FINANCIAL STATEMENTS 30 JUNE 2015 INVESTOR PRESENTATION 26 AUGUST - PowerPoint PPT Presentation

FINANCIAL STATEMENTS 30 JUNE 2015 INVESTOR PRESENTATION 26 AUGUST 2015

ARION BANK IS A UNIVERSAL RELATIONSHIP BANK ARION BANK PROVIDES A FULL RANGE OF FINANCIAL SERVICES Corporate Banking Asset Management  Leading lender to large  Leading player in the corporates in Iceland Icelandic market  Innovative and customized  AuM equal to Arion Bank’s solutions total assets  International activities in  Services institutional seafood and related investors and HNW clients businesses Retail Banking Investment Banking  ~ 30% market share  Managed both IPOs this  Largest private provider of year and more than 50% of residential mortgages all Icelandic IPOs since  Wide range of financial 2009  A leading capital markets services for individuals and SMEs house and M&A advisor  Strong focus on digital  Full range of investment banking solutions banking services

STRATEGIC SUBSIDIARIES IN THE ARION BANK GROUP ARION BANK PROVIDES A FULL RANGE OF FINANCIAL SERVICES  Leading life insurance  The largest online and e- company in Iceland commerce payment  Focus on modern personal services company in Iceland  Operations in Iceland, insurance services  Sales and distribution Denmark and the UK  Member of VISA EU and partnerships with Arion Bank MasterCard International  Iceland’s largest fund management company  Retail and professional clients  Range of mutual, investment and institutional investment funds

HEADLINE FIGURES FOR H1 2015 Profitability Strength Efficiency Asset quality Return on Cost-to- Problem equity Tier 1 ratio income ratio loans 22.8% 21.8% 36.5% 3.3% H1 2014: 31.12.2014: H1 2014: 31.12.2014: 23.4% 21.8% 50.5% 4.4% Leverage Mortgages/ Employees Net earnings ratio Total loans ISK 19,326 1,123 15.4% 40.7% million 31.12.2014: 31.12.2014: 31.12.2014: H1 2014: 1,120 15.4% 42.8% ISK 17,409 million 4

HIGHLIGHTS OF THE FIRST HALF OF 2015 SOUND OPERATIONS IN A FAVORABLE BUSINESS ENVIRONMENT Arion Bank Operating environment • Arion Bank managed both IPOs on NASDAQ Iceland  The economic situation has been positive in Iceland. this year: the real estate companies Reitir and Eik and There is 3.6% economic growth, 1.9% inflation and sold shareholdings in the companies unemployment is around 3% • Sale and listing of shares in Refresco Gerber.  On 8 June the government announced measures to Companies in the Arion Bank group held a 9.8% stake lift the capital controls in the company, directly or indirectly  Following the announcement the sovereign credit  Asset Management yielded excellent results in the rating was upgraded by the three main ratings first half of the year agencies  The Bank has been a leader in corporate lending and  Increased activity on the currency, equity and bonds has increased its lending to international companies markets by making loans to seafood companies in North America  The Bank has increased its market share in lending to SMEs 5

HIGHLIGHTS OF THE FIRST HALF OF 2015 BOND ISSUE IN EUROS – BEST BUSINESS ACCELERATOR IN NORDIC REGION Funding Innovation  • Arion Bank’s credit rating was upgraded from BB+ ISK 800 million invested in start-up fund Eyrir Sprotar (with positive outlook) to BBB- (with stable outlook) • Arion Bank held Startup Reykjavík for fourth year – a  In March Arion Bank became the first Icelandic bank total of 40 companies have now participated to issue bonds in euros to a broad group of investors • Startup Reykjavík has been named by Nordic Startup - € 300 million 3-year bonds Awards as the best business accelerator in Nordic • The issue was followed in June with NOK 500 million region bond issue • More unfavourable loans paid off and cost of capital reduced 6

HIGHLIGHTS OF THE FIRST HALF OF 2015 STRONG EMPHASIS ON EQUALITY AT THE BANK Equality • Arion Bank was the first Icelandic bank to receive equal salaries certification from VR (Iceland’s largest commercial and office worker union) • This is designed to ensure no discrimination in terms of salaries between people in the same or comparable positions at work • Arion Bank is the largest company to receive VR‘s equal salaries certification 7

INCOME STATEMENT 8

INCOME STATEMENT SOLID PERFORMANCE IN Q2 2015 Net interest income increases from Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 previous quarters, Net interest income 7,392 5,783 5,911 6,343 6,483 mainly due to a slight increase in inflation Net commission income 3,677 3,757 3,192 3,526 3,445 Net financial income 2,184 7,539 1,429 1,993 4,439 Salaries and related Other income 1,038 4,702 5,211 687 2,356 expense decrease from Operating income 14,291 21,781 15,743 12,549 16,723 Q2 2014 Salaries and related expense (3,675) (3,492) (3,953) (2,862) (3,714) Negative net change in Other operating expenses (3,108) (2,896) (4,467) (2,786) (3,064) valuation on loans is Bank levy (659) (730) (636) (633) (715) predominantly due to Net impairment (1,863) 1,782 (744) 876 34 revaluation of loans at Net earnings before taxes 4,986 16,445 5,943 7,144 9,264 the subsidiary AFL- Income tax (647) (1,720) (223) (1,989) (1,152) sparisjóður Net gain from disc. operations 79 183 241 67 6,433 Net earnings 4,418 14,908 5,961 5,222 14,545 9 All amounts in ISK million

INCOME STATEMENT NET EARNINGS AFFECTED BY VALUE CHANGES OF EQUITIES RELATING TO IPO’S Increase in net interest income due to increase Diff H1 2015 H1 2014 Diff% in inflation in H1 2015 Net interest income 13,175 11,966 1,209 10% and changes in funding structure Net commission income 7,434 6,593 841 13% Net financial income 9,723 3,867 5,856 151% Substantial growth in Other income 5,740 3,274 2,466 75% Net commission Operating income 36,072 25,700 10,372 40% income from all Salaries and related expense (7,167) (7,164) (3) 0% sources Other operating expenses (6,004) (5,811) (193) 3% High net financial Bank levy (1,389) (1,375) (14) 1% income and other Net impairment (81) 2,001 (2,082) - income in H1 2015 due Net earnings before taxes 21,431 13,351 8,080 61% to sale and listing of Income tax (2,367) (2,467) 100 (4%) legacy equity holdings Net gain from disc. operations 262 6,525 (6,263) - Net gain from Net earnings 19,326 17,409 1,917 11% discontinued operations in H1 2014 mainly a result of successful listing and sale of 18% stake in HB Grandi 10 All amounts in ISK million

NET INTEREST INCOME NIM IS UNUSUALLY HIGH DURING THE QUARTER AT 3.3% Interest income from loans 7.4 Inflation increased 7.5 during Q2 2015 14.8 15 resulting in higher net 12.7 6.5 12.0 6.3 interest income 10.5 9.6 5.9 compared to previous 10 5.8 quarters 7.7% 6.7% 6.2% 5 5.5% Prepayment of a 5.1% 5.0 portion of the Bank’s subordinated loan had 0 3.3% a positive effect on Net Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 2.9% 3.1% Interest Margin 2.8% 2.6% Interest income lending / av. lending Interest expense funding* 10 2.5 8.6 7.5 6.8 5.8 4.9 5 4.6% 4.1% 3.2% 3.7% 2.7% 0 0.0 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Interest expense funding / av. funding Net interest income NIM 11 All amounts in ISK billion *Funding includes due to credit institutions and Central Bank, deposits, borrowings and subordinated liabilities.

NET COMMISSION INCOME COMMISSION INCOME IS TRENDING UPWARDS Cards and Asset 5 Breakdown of Net commission income management a Q2 2015 growing source of commission income 3.8 Commission income in 3.7 3.5 0.2 3.4 investment banking 0.4 3.2 0.8 decreases from Q1 as 0.8 0.6 0.6 expected 1.4 0.4 ISK 3.7 - No IPO in Iceland in Q2 0.9 0.7 0.6 0.4 Billion 0.7 Lending and 0.3 guarantees and other 0.2 sources of commission 1.0 0.9 0.9 income stable 1.0 0.9 1.0 Cards 1.5 1.4 1.4 Asset management 1.2 1.2 Collection and payment services Investment banking 0 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Lending and guarantees Cards Asset management Other net fee and commission income Investment banking Other 12 All amounts in ISK billion

NET FINANCIAL INCOME VERY GOOD RETURN ON LISTED AND UNLISTED EQUITY POSITIONS Bonds (ISK bn.) and return on bonds (%) (returns include interest income) 80.0 73.2 Good return on shares 69.7 68.5 67.8 67.8 during Q2 due to favourable stock 60.0 8 market 9% 40.0 Return on bond 7% holdings improving 6% 6% 4% 20.0 A slight growth in 6 equity positions mainly related to listing of a 0.0 former associated Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 companies whilst bond Shares (ISK bn.) and return on shares (%) positions remain 4 40.0 36.1 36.3 7.5 relatively stable 31.1 30.1 30.1 89% 4.4 63% 2 20.0 22% 20% 2.2 2.0 9% 1.4 0.0 0 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 13 All amounts in ISK billion