
Maturity analysis of assets and liabilities
Contractual cash flow of assets and liabilities
2022 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 ................. 18,183 88,515 7,531 - - - 114,229 114,118
Loans to credit institutions ................... 23,904 21,597 31 - - - 45,532 45,501
Loans to customers ............................. 2,282 139,996 147,972 470,458 1,138,049 - 1,898,757 1,084,757
Financial instruments ........................... 8,527 77,677 43,773 12,384 15,775 41,749 199,885 193,329
Derivatives - assets leg ...........................
- 76,104 22,301 32,447 - - 130,852 123,547
Derivatives - liabilities leg .......................
- (69,826) (19,032) (29,503) - - (118,361) (114,031)
Other financial instruments .....................
8,527 71,399 40,504 9,440 15,775 41,749 187,394 183,813
Other financial assets .......................... 488 1,880 4,935 1,364 - - 8,667 8,667
Financial assets ................................. 53,384 329,665 204,242 484,206 1,153,824 41,749 2,267,070 1,446,372
Financial liabilities
7,233 4,484 - - - - 11,717 11,697
Deposits .............................................. 545,764 102,796 84,239 20,568 3,795 - 757,162 755,361
Financial liabilities at fair value ............. - 1,647 2,973 18,487 - - 23,107 20,997
Derivatives - assets leg ...........................
- (25,891) (25,670) (12,131) - - (63,692) (62,420)
Derivatives - liabilities leg .......................
- 27,527 28,643 30,618 - - 86,788 83,406
Short position in bonds used for hedging
- 11 - - - - 11 11
Other financial liabilities ....................... 109 8,141 593 1,256 - - 10,099 10,099
Borrowings ........................................... - 21,755 14,169 338,265 50,794 - 424,983 392,563
Subordinated liabilities ......................... - 1,402 1,634 19,685 36,111 - 58,832 47,331
Financial liabilities ............................. 553,106 140,225 103,608 398,261 90,700 - 1,285,900 1,238,048
Net position for assets and liab. ....... (499,722) 189,440 100,634 85,945 1,063,124 41,749 981,170 208,324
Off-balance sheet items
Financial guarantees ............................ - 2,194 10,024 2,058 6,036 - 20,312 20,312
Unused overdraft ................................. - 57,259 - - - - 57,259 57,259
Undrawn loan commitments ................. - 47,464 27,308 27,686 3,430 - 105,888 105,888
Off-balance sheet items ..................... - 106,917 37,332 29,744 9,466 - 183,459 183,459
Net contractual cash flow .................. (499,722) 82,523 63,302 56,201 1,053,658 41,749 797,711 24,865
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 Group'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.
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 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.
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 72% is on-demand.
Due to credit inst. and Central Bank .....
Liquidity risk is 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.
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.
73
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
45. Liquidity and Funding risk, continued
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
Net Stable Funding Ratio
2022 2021
1,109,623 1,001,543
931,991 827,953
119% 121%
Available 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.
Due to credit inst. and Central Bank .....
Required stable funding ..........................................................................................................................................
Net stable 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%.
74
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
45. Liquidity and Funding risk, continued
Liquidity coverage ratio
Foreign
2022
ISK
currency
Total
139,562 73,729 213,291
23,956 - 23,956
163,518 73,729 237,247
155,507 34,631 190,138
580 73 653
9,868 6,266 13,949
165,955 40,970 204,740
- 23,388 23,388
23,854 7,794 31,648
23,854 31,182 55,036
115% 720% 158%
2021
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%
Liquidity coverage ratio (LCR) *** .....................................................................................................
Deposits ..............................................................................................................................................
Liquid assets .......................................................................................................................................
The following table shows the breakdown for the Group's LCR calculations.
Cash inflows ........................................................................................................................................
Other cash outflows .............................................................................................................................
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.
Short-term deposits with other banks ** ...............................................................................................
Liquid assets .......................................................................................................................................
Liquid assets level 2 ............................................................................................................................
Short-term deposits with other banks ** ...............................................................................................
Borrowings ...........................................................................................................................................
Liquid assets level 2 ............................................................................................................................
In 2022, the Bank complied 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 was required to maintain a 100% minimum LCR ratio for both the aggregate position
in all foreign currencies and all currencies. For the LCR in ISK, the requirement was 40% in 2022. As of January 2023 rules no. 266/2017
were replaced with rules no. 1520/2022 which reference the EU LCR regulations directly. The minimum requirement for the total LCR will
remain at 100% but the requirement for the LCR in ISK will change to 50% and there will be no minimum requirement for the aggregate
position in all foreign currencies. Instead the bank will be required to maintain an 80% minimum for the LCR in EUR.
Cash inflows ........................................................................................................................................
Liquid assets level 1 * ..........................................................................................................................
Other cash inflows ...............................................................................................................................
Cash outflows .....................................................................................................................................
Cash outflows .....................................................................................................................................
Liquidity coverage ratio (LCR) *** .....................................................................................................
** Short-term deposits with other banks are defined as cash inflows in LCR calculations.
Other cash outflows .............................................................................................................................
Borrowings ...........................................................................................................................................
Other cash inflows ...............................................................................................................................
Deposits ..............................................................................................................................................
Liquid assets level 1 * ..........................................................................................................................
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.
*** 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.
* 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.
75
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
45. Liquidity and Funding risk, continued
Composition of liquid assets
2022
ISK USD EUR Other Total
112,744 257 593 524 114,118
- 14,125 4,456 4,807 23,388
50,116 - - - 50,116
- - 55,915 16,435 72,350
162,860 14,382 60,964 21,766 259,972
2021
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
LCR deposit categorization
LCR categorization - amounts and LCR outflow weights
Less Weight Weight Term Total
2022 stable % Stable % deposits* deposits
100,033 11% 116,328 5% 109,180 325,541
53,783 11% 19,116 5% 8,663 81,562
14,986 25% - 5% - 14,986
121,674 40% 3,139 20% 19,109 143,922
45,145 40% - - 790 45,935
57,701 100% - - 14,743 72,444
72,685 100% - - 8,846 81,531
1,137 100% - - - 1,137
467,144 138,583 161,331 767,058
2021
Individuals .......................................... 89,425 11% 125,515 5% 91,170 306,110
Small and medium enterprises ............ 48,511 11% 18,210 5% 5,056 71,777
Corporations ....................................... 109,573 40% 2,792 20% 20,293 132,658
Sovereigns, central banks and PSE .... 30,985 40% - - 784 31,769
Pension funds ..................................... 42,258 100% - - 13,424 55,682
Domestic financial entities .................. 45,576 100% - - 15,613 61,188
Foreign financial entities ..................... 1,292 100% - - - 1,292
Total ................................................... 367,619 146,517 146,340 660,476
* Here term deposits refer to deposits with maturities greater than 30 days.
Deposits maturing within 30 days
Foreign financial entities ...........................................................
Individuals ................................................................................
Corporations .............................................................................
Sovereigns, central banks and PSE ..........................................
Cash and balances with Central Bank ........................................................
Short-term deposits with financial institutions .............................................
Domestic bonds eligible as collateral with Central Bank .............................
Foreign government bonds .........................................................................
Liquidity reserve ........................................................................................
Short-term deposits with financial institutions .............................................
Small and medium enterprises ..................................................
Liquidity reserve ........................................................................................
Domestic financial entities ........................................................
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.
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.
The following table shows the composition of the Group's liquidity buffer.
Foreign government bonds .........................................................................
Domestic bonds eligible as collateral with Central Bank .............................
Pension funds ...........................................................................
Operational relationship ............................................................
Total .........................................................................................
Cash and balances with Central Bank ........................................................
76
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
46. Capital management
Capital adequacy
Own funds 2022 2021
188,331 194,598
(649) (673)
187,682 193,925
(6,425) (8,435)
(224) (240)
(15,980) (26,773)
1,142 920
166,195 159,397
105 133
13,396 13,225
179,696 172,755
33,935 21,863
(1,155) (1,056)
32,780 20,807
212,476 193,562
Risk-weighted exposure amount (REA)
707,479 623,395
57,651 69,553
14,645 7,761
1,387 4,691
7,493 8,958
6,010 2,379
89,166 96,085
883,831 812,822
Capital ratios
18.8% 19.6%
20.3% 21.2%
24.0% 23.8%
Additional value adjustments ...................................................................................................................................
Foreseeable dividend and buyback * .......................................................................................................................
Tier 1 capital ..........................................................................................................................................................
Operational risk .......................................................................................................................................................
Non-controlling interest not eligible for inclusion in CET1 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.
Non-controlling interest eligible for inclusion in T1 capital ........................................................................................
Credit risk, securities and other ...............................................................................................................................
Market risk due to currency imbalance ....................................................................................................................
Credit valuation adjustment .....................................................................................................................................
Tier 2 instruments of financial sector entities (significant investments) ....................................................................
Total own funds .....................................................................................................................................................
Additional Tier 1 capital ...........................................................................................................................................
Tier 2 capital ..........................................................................................................................................................
Common Equity Tier 1 capital before regulatory adjustments ...........................................................................
Adjustment under IFRS 9 transitional arrangements as amended ...........................................................................
Total equity ..............................................................................................................................................................
The Group's consolidated situation as stipulated in CRR is the Group's accounting consolidation excluding insurance subsidiaries, in
particular Vördur.
Counterparty credit risk ...........................................................................................................................................
CET1 ratio ...............................................................................................................................................................
Total risk-weighted exposure amount ..................................................................................................................
Tier 1 ratio ...............................................................................................................................................................
Capital adequacy ratio .............................................................................................................................................
Market risk due to trading book positions ................................................................................................................
The Bank has opted to make use of the transitional arrangements for IFRS 9 and Covid-19 in its capital adequacy calculations and this is
reflected in the Group's capital ratios. The transitional arrangements increase the capital adequacy ratio by 0.1 percentage points.
* On 31 December 2022, the foreseeable dividend corresponds to 50% of profits as per the Bank's dividend policy. The deduction includes an ongoing and
approved buyback from December 2022 and the remaining part of authorized buyback of own shares from the Central Bank from 5 September 2022. On 31
December 2021, the foreseeable dividend and buyback was the aggregation of an expected dividend of ISK 22.5 billion and the remainder of the buyback program
amounting to ISK 4.3 billion based on permission from the FSA from 7 October 2021.
The Group's capital ratios are calculated in accordance with the Icelandic Financial Undertakings Act No. 161/2002 with later changes,
through which CRD V / CRR II have been adopted. The Group applies the standardized approach to calculate capital requirements for
credit risk, including counterparty credit risk, credit valuation adjustment risk, market risk and operational risk.
Credit risk, loans and off-balance sheet items .........................................................................................................
Intangible assets .....................................................................................................................................................
Common Equity Tier 1 capital ..............................................................................................................................
Tier 2 instruments ...................................................................................................................................................
77
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
46. Capital management, continued
Capital ratios of the parent company 2022 2021
18.8% 20.2%
20.3% 21.9%
23.9% 24.4%
Capital buffer requirement, % of REA 2022 2021
2.5% 2.5%
2.0% 2.0%
3.0% 3.0%
2.0% -
9.5% 7.5%
Capital requirement, % of REA
CET1 Tier 1 Total
4.5% 6.0% 8.0%
2.0% 2.6% 3.5%
9.3% 9.3% 9.3%
15.8% 17.9% 20.8%
18.8% 20.3% 24.0%
Leverage ratio
2022 2021
1,415,353 1,256,916
32,118 4,796
10,174 720
59,723 102,016
1,517,368 1,364,448
179,696 172,755
11.8% 12.7%
Off-balance sheet exposures ...................................................................................................................................
Derivative exposures ...............................................................................................................................................
Tier 1 capital ..........................................................................................................................................................
Capital buffer for systematically important institutions .............................................................................................
Systemic risk buffer * ..............................................................................................................................................
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.
Tier 1 ratio ...............................................................................................................................................................
CET1 ratio ...............................................................................................................................................................
On-balance sheet exposures ...................................................................................................................................
Regulatory capital requirement ..........................................................................................................
Securities financing transaction exposures ..............................................................................................................
Leverage ratio .........................................................................................................................................................
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 .......................................................................................................................................................
Pillar 2R capital requirement ** .............................................................................................................
Available capital ...................................................................................................................................
Pillar 1 capital requirement ....................................................................................................................
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 SREP result based on the Group's Financial Statement at 31 December 2021. The Pillar 2R requirement is 3.5% of risk-weighted exposure amount based
on the Group's prudential consolidation under CRR, which excludes Vördur.
Countercyclical capital buffer * ................................................................................................................................
Capital conservation buffer ......................................................................................................................................
Combined buffer requirement * .............................................................................................................
* 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.
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.
78
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
46. Capital management, continued
MREL
Minimum requirement for own funds and eligible liabilities 2022 2021
212,476 193,365
155,667 140,239
368,143 333,604
82,196 58,523
285,947 275,081
883,832 812,822
32.4% 33.8%
23.0% -
1,446,370 1,277,543
19.8% 21.5%
14.7% -
Solvency II
9,175 9,090
1,169 1,069
- -
10,344 10,159
7,114 6,902
145.4% 147.2%
47. Operational risk
Total liabilities and own funds (TLOF) ......................................................................................................................
Own funds and eligible liabilities .........................................................................................................................
Combined buffer requirement (CBR) .......................................................................................................................
Own funds and eligible liabilities not used for CBR ............................................................................................
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) ......................................................................................................................
Foreseeable dividends ............................................................................................................................................
Own funds ...............................................................................................................................................................
Eligible liabilities ......................................................................................................................................................
Risk-weighted exposure amount (REA) ...................................................................................................................
Own funds and eligible liabilities not used for CBR (% REA) ...................................................................................
MREL requirement (% REA) ..................................................................................................................................
Subordinated liabilities .............................................................................................................................................
Excess of assets over liabilities in accordance with Solvency II ...............................................................................
Own funds and eligible liabilities not used for CBR (% TLOF) ..................................................................................
MREL requirement (% TLOF) ................................................................................................................................
SCR ratio ................................................................................................................................................................
The Group must fulfil a minimum requirement for own funds and eligible liabilities (MREL) in accordance with the Act on Resolution of
Credit Institutions and Investment Firms, no. 70/2020 and subsequent amendments, which transpose BRRD I and aspects of BRRD II
(relating to MREL) into Icelandic law. Own funds which are not used to fulfil the combined buffer requirement can be used towards the
MREL requirement. In September 2022, the Icelandic Resolution Authority (IRA) presented the Group with the MREL requirement based on
year-end 2021 financials. According to IRA's methodology, the requirement is calculated as a fraction of total REA but then converted into a
fraction of own funds and eligible liabilities which represents the actual requirement. Both ratios are shown in the table below. An MREL
subordination requirement has not been implemented in Iceland.
79
Arion Bank Consolidated Financial Statements 2022 Amounts are in ISK millions
Notes to the Consolidated Financial Statements
48. Sustainability risk
The Green Financing Framework
Green Financing Instruments 2022 2021
21,274 8,209
97,405 47,148
118,679 55,357
Identified eligible green assets by category
51,936 42,245
4,879 2,255
64,232 55,881
8,189 -
6,174 5,591
135,410 105,972
Pollution prevention and control and wastewater management ................................................................................
Book value .............................................................................................................................................................
Borrowings ..............................................................................................................................................................
Clean transportation ................................................................................................................................................
Sustainability risk is 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.
* Based on fisheries certificates in relation to the official quota year (1 September 2021 to 31 August 2022).
Energy efficiency .....................................................................................................................................................
Green buildings .......................................................................................................................................................
Sustainable fishery and aquaculture ........................................................................................................................
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.
Book value .............................................................................................................................................................
Deposits ..................................................................................................................................................................
80
Arion Bank Consolidated Financial Statements 2022
Significant accounting policies
49. Going concern assumption
50. Principles underlying the consolidation
Subsidiaries
Business combinations
–
–
–
–
–
–
–
Non-controlling interests
–
–
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.
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 2021, except for when there have been made
amendmends to current IFRS valid from 1 January 2022, 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 2022 but they do not have a
material effect on these Consolidated Financial Statements.
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.
at their proportionate share of the acquiree's identifiable net assets, which are generally at fair value.
Changes in the Group's interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
Notes to the Consolidated Financial Statements
the fair value of the consideration transferred; plus
power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);
the ability to use its power over the investee to affect its returns.
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.
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.
The Group measures goodwill at the acquisition date as:
81
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
50. Principles underlying the consolidation, continued
Loss of control
Transactions eliminated on consolidation
Funds management
51. Associates
Impairment on investments in associates
52. 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 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.
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.
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.
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.
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.
82
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
53. Interest
–
–
–
54. Fee and commission
55. Net financial income
i)
ii)
iii)
56. Net insurance income
amortized cost;
Interest income and expense presented in the Income Statement include Income and expenses of assets and liabilities carried at:
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.
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).
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).
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.
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.
fair value through profit and loss (FVTPL); and
Net financial income comprises Dividend income, Net gain on financial assets and liabilities at fair value and Net foreign exchange gain.
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.
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.
83
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
57. Income tax expense
58. Financial assets and financial liabilities
Recognition and initial measurement
Derecognition
Debt instruments
–
–
–
–
–
–
–
Debt instruments, including loans and debt securities, are classified into one of the following measurement categories:
amortized cost;
All other debt instruments are carried at FVTPL.
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).
its contractual cash flows are SPPI.
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.
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.
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).
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.
84
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
58. Financial assets and financial liabilities, continued
Business model assessment
-
-
-
-
-
Cash flow characteristics assessment
Debt instruments measured at amortized cost
Debt instruments measured at FVOCI
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 are recognized in the Income Statement in accordance with effective interest rate method.
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.
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.
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;
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.
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.
85
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
58. Financial assets and financial liabilities, continued
Debt instruments measured at FVTPL
Purchased loans
Equity instruments
Offsetting
Equity instruments are 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.
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.
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.
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.
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.
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.
Expected credit losses
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.
86
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
58. Financial assets and financial liabilities, continued
Stage Criteria
Definition of default
–
–
Probability of default and credit risk rating
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:
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, the Bank defines six different exposure portfolios and has different statistical credit risk models for
each of them - mortgages, consumer loans, auto loans, guarantees, loans to individuals for work purposes and other loans. 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, defaults in other portfolios are also considered and
cross-default applies when they are significant.
3
Exposures in default / Credit impaired
2
the borrower is considered to be unlikely to pay.
Exposures not impaired and with no significant increase
in credit risk
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.
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.
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.
Assessment of expected credit loss, and effective interest
rates.
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.
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.
The Group defines default in accordance with article 178 of EU Regulation No 575/2013 (CRR). The Group considers a financial asset to be
in default when:
For corporate counterparties, more than 90 days past due means that the counterparty has been past due on a material exposure each day
in the last 90 days. For individuals, more than 90 days past due means that the individual has been past due on a material exposure in the
same exposure portfolio each day in the last 90 days.
An asset does not return to non-defaulted status until after a probation period which is at least either three months if no forbearance
measures have been granted or one year if forbearance measures have been granted.
87
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
58. 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
Probability of default
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.
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.
Investment Grade
Default / Impaired
Non-investment
Grade
Investment Grade
88
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
58. Financial assets and financial liabilities, continued
Loss given default
Exposure at default
Significant increase in credit risk
–
–
–
–
–
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 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, construction projects, 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.
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.
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;
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.
the exposure has received forbearance measures in the past six months;
89
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
58. Financial assets and financial liabilities, continued
Exposures in default
Expected credit loss measurement
–
–
–
Forward looking scenarios
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 43. Any decreases in impairment loss amounts are reversed through net
impairment.
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.
Exposures in default at each reporting date, according to the Group’s definition, are considered to be credit impaired.
The expected credit loss (ECL) calculations are based on three main components:
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.
90
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
58. Financial assets and financial liabilities, continued
59. Hedge accounting
60. 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.
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.
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.
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.
91
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
61. Loans
62. Derivatives
63. Intangible assets
Goodwill and infrastructure
Customer relationship and related agreements
Software
Amortization of intangible assets
64. Investment property
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.
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.
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.
92
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
65. Impairment of non-financial assets
66. Deposits
67. Borrowings
68. Subordinated liabilities
69. Assets and disposal groups held for sale
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.
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.
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.
93
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
70. Other assets and other liabilities
Property and equipment
Right-of-use asset and lease liability
Other assets and other liabilities
Technical provision
71. Equity
Share capital and share premium
Treasury shares
Dividends
Option reserve
Warrants reserve
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 ......................................................................................................................................................................
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 of the Group to purchase shares in
Arion Bank. The stock option plan is set up in accordance with article 10 in the Icelandic 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. Share capital has been fully paid.
The warrants reserve represents the consideration received for outstanding warrants.
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.
Dividends on shares are recognized in equity in the period in which they are approved by Arion Bank's shareholders.
94
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
71. Equity, continued
Reserve for investments in subsidiaries and associates
Reserve for investments in securities
Reserve due to capitalized development cost
Financial assets at fair value through OCI
Statutory reserve
Foreign currency translation reserve
72. Earnings per share
73. Financial guarantees
74. Fiduciary activities
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.
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.
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.
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.
A reserve for 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 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.
95
Arion Bank Consolidated Financial Statements 2022
Notes to the Consolidated Financial Statements
75. Employee benefits
Share-based payment expense
76. Standards issued but not yet effective
IFRS 17 Insurance Contracts
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.
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.
IFRS 17 Insurance Contracts came into effect on 1 January 2023. The standard applies to all issued insurance and reinsurance contracts.
The issuers of insurance contracts should present them in the balance sheet as the sum of the cash flow and the margin yielded by the
contracts. Cash flow refers to the estimated premiums which the company collects minus the payment of claims and cost, taking into
account time and risk. Margin refers to the estimated profit from the insurance contracts. The company is of the opinion that the impact of
the standard on the company’s results is not significant but there will be a change to the presentation of the information on operations. The
insurance reserve in the balance sheet at the beginning of 2023 will be considerably lower than the reserve according to current methods.
Firstly, the presentation of the premium reserve is such that only pre-paid premiums are considered part of the premium reserve, which
results in a considerable decrease in the reserve and a corresponding decrease in receivables. Secondly, the calculation of the claims
reserve changes somewhat and will not have a significant impact on the reserve amount.
New standards, amendments to standards and interpretations have been issued but are not yet effective for the year ended 31 December
2022, and have not been applied in preparing these Consolidated Financial Statements. Relevant to the Group's reporting is IFRS 17
Insurance contracts.
96
Arion Bank Consolidated Financial Statements 2022
Amounts are in ISK millions
Income Statement
2022 2021 2020 2019 2018
40,277 32,063 31,158 30,317 29,319
16,065 14,673 11,642 9,950 10,350
2,614 3,442 3,071 2,886 2,589
(3,095) 6,220 2,745 3,212 2,302
270 22 - 756 27
1,067 1,805 2,148 877 1,584
57,198 58,225 50,764 47,998 46,171
(15,856) (14,638) (12,332) (14,641) (14,278)
(11,055) (11,237) (12,109) (12,222) (12,000)
(26,911) (25,875) (24,441) (26,863) (26,278)
(1,749) (1,516) (1,301) (2,984) (3,386)
144 3,169 (5,044) (382) (3,525)
28,682 34,003 19,978 17,769 12,982
(9,809) (6,782) (3,231) (3,714) (4,046)
18,873 27,221 16,747 14,055 8,936
6,543 1,394 (4,278) (12,955) (1,159)
25,416 28,615 12,469 1,100 7,777
Statement of Financial Position
Assets
114,118 69,057 42,136 95,717 83,139
45,501 30,272 28,235 17,947 56,322
1,084,757 936,237 822,941 773,955 833,826
193,329 225,657 227,251 117,406 114,557
7,862 6,560 6,132 7,119 7,092
787 668 891 852 818
8,783 9,463 9,689 8,367 6,397
135 2 2 2 90
61 16,047 16,811 43,626 48,584
14,223 19,901 18,618 16,864 13,502
1,469,556 1,313,864 1,172,706 1,081,855 1,164,327
Liabilities and Equity
11,697 5,000 13,031 5,984 9,204
755,361 655,476 568,424 492,916 466,067
20,997 5,877 5,240 2,570 2,320
10,303 7,102 4,262 4,404 5,119
- 16,935 16,183 28,631 26,337
42,973 37,151 32,714 32,697 30,107
392,563 356,637 298,947 304,745 417,782
47,331 35,088 36,060 20,083 6,532
1,281,225 1,119,266 974,861 892,030 963,468
187,682 193,925 197,672 189,644 200,729
649 673 173 181 130
188,331 194,598 197,845 189,825 200,859
1,469,556 1,313,864 1,172,706 1,081,855 1,164,327
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 .............................................................................................
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 ...............................................................................
Total equity .............................................................................................
Liabilities associated with disposal groups held for sale ............................
Intangible assets ......................................................................................
Tax assets ................................................................................................
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 ................................................................................
97
Arion Bank
Borgartun 19
105 Rey
kjavik
Iceland
Id.: 581008-0150
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