#1Arion Bank First quarter results 2020 Investor presentation 6 May 2020#22 Highlights of the quarter Covid-19 has had a severe impact on the Icelandic economy and society A The authorities and the health care system have responded extremely well and the pandemic is on the decline in Iceland GDP is expected to contract and unemployment will increase despite strong economic stimulus from both the Central Bank and the Government Arion Bank is supporting its customers, both corporate and individuals Core trends positive in the Bank's operations but Covid-19 has a fundamental effect on results The Bank with its very strong capital and liquidity, is well equipped to support its customers and the economy as a whole#3Development of COVID-19 in Iceland The pandemic is on the decline as Iceland has responded robustly Testing was started early Number of active infections and number of recovered Tests per 1000 population (May 5 2020) Tracing of infected individuals was extensive 2,000 1,800 1,600 At the peak up to 10% of the population 1,400 was in quarantine 1,200 The country has had limited lock-down compared with many other countries 1,000 800 600 Number of infections has been in steep decline for the last weeks 400 200 Very few new cases reported in the last few days Iceland has been easing social restrictions considerably and it is expected to continue to do so in the near term 3 Sources: WWW.COVID.IS, OECD 0 28.02.20 06.03.20 13.03.20 20.03.20 Active infections ■Recovered 27.03.20 03.04.20 10.04.20 17.04.20 24.04.20 01.05.20 Iceland 150 Luxemburg 79 19 Denmark 44 Italy 37 Norway 35 Germany 30 United States 22 Finland 19 United Kingdom 12 0 50 100 150 200 Number of active infections, recovered and deaths by age (cumulative) Infections as a percentage of tests conducted 400 350 300 250 200 150 100 50 0 1-6 6-12 13-17 18-29 30-39 40-49 50-59 69-09 70-79 80-89 90-99 1 100-109 ■Recovered Active infections ■Deaths 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 28.feb. 06.mar. 13.mar. 20.mar. 27.mar. 03.apr. 10.apr. 17.apr. 24.apr. 01.maí *#4Macroeconomic environment#5The development of GDP looks bleak in the short term The spread of Covid-19 and subsequent bans on travel and public gatherings have a very negative effect on the Icelandic economy GDP growth In a short time the world has changed. It's likely that the world economy will experience 6.6% 4.7% 4.5% 3.8% its worst recession since the Great Depression. The Great Lockdown, as 2.1% 1.9% Estimated GDP per capita in 2020 (2011 international dollar, thous.) 6.0% 47 named by the IMF, will heavily impact the Icelandic economy due to its dependency on tourism According to the IMF's latest forecast Iceland's GDP could shrink by 7.2% in 2020, followed by a strong rebound in 2021. Despite a larger contraction than in other Nordics GDP per capita will remain high There is great uncertainty surrounding all economic forecasts at this time and it is impossible to quantify the effects as of yet. As stated by the IMF "much worse growth outcomes are possible and maybe even likely" As the Chief Epidemiologist has hinted that some sort of travel restrictions will remain in -7.2% 2014 2015 2016 Iceland 2017 2018 2019 2020E 2021E Other Nordics Euro area *IMF forecast Tourism contribution to GDP (Arion Bank estimates)* Other Nordics 45 Iceland 36 Euro area Tourist arrivals via KEF airport (millions and YoY growth) 10% 9% 9% 2.5 8% 9% 9% 5% 24% -14% 8% 7% 8% 2 40% 7% 6% force throughout the year it's clear that 6% 5% 4% 5% tourist arrivals will drop dramatically. By how much is impossible to tell but Arion Bank's base case assumes roughly a 60% drop 5% 4% 1.5 30% 24% 1 -60% 3% 2% 0.5 1% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 2014 2015 2016 2017 2018 2019 2020E *2020 forecast not available 5 Sources: IMF, Icelandic Tourist Board, Statistics Iceland, Arion Bank. *#6Unprecedented times Unemployment has reached new heights while inflation is expected to remain close to target With the largest export sectors struggling, especially tourism where the source of income has disappeared for the time being, it's no surprise to see the ISK depreciate. Inflation is expected to remain subdued throughout the year, given that tumbling oil prices, low airfares and depressed demand offset the ISK depreciation. 170 160 150 140 130 120 110 Bans on travel and public gatherings, in 100 addition to mandatory closures, have 90 already translated into a higher unemployment rate. The directorate of labour expects the unemployment rate to be 17% in April. Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 USD EUR The ISK against major trade currencies Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Payment card turnover decreased by 13.5% YoY in March, the largest drop since 2009. A stricter ban on public gatherings was implemented at the end of March, meaning that the April figures will show the full effects The composition of registered unemployment 18% 16% 14% 10% of the Government's measures. 12% 10% 8% 6% 4% 2% 3.8% 4.1% 4.3% 4.8% 5.0% 5.7% 0% 6 Sources: CBI, Statistics Iceland, Directorate of Labour, Arion Bank Oct-19 Nov-19 ■Unemployment rate ■Reduced employment ratio Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 10.1% 5% 0% 3.5% -5% 6.8% -10% -15% -20% Inflation and inflation target 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Total payment card turnover (YoY change) 20% 15% пи чи Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 *#7Better equipped to handle the recession than most Both fiscal and monetary policy have the ammunition to support the economy Before the pandemic hit the CBI, unlike many central banks, still had the firepower to support the economy. Even after taking Central government debt (% of GDP) Household and corporate debt (% of GDP) 100% 400% 90% 350% drastic measures that include reductions in interest rates, minimum reserve requirements and countercyclical capital buffers as well as launching a QE program, interest rates remain high in international comparison, creating scope for further rate cuts. Furthermore, the CBI has hefty FX reserves at its disposal 80% 70% 300% 60% 250% 50% 200% 40% 150% 30% 100% 20% 50% 10% 0% 0% The CBI's FX reserves, well balanced external trade, despite everything, and the positive NIIP of the economy mean that balance of payments worries are limited More importantly, both the public and private sectors used the last upswing to deleverage, pushing debt levels to historic lows 2009 2010 2011 2012 Norway 2013 2014 2015 United Kingdom 2016 2017 2018 2019 Sweden -Iceland Key interest rates (seven-day term deposit rate) 7.0% The Treasury is in a strong position to support businesses and stimulate the 6.0% 5.0% economy anew through infrastructure investment when the pandemic is on the decrease 4.0% 3.0% So far the scope of the Government's 2.0% measures amount to roughly 10% of GDP. Further measures are expected 1.0% Accumulated national savings for the last 0.0% seven years are approx. 60% of GDP (2019) Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 2010 Households CBI's FX reserves (bn. EUR) 876543210~ -1 -2 2003 2004 2005 2006 2007 2008 2008 2011 2012 X 2016 Net FX reserves 2017 2018 2011 2012 2013 2014 2015 ■Companies 2013 2014 2015 2016 2017 2018 2019 2019 2020 2009 2010 Total FX reserves 7 Sources: CBI, Statistics Iceland, Arion Bank *#8Regulatory and Government response to Covid-19 The Government and the Central Bank of Iceland have introduced numerous measures to deal with the expected impact of the pandemic Eased requirements on the banking system Increased liquidity available for banks from the Central Bank ➤ Covered bonds now eligible as collateral in transactions with the Central Bank Reserve requirements lowered Reduced capital requirements The countercyclical buffer reduced from 2% to zero Bank capital preserved. No dividend payments or share buybacks for the time being The bank levy has been lowered from 0.318% to 0.145% in one step The Central Bank lowered its key interest rate to a historical low of 1.75% from 3.00% at the beginning of the year Government assistance to companies and households. Government to pay up to 75% of wages to employees of companies impacted by Covid-19 Also applicable during notice periods if companies need to lay off staff Government guarantees for up to 100% of new operating loans to companies fulfilling certain conditions Deferral of tax payments of companies affected by Covid-19 Early withdrawal of voluntary pension schemes Increased and expanded reimbursement of value-added tax on labor Special child benefits introduced *#9Business continuity supported by effective digital solutions 98% of all customer touch points in Q1 are digital The Bank operates in accordance with its business continuity plan implemented at the end of February, aimed to ensure business continuity and to safeguard the welfare of customers and employees. The Bank's security committee has in recent weeks met on a daily to semi-daily basis • • • 9 Arion Bank services All branches closed 25 March - will reopen on 12 May Around 80% of employees worked from home until 4 May when 40-45% returned Increase in in-bound calls dramatic in Q1 The Bank's overall operations are performing well • Support from digital solutions 40% increase in digital channels since branches closed Automatic credit decisions 45% of all retail decisions (personal loans, overdraft application and credit card limits) 95% of all credit appraisals done digitally in Q1 Solutions for individual customers Mortgage holiday: Customers allowed to take payment holidays for up to three months to help them deal with any potential difficulties Short term consumer loans Distributing credit-card balance due over a number of months Solutions for corporate customers Payment holiday for companies meeting certain criteria, in line with an agreement signed by all relevant financial institutions in Iceland and Credit lines extended and increased New lending to companies meeting certain criteria with government guarantee (in development) *#10Financials#11Operational highlights of the first quarter 2020 11 H Arion Bank's strategy results in core operations trending positively NIM improves YoY NII to Credit risk improves YoY Core revenues up 9% OPEX is down 10% YoY Covid-19 related issues push earnings into negative territory Equity positions decreased in line with the market Impairments increase substantially HFS assets negatively affected by the pandemic AT1 issuance and cancelation of dividend and buy-backs push total capital ratio up to 27.5% Surplus Capital of ISK 39 billion on top of ISK 24 billion from management buffer and lowering of countercyclical buffer ROE from continuing operations negative 2.7% and Operating income/REA was 5.0% Deposits increase by 9.4% from YE 2019#1212 Income statement Q1 2020 • Earnings from continued operations are negative due to the effects of Covid-19 The 2% reduction in NII derives from smaller loan book in line with strategy Strong performance in net commission income in most sectors Turmoil in equity markets due to Covid-19 drive NFI down Salaries decreased from Q1 2019 as the Bank has reduced the number of FTE'S The bank levy has been lowered from 0.376% to 0.145% Increase in net impairment mostly due to more negative assumptions in IFRS 9 models Unfavorable effective income tax rate due to negative income from equity holdings HFS assets, mainly Valitor and TravelCo are also affected by Covid-19 Net interest income Net commission income Net insurance income Net financial (loss) income Share of (loss) profit of associates Other operating income Operating income Salaries and related expenses Other operating expenses Operating expenses Bank levy Net impairment Earnings loss before income tax Income tax expense Net earnings / loss from continuing operation Discontinued operations, net of tax Net earnings/loss All amounts in ISK million Q1 2020 Q1 2019 Diff% Q4 2019 Diff% 7,253 7,434 (2%) 7,693 (6%) 3,076 2,218 39% 2,615 18% 501 253 98% 723 (31%) (2,000) 766 489 (24) 727 6 170 310 (45%) 200 (15%) 8,976 11,708 (3,130) (3,630) (860) (1,282) (889) (2,171) (23%) 11,726 (14%) (3,077) (3,232) (5%) (3,367) (6,207) (6,862) (10%) (6,443) (331) (906) (63%) (2,860) (1,081) 165% (422) 2,859 (115%) (622) 2,237 (157%) (1,219) 1,018 (23%) (3,076) 2% (9%) (4%) (357) (7%) 1,203 6,129 38% (923) (7%) 5,206 (125%) (27%) (7,981) (89%) (313%) (2,775) (22%) *#1313 Net interest income 10 bps improvement in NIM despite challenging environment ° Net interest income decreased by 2% from Q1 2019 whilst interest bearing assets decreased by 5% Net interest income Credit risk 7.8 7.7 7.4 7.4 7.3 683 669 649 Strong net interest margin in light of: 2.7% 2.8% 3.0% 2.8% 2.6% Policy rate lowered to historic low during the period Lower inflation during the quarter (1.1% vs 2.1% in Q1 2019) 614 611 4.3% 4.6% 4.9% 4.7% 4.5% Issuance of Tier 2 subordinated bonds in 2019 and AT1 in Q1 Reduction of wholesale funding in ISK and FX have positive effect on NIM as well as increased proportion of ISK in liquidity buffer Lower interest income from loans to customers and lower effect from inflation on Net interest income is largely offset by lower funding cost in deposits and borrowings Prepayment of expensive funding and strong liquidity management supports NIM Q1 2019 Q2 2019 Q3 2019 Net interest margin Q4 2019 Q1 2020 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 - Net interest income / Average credit risk Net interest income Q1 2019 vs Q1 2019 (ISK million) 7,434 (253) (1,613) 1,058 295 (272) 877 (274) 7,252 NII Q1 2019 Loans to credit institutions Loans to customers Securities Deposits Borrowings Subordinated Net inflation and other effect NII Q1 2020 and CB All amounts in ISK billion *#1414 Net fee and commission and net insurance income Steady positive trends in both fee and insurance based operations Net fee and commission income Net insurance income 0.8 1.1 3.1 0.7 2.6 2.6 0.4 2.5 2.2 0.4 0.3 0.3 0.3 0.3 0.3 0.4 0.4 109.6% 0.3 0.5 35 1.0 0.4 0.5 0.7 94.4% 0.5 103.5% 89.0% 80.0% 0.3 0.5 0.4 0.4 0.4 0.3 0.8 0.9 0.9 0.9 0.9 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 ■Cards and payment solution ■Lending and guarantees Collection and payment services ■Cap. markets and corporate finance ■Asset management Income from lending and guarantees exceptionally strong, mainly driven by prepayment of loans and the service agreement with HFF Increase in cards and payment solutions from Q1 2019 mainly due to one-off payment from VISA. Covid-19 has however already had a negative effect on cards and is likely to do so even further in Q2 Income from asset management is very stable. Assets under management were ISK 999 billion at 31 March, reducing slightly from YE 2019 Revised strategy is meant to underpin increased fee and commission income going forward All amounts in ISK million Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Combined ratio (%) Strong quarter compared to Q1 2019 as Net insurance income increased by 98% YoY. Decrease from Q4 due to seasonality in non-life insurance - Premiums increased by 8% while claim rate decreased, partly due to Covid-19 from end of February Volatility in non-life, often affected by weather conditions over the winter Combined ratio of 103.5% in Q1 is competitive in the domestic market *#1515 Net financial income Loss on equity holdings as markets are hit hard by Covid-19 Net financial income in Q1 was negatively affected by: Bond holdings Net financial income 1.0 0.9 131.0 0.8 0.5 Equity holdings measured at fair 115.4 value as markets were negative from the start of Covid 19 pandemic 94.6 31.1 63.6 81.0 FX loss of ISK 156 million at the 30.7 65.88 22.9 Arion Bank level. The Bank manages 29.7 FX risk for the Group and ISK 413 84.3 million of FX gains are booked at HFS assets 58.2 63.9 67.3 36.2 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 ■FX ■ISK Net loss of fair value hedge of interest swaps It was positively affected by: FV development in bond holdings which increased significantly due to postponement of dividend payment, issuance of AT1 and increase in deposits Equity holdings 23.6 21.6 20.9 Favorable developments in market derivatives 3.4 19.6 19.2 4.6 2.2 4.4 2.5 10.1 Total portfolio of Vördur is ISK 20.0 7.5 7.5 7.4 6.2 billion; ISK 12.6 billion of bonds and ISK 7.4 billion in equity instruments 10.1 9.9 9.2 9.6 10.2 All amounts in ISK billion FX gain at HFS assets 0.4 (2.0) Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Net financial income by type in Q1 2020 0.5 0.1 (0.2) 0.4 (2.4) Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 ■Listed Unlisted ■Unlisted bond funds Equity holdings Bond holdings Derivatives FX difference FX difference at HFS assets (1.6)#1616 Total operating expenses Operating expenses trending right but Cost-to-income ratio is hit by volatility in net financial income . Net financial income has a detrimental negative effect on cost-to-income ratio in the quarter Number of FTE's reduced by 15.2% at the parent company from Q1 2019, mostly due to organizational changes at the end of Q3 2019. Small increase in FTE's at subsidiaries during the quarter Salaries and related expenses reduced by 13.7% from Q1 2019 whilst the number of FTE's reduced by 11%. General wage inflation in Iceland was 4.9% in the same period - Salaries and related expenses were affected by capitalized salaries which amounted to ISK 151 million in Q1 (ISK 79 million in Q1 2019) relating to investment in the Sopra core system Cost-to-income ratio (%) Total operating expenses 69.2 6.9 6.9 6.6 6.5 6.2 58.6 54.2 56.2 54.9 2.8 3.2 2.8 3.4 3.1 1.1 3.6 3.8 3.0 3.1 3.1 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q1 2019 Q2 2019 ■Salaries and related expenses Q3 2019 Q4 2019 Q1 2020 ■Redundancy expenses Other operating expense Number of employees Other operating expenses (ISK million) 3,366 3,232 3,076 917 880 2,814 2,810 704 106 802 801 815 881 110 832 113 114 128 687 629 489 Other operating expenses reduced by 346 5% from Q1 2019, most notably marketing costs. The Bank will focus increasingly on other OPEX over the coming quarters 350 362 248 358 281 181 326 146 293 258 302 314 265 287 811 770 275 273 689 687 687 270 250 1,156 1,312 984 1,075 1,165 All amounts in ISK billion Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q1 2019 Parent company Subsidiaries Q2 2019 Q3 2019 Q4 2019 Q1 2020 Housing cost IT cost ■Professional services Depreciation & amortisation ■Marketing cost Other expenses *#17Balance sheet - Assets The balance sheet is extraordinarily strong which is prudent at this time due to Covid-19 but not efficient under more stable circumstances The Balance sheet increased by 9.8% from 31.12.2019, the increase mainly being liquid assets REA decreased 0.9% despite balance sheet growth Loans to customers increased slightly from the end of 2019, mainly due to mortgage lending. Corporate lending held up in ISK as foreign currency loans increased in value with the depreciation of the ISK during the quarter Increase in liquid assets due to postponement of dividend payment, issuance of AT1 and increase in deposits Very strong liquidity position Total LCR ratio is 224% and ISK LCR ratio is 156% The Bank is very well positioned to meet the funding requirements of its customers in both ISK and FX and to provide customers with solutions through the Covid-19 pandemic Other and intangibles: 5.5% of total assets ISK 344 billion, of which ISK 214 billion liquidity reserve (35% of customer deposits) Loans to customers 65.6% of total assets 17 All amounts in ISK billion 41% 52% 7% ■Individual, mortgages Individual, other O Corporate and other 31.03.2020 ISK 1,188 billion 31.12.2019 ISK 1,081 billion 31.03.2019 ISK 1,222 billion 79 56 9 7 128 68 192 8 117 94 118 85 96 34 18 I 829 779 774 ▪ Loans to customers ▪ Loans to credit institutions Cash and balances with Central Bank Financial instruments - Intangible assets Other assets 1Other includes investment property, investment in associates, tax assets, assets and disposal groups held for sale and other assets *#1818 Loans to customers Loan book increases by 0.6% but would have decreased by 2.5% at year end FX rates The loan book continues to be well balanced between individuals and corporates Loans to individuals increased by 1.5% Loans to customers Loans to customers by sector (%) during the quarter mainly due to strong mortgages lending 12 834 829 5 The corporate loan book is stable from year- end but decreases in real-term due to ISK 765 58 58 774 779 8 depreciation 55 58 57 11 - Good diversification between sectors in the corporate loan book 16 Demand for new lending is negatively 342 342 310 310 317 affected by Covid-19, reflected in loan commitments, 32% decrease from YE 2018 Impairment on loans is ISK 3.0 billion or 0.38% of loans to customers. Thereof 0.11% (27.4% of loan 176 195 156 180 182 ■Individuals Real Estate & Construction ■Fishing 48 Wholesale & Retail Finance & Insurance Other sectors Loans to customers by currency (%) 22 ■ISK CPI linked 36 ■ISK Non-CPI linked impairments) is due to specific impairment (Stage 3) 0.06% (15.9% of loan impairments) due to increased risk in tourism exposures 0.05% (12.7% of loan impairments) is due to other increase in credit risk 0.16% (44.0% of loan impairments) is due to change in economic scenario in IFRS 9 models. 244 257 235 225 223 41 31.12.2017 31.12.2018 31.03.2019 31.12.2019 31.03.2020 Corporate ■SME's Individ. Mortgage Individ. other REA from loans to customers reduces by 1.2% despite increase in the loan book during the quarter, partly due to regulatory changes regarding SME exposures All amounts in ISK billion ■FX *#19Loans to customers - asset quality Very well collateralized loan portfolio supports asset quality . • Approximately 91% of loans to customers are secured by collateral, of which 70% are secured by real estate Mortgages to individuals are about 43% of the loan portfolio Due to Covid-19 pandemic, the Bank decided to transfer all tourism-related loans to Stage 2. Increased loss allowance of tourism exposure amounted to over ISK 800 million during the first quarter Coverage ratio of 35.3% - rather low in international comparison due to high collateral rate 19 All amounts in ISK billion Loans to customers by sector (ISK billion) 378 92% 129 87 62 65 65 96% 38 96% 32 88% 96% 57% 80% Individuals Real estate and Fishing Industry Wholesale and Financial and Industry, energy constructions retail trade insurance activities and manufacturing Other corporates 94% Thereof travel exposure ■ Collateralized* Uncollateralized *Collateral / Face value Loss allowance by sector (% of face value) 1.17 0.94 0.92 Individuals 3.28 2.47 1.25 Real estate and Fishing Industry Wholesale and Financial and Industry, energy constructions retail trade insurance and activities manufacturing 4.85 4.94 Other corporates Thereof travel exposure *#20Loans to customers by IFRS 9 stages Significant transfers between stage 1 and stage 2 as Covid-19 affects IFRS 9 models Loans to customers total Individuals 2 11 31.12.2019 ISK 774 billion 31.03.2020 Collateral rate on face value 31.12.2019 20 20 31.03.2020 19 2 ISK 779 billion 87 88.5% 89.4% 79 Loans in stage 3 increased by approx. ISK 1.5 billion or 11% from YE 2019 All amounts in ISK billion 31 ISK 369 billion 42 95 Corporates 2 19 ISK 405 billion 2 79 32 ISK 374 billion ISK 405 billion 66 94 ■Stage 1 Stage 2 ■ Stage 3 91.5% 91.7% 85.9% 87.3% Thereof travel exposure Travel sector transferred to Stage 2 - approx. ISK 44 billion 17 ISK 57 billion 5 ISK 62 billion 95 95.3% 93.6% 77 *#21Balance sheet - Liabilities and equity Deposits are increasing in the funding mix . Strong equity position and a very high leverage ratio Dividend payment of ISK 10.0 billion in March 2020 cancelled as well as share-buy back program The Bank is a frequent issuer of covered bonds in the domestic market and a regular issuer of senior unsecured in the international market. Increase in borrowings during the quarter is primarily due to weaker ISK against foreign currencies Deposits increased by 9.4% from YE 2019 - continued focus on deposits going forward The Bank issued its first AT1 instrument during the quarter (USD 100 million or ISK 13 billion) and has previously issued a number of Tier 2 subordinated bonds in line with its capital strategy The funding mix is well balanced between deposits, covered bonds and senior unsecured bonds Equity CET1 ratio 22.5% Capital adequacy ratio 27.5% Leverage ratio 14.5% Borrowings (in ISK) ISK 150 billion EUR 134 billion Other currencies 38 billion Deposits On demand 70% Up to 3M 16% More than 3M 14% 9.4% increase from 31.03.2019 24 21 All amounts in ISK billion 31.03.2020 31.12.2019 31.03.2019 ISK 1,188 billion ISK 1,082 billion ISK 1,222 billion 184 193 190 97 78 7 36 68 20 ■ Covered bonds 445 46% 322 54% 305 ■ Senior unsec. bonds 8 6 9 5% ■Individuals 20% 539 493 490 Corporates 48% 27% ■ Pension funds & domestic fin. institutions ■ Other " Deposits Due to credit institutions and Central Bank Borrowings ▪ Subordinated liabilities Other liabilities Equity 1 Other includes Financial liabilities at fair value, tax liabilities, Liabilities associated with disposal groups held for sale and Other liabilities *#22Deposits Continued focus on deposits both from individuals and corporates 22 22 . • Deposits and due to credit institutions and Central Bank Maturity of deposits (%) Deposits represent 55% of the Bank's total liabilities Special emphasis on corporate deposits 27% growth from YE 2018 and 17% growth from YE 2019 FX deposits increased significantly during the quarter, partly due to depreciation of the ISK. FX deposits represents 17% of total deposits compared with 14% at year-end 2019 548 16 500 499 75 470 475 75 65 64 57 58 66 69 65 50 50 65 The Bank will continue focusing on 69 56 56 69 deposits from individuals and corporates as they provide long term stable funding 147 126 116 119 113 All amounts in ISK billion 246 249 258 261 230 3 On demand 11 Up to 3 months ■3-12 months 70 ■More than 12 months Deposits by currency (%) 17 ■ISK 31.12.2017 31.12.2018 31.03.2019 31.12.2019 31.03.2020 ■FX 83 Other Pension funds Corporations ■Individuals *#23Borrowings Limited need to access international wholesale funding markets in 2020 • • • • Liquidity Coverage Ratio of 224%, far above the regulatory minimum of 100% In addition to a strong stand alone liquidity position the Central Bank of Iceland has made increased liquidity available to banks Arion Bank covered bonds are now eligible collateral in Central Bank financing No material redemption of long term funding until December 2021 Comfortable liquidity position and limited refinancing needs mean that the Bank does not need to access international wholesale funding markets in 2020 Credit rating from S&P changed in April from BBB+ to BBB but outlook changed from negative to stable Rating change largely due to expected negative effects of Covid-19 on the Bank 23 All amounts in ISK billion Borrowings by type 445 13 401 18 356 14 210 176 Maturities of borrowings (%) 90.4 51.2 40.3 40.4 28.1 323 17.2 216 305 0 2 173 158 15.1 3.7 0.3 28.1 7.7 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 >2030 ■ Covered bonds ■Senior unsecured - Ratings S&P (April 2020) 216 166 173 145 149 Senior unsecured BBB A Short term debt A-2 A-1 31.03.2017 31.03.2018 31.03.2019 31.12.2019 31.03.2020 Covered bonds ■Senior unsecured Bills and other Outlook Stable Stable *#2424 Own funds Capital ratio at 27.5% is exceptionally strong as is the leverage ratio Capital ratio (%) . • The CET1 ratio is enhanced to 22.5% with the cancelation of ISK 10 billion dividend payment planned in Q1 Arion Bank filled the 3% Tier 2 bucket with issuance in 2018 and 2019 In February Arion Bank successfully 27.5 issued USD denominated Additional Tier 2.9 24.0 24.0 0.4 22.0 22.3 2.1 2.8 1.0 0.8 1 transaction for a total of $100 million. The bonds have a fixed coupon of 6.25%. The notes will have a standalone and consolidated 5.125% CET1 trigger with equity conversion The issuance strengthens the Bank's own funds and is a milestone towards reaching a more optimal capital structure in line with the Bank's medium-term targets REA reduces slightly despite a 9.8% increase in balance sheet Leverage ratio remains very strong in all respects All amounts in ISK billion Leverage ratio (%) 15.4 14.2 14.1 14.5 13.5 31.12.2017 31.12.2018 31.03.2019 31.12.2019 31.03.2020 Risk-weighted exposure amount 23.6 22.5 797 21.2 21.3 788 21.2 767 720 713 31.12.2017 31.12.2018 31.03.2019 31.12.2019 31.03.2020 ■CET 1 ratio Additional Tier 1 ratio ■Tier 2 ratio 31.12.2017 31.12.2018 31.03.2019 31.12.2019 31.03.2020 *#25Capital adequacy The Bank will weather COVID-19 with an exceptionally strong capital position following AT1 issuance and dividend postponement Own funds increased by ISK 23.3 billion in Q1 2020 Issuance of USD 100m Additional Tier 1 capital instrument in February - Foreseeable dividend added back to own funds in light of the Board's decision to postpone the planned equity reduction Risk-weighted exposure amount (REA) decreases from ISK 720 billion to ISK 713 billion • • ISK 13 billion reduction due to the introduction of SME supporting factor. Further contraction of corporate loan book contributes to lower REA. REA reduction offset by increased leverage as a result of krona depreciation Capital requirement reduced from 20.3% to 18.4% of REA. Countercyclical capital buffer (CcyB) vacated entirely due to COVID-19 Target CET1 ratio unchanged at 17% Additional 1.9% management buffer (ISK 13.5 billion) that corresponds to the previous CcyB. The traditional 100-200bps management buffer amounts to ISK 7-14 billion - Capital of ISK 39 billion in excess of target capital structure. Development of capital buffers (%) Own funds and capital requirements (%) Management buffer (CET1) 21.9 ISK 7-14 bn. 100-200bps 2.8 18.4 18.4 1.9 Additional 2.1 management countercyclical buffer (CET1) ISK 13.5 bn. 7.3 7.3 27.5 ISK 39 bn. 2.9 5.5 2.1 Capital buffers ■ Pillar 2 R ■ Pillar 1 ■T2 10.00 22.5 9.25 9.50 0.8 8.50 8.75 0.6 ■ AT1 3.1 7.50 1.00 1.25 1.75 2.00 7.50 2.50 1.7 17.0 3.00 3.00 3.00 2.0 3.00 ■ CET1 3.00 3.00 3.00 1.5 2.00 2.00 2.00 2.00 2.00 2.00 2.00 8.0 2.50 2.50 2.50 2.50 2.50 2.50 2.50 4.5 Q1 2017 Q1 2017 Q4 2017 Q2 2019 Feb 2020 March Max CcyB 2020 ■Capital conservation buffer ■Systemic risk buffer Capital buffer for systematically important inst. Countercyclical capital buffer Capital Capital requirement requirement by Tier Management Target capital buffer structure Excess capital Capital ratio 31.3.2020 25 *#2626 Valitor: Reducing international presence and significantly scaling down a very expensive direct channel investment journey VALITOR Previous strategy 1. Get more volumes through its acquiring platform through partnerships Stripe the most important customer for a 2. few years 2. International expansion in higher margin businesses in direct channel 3. 3. International acquisitions in direct channel to expand volumes 4. 4. Acquisition of new Omni channel technologies to boost volumes on the platform 2012 Partnership with large high volume low margin customers started International growth 1. Valitor started Markadis UK as organic initiative Acquisition of Altapay in Denmark with operations in Denmark and the UK (ISK 3.9 bn.) Acquisition of Chip & Pin with operations in the UK (ISK 1.6 bn.) Acquisition of IPS with cross-border Omni- channel capabilities in Europe (ISK 0.5 bn.) Results and countermeasures • • Results disappointing Cost still very high and income growth slow Acquisition cost roughly ISK 6 billion Impairment of ISK 4 billion in goodwill in Q4 2019 Accumulated underlying operating loss of ISK 9 billion since 2016 largely contributed by investments in direct channel platform The Board of Valitor is currently going through a strategic review of Valitor's businesses Valitor A/S (pri. Altapay) sold in May 2020 This will support the ongoing sales process of Valitor 2014 Markadis founded in the UK - direct channel Altapay acquired in Denmark - direct channel Investments in platform development and realization of synergies from previous acquisitions 2017 Chip and Pin acquired in UK and merged with Markadis (Direct channel) IPS acquired in the UK - Omni channel 2018 Valitor sales process starts 2019 December Valitor announces organizational changes 2020+ *#27Going forward Macro economic developments, both internationally and in Iceland, will dominate in the coming quarters Arion Bank will support its customers as possible and has financial strength to work with the government on the preservation and rebuild of the economy Continued focus will be on core revenues and operating expenses. Leading position as regards digital services will play an important role and recent experience is likely to drive further developments 27 22 KR Given the economic uncertainty, additional Covid-19 related impairments cannot be ruled out in the coming quarters The Bank does not rule out the possibility that the current economic environment, coupled with the Bank's very strong capital and liquidity position, might open up opportunities to efficiently use some of these resources The Bank is committed to its medium term targets, assuming the economy recovers in the medium term#28KFI's and other information#2929 Key financial indicators - annual Return on equity (%) 10.5 6.6 3.7 0.6 Cost-to-income ratio (%) Net interest margin (%) 69.2 56.0 56.9 56.0 3.1 48.9 2.9 2.8 2.8 2.8 (4.6) 2016 2017 2018 2019 Q1 2020 2016 2017 2018 2019 Q1 2020 2016 2017 2018 2019 Q1 2020 CPI imbalance (ISK billion) 132.9 116.0 100.5 88.9 81.7 Operating income / REA (%) 7.3 6.1 5.8 6.4 5.0 Risk weighted assets / Total assets (%) 72.7 66.8 68.4 66.5 60.0 2016 2017 2018 2019 Q1 2020 2016 2017 2018 2019 Q1 2020 2016 2017 2018 2019 Q1 2020 *#3030 Key financial indicators - quarterly Return on equity (%) 3.6 2.1 Cost-to-income ratio (%) 69.2 62.5 58.6 Net interest margin (%) 2.7 2.7 2.8 Q1-18 Q1-19 (4.6) Q1-20 Q1-18 Q1-19 Q1-20 Q1-18 Q1-19 Q1-20 Operating income / REA (%) Loans-to-deposits ratio (%) (without loans financed by covered bonds) Capital ratio (%) 27.5 173 169 23.6 22.3 2.9 144 0.0 1.0 134 125 117 5.6 5.9 23.6 24.6 21.3 5.0 Q1-18 11 Q1-19 Q1-20 Q1-18 Q1-19 Q1-20 Q1-18 Q1-19 Q1-20 ■Tier 1 ratio ■Tier 2 ratio *#3131 Key figures Operations Q1 2020 Q1 2019 Q1 2018 Q1 2017 Q1 2016 Q1 2020 Q4 2019 Q3 2019 Q2 2019 Q1 2019 Net interest income 7,253 7,434 6,827 6,904 7,273 7,253 7,693 7,382 7,808 7,434 Net commission income 3,076 2,218 2,205 2,198 3,219 3,076 2,615 2,639 2,478 2,218 Operating income 8,976 11,708 10,810 11,404 12,090 8,976 11,726 12,344 12,220 11,708 Operating expenses 6,207 6,862 6,759 6,478 7,198 6,207 6,443 6,940 6,618 6,862 Net earnings (loss) (2,171) 1,018 1,951 3,352 2,884 (2,171) (2,775) 761 2,096 1,018 Return on equity (4.6%) 2.1% 3.6% 6.3% 5.7% (4.6%) (5.8%) 1.6% 4.3% 2.1% Net interest margin 2.8% 2.7% 2.7% 2.8% 3.1% 2.8% 3.0% 2.6% 2.8% 2.7% Return on assets (0.8%) 0.3% 0.7% 1.2% 1.1% (0.8%) (1.0%) 0.2% 0.7% 0.3% Cost-to-income ratio 69.2% 58.6% 62.5% 56.8% 59.5% 69.2% 54.9% 56.2% 54.2% 58.6% Cost-to-total assets 2.2% 2.3% 2.4% 2.4% 2.8% 2.2% 2.2% 2.3% 2.2% 2.3% Balance Sheet Total assets Loans to customers Mortgages Share of stage 3 loans, gross 2.9% REA Total assets 60.0% 1,187,820 1,222,695 1,131,768 1,119,648 1,028,606 778,823 829,246 782,255 720,198 694,004 340,235 366,381 340,202 302,679 190,008 2.5% 64.4% 1,187,820 1,081,854 1,213,155 1,233,419 1,222,695 778,823 773,955 812,481 821,731 829,246 340,235 333,406 372,938 369,583 366,381 2.9% 2.7% 2.5% 2.4% 2.5% 68.8% 66.4% 71.5% 60.0% 66.5% 62.2% 63.1% 64.4% Tier 1 ratio 24.6% 21.3% 23.6% 27.3% 26.2% 24.6% 21.2% 21.6% 21.4% 21.3% Leverage ratio 14.5% 13.5% 15.4% 0.0% 0.0% 14.5% 14.1% 12.8% 13.3% 13.5% Liquidity coverage ratio 224.2% 213.0% 209.9% 163.5% 153.4% 224.2% 188.3% 246.4% 198.0% 213.0% Loans to deposits ratio 144.4% 169.1% 172.7% 151.4% 160.2% 144.4% 157.0% 159.9% 162.8% 169.1% All amounts in ISK million *#3232 32 Disclaimer • • • • • • This document has been prepared for information purposes only and should not be relied upon, or form the basis of any action or decision, by any person. Nothing in this document is, nor shall be relied on as, a promise or representation as to the future. In supplying this document, Arion Bank does not undertake any obligation to provide the recipient with access to any additional information or to update this document or to correct any inaccuracies herein which may become apparent. The information relating to Arion Bank, its subsidiaries and associates and their respective businesses and assets contained in, or used in preparing, this document has not been verified or audited. Further, this document does not purport to provide a complete description of the matters to which it relates. Some information may be based on assumptions or market conditions and may change without notice. 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