Annual Report Annual Report 2011 Annual Report 2011 arionbanki.is Table of Contents Financial Overview 2 Progress in Recovery 4 Chairman’s Address 8 CEO’s Address 10 The Economic Landscape 16 Year in Review 20 Key Business Objectives 23 Corporate Governance 26 Corporate Social Responsibility 29 Asset Management 36 Corporate Banking 38 Investment Banking 40 Retail Banking 42 Support Units 46 Subsidiaries 51 Holding Companies 56 Risk Management 60 Progress since Establishment 63 Funding & Liquidity 66 Financial Results 70 Annual Accounts 72 Board of Directors 150 Senior Management 153 1 Arion Bank – Annual Report 2011 Financial Overview Operating income Net earnings 50 50 20 20 ISK billions ISK billions 40 35.6 40 16 16 31.9 33.3 12.9 12.6 30 30 12 11.1 12 20 20 8 8 10 10 4 4 0 0 0 0 2009 2010 2011 2009 2009 2010 2010 2011 2011 2009 2010 2011 Return on equi Capital ratio 25% 25 25% 25 21.2% 20% 20 20% 19.0% 20 16.7% 4.8% 3.8% 15% 13.4% 15 15% 13.7% 15 10.5% 10% 10 10% 16.4% 10 13.7% 15.2% 5% 5 5% 5 0% 0 0% 0 2009 2010 2011 2009 2009 2010 2010 2011 2011 2009 2010 2011 Tier 1 ratio Tier 2 ratio Cost-to-income ratio Cost-to-total average assets ratio 100% 100 5% 5 80% 80 4% 4 60% 54.2% 52.5% 60 3% 2.7% 3 47.7% 2.2% 2.2% 40% 40 2% 2 20% 20 1% 1 0% 0 0% 0 2009 2010 2011 2009 2009 2010 2010 2011 2011 2009 2010 2011 2 Financial Overview Total assets Total equi 1,000 1000 200 200 ISK billions 892.1 ISK billions 812.6 800 757.3 800 160 160 600 600 120 109.5 114.6 120 90.0 400 400 80 80 200 200 40 40 0 0 0 0 2009 2010 2011 2009 2009 2010 2010 2011 2011 2009 2010 2011 Loans-to-deposits ratio Risk Weighted Assets / Total assets 125% 114.6% 125 125% 125 98.5% 100% 100 100% 100 83.9% 84.7% 74.5% 75% 72.2% 75 75% 75 50% 50 50% 50 25% 25 25% 25 0% 0 0% 0 2009 2010 2011 2009 2009 2010 2010 2011 2011 2009 2010 2011 Breakdown of net earnings in 2011 ISK billions 5.5 2.3 - 11.3 - 8.6 10.7 - 10.8 23.4 - 5.9 2.8 11.1 Net Valuation Net Net Other Salaries Other Taxes Net pro t Net interest change commission nancial income & operating & from disc. earnings income income income related cost expense bank levy operation 2011 3 Arion Bank – Annual Report 2011 Progress in Recovery A key priority in Arion Bank’s operations during 2011 was the finan- cial restructuring of corporate and household debt. Arion Bank has been at the forefront in this area since its establishment. Recovery work is not only important for the Bank but also for the economy as a whole. Corporate Recovery Clients who are unable to meet their obligations are entered into the Bank’s debt recovery process. The objective is to turn insolvent companies into solvent compa- nies with a healthy balance sheet and make them able to take on future business and contribute to the further positive development of the economy. The Bank made excellent progress in recovery work in 2011 and had largely completed it by the end of the year. Total number of companies in recovery 1,200 986 1,000 944 953 877 871 800 698 609 600 416 400 200 0 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Conclusion reached Total entered recovery The Bank estimates that up to 1,000 corporate clients will have gone through the debt recovery process by the end of 2012. Restructuring household debts More than 14,000 personal customers have taken advantage of the debt solution packages offered by the Bank. One of the key tools for achieving our goals has been the special debt relief programme. Arion Bank also set up a dedicated debt advisory service for personal customers at the end of 2010. The ability to draw upon the expertise of the debt advisory specialists was of paramount importance in completing such a high number of difficult debt recovery cases in 2011. 4 Progress in Recovery Improved asset quality The result of this work is that the quality of the Bank’s asset portfolio has increased significantly. The number of Non- The Bank is highly focused on the performance of the loan book. The Bank’s class- performing loans steadily ification of the loan book seeks to capture the changes in the creditworthiness of decreased over the year counterparties as early as possible. The classification is based on four categories: Performing; Watch; Sub-performing; and Non-performing. For further information and had fallen to 13% by about the classification criteria, please refer to Note 105a to the Annual Accounts. the end of 2011 which The number of Non-performing loans steadily decreased over the year and had fallen is in line with the Bank’s to 13% by the end of 2011 which is in line with the Bank's targets. targets. Non-performing loans as % of the loan book 100% 80% 31% 38% 34% 42% 44% 56% 7% 11% 60% 10% 11% 30% 13% 15% 15% 40% 18% 20% 18% 20% 39% 13% 32% 37% 30% 23% 13% 0% Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Non-performing Sub-performing Watch Performing Plans for 2012 Arion Bank aims to complete its corporate and individual debt recovery projects in 2012. This process enhances our understanding of the loan book and, as it progresses, eliminates uncertainties and improves the quality of the Bank’s balance sheet. 5 “ It is important for a company like HB Grandi that the Bank understands the nature of the business and the value chain of one of Iceland’s largest fisheries companies.” Eggert Benedikt Gudmundsson CEO of HB Grandi Arion Bank – Annual Report 2011 Chairman’s Address The Icelandic economy has shown good signs of recovery. Economic growth in 2011 was above 3%, amongst the highest in the OECD. When the Icelandic financial system failed in the autumn of 2008, the eyes of the world turned to Iceland to watch the unfolding chain of events. To some extent Iceland has now returned to the limelight, but for different reasons. The country has made good progress, built up strong financial institutions and in many ways serves as an example to others. Economic recovery The challenges presented in the autumn of 2008 were considerable; not just for the authorities but also for the corporate sector and the general public. From the outset it was clear that the financial companies would play a key role in the rebuilding of Monica Caneman, Chairman the economy. It would often prove to be a difficult and thankless task, given the part played by the financial sector in the Icelandic crisis. The undertaking faced by the banks, founded towards the end of 2008, was vital yet highly demanding. However, everyone involved in the reconstruction of the Icelandic economy has per- formed their duties effectively. The government has made great strides in stabilizing the budget deficit, indeed to such an extent that Iceland has completed the International Monetary Fund (IMF) programme. However, this has not been a painless process. Taxes on individuals and corporations have been raised, not least on financial companies, and the public sector has had to endure cut-backs. The Icelandic banks have put great effort into financially restructuring thousands of companies. Arion Bank has completed the reorganization of close to 900 corporate clients which required financial restructuring. The Bank has also channelled its energy into resolving household debt and has reorganized the debts of more than 14,000 individuals. It is imperative now that when good progress is being made, when the most important tasks related to settling past business have either been completed or are in process, that the focus is shifted even more firmly on to the future, to the growth of the economy and the opportunities that lie ahead. Investment is needed The current economic growth in Iceland is to a large extent fuelled by private consump- tion. For economic growth to be sustainable investment is crucial, but the fact is that investment in Iceland is at an all-time low. It is not an overstatement to say that the most pressing task today is to increase investments in Iceland. 8 Chairman’s Address The main reason for the low level of investment is the continued uncertainty in the Icelandic economy and, of course, the capital controls. The sooner the uncertainty is reduced the better, for everyone: the financial sector, the corporate world and subse- quently families and individuals. The sooner Iceland attracts foreign investment, the quicker the rebuilding process can proceed. The banks have done what is in their power to limit the uncertainty by establishing themselves as financially strong institutions with strong capital ratios well above the current requirements of the Icelandic Financial Supervisory Authority (FME). The government now needs to step up and reduce the uncertainty with all necessary means, only in doing so will investors regain the needed confidence. In this context it is right to note that, even though it is fitting that the financial institu- tions shoulder their responsibilities in the rebuilding process, it is also important that taxes on the financial sector do not inhibit the sector’s competitiveness.