Arion Bank

High level of capitalization and leverage ratios. Stable and solid domestic franchise equally split between retail and corporates. Limited wholesale financing needs. Relatively high exposure to tourism and commercial real estate weigh on asset quality. Domestic economy limits opportunities to diversify risk. Sluggish profitability prospects. The stable outlook indicates that we expect the sharp economic contraction in Iceland--associated with COVID-19--to impair the Arion Bank's (Arion) profitability, causing return on equity to remain at 2%-4% over the next two years, and asset quality to deteriorate so that the bank's nonperforming asset ratio is likely to rise above 5%, from 2.9% as of December 2019. During the next two years, we anticipate that Arion's risk-adjusted capital (RAC) ratio will remain above 15%,

...Outlook: Stable The stable outlook indicates that we expect the sharp economic contraction in Iceland--associated with COVID-19--to impair the Arion Bank's (Arion) profitability, causing return on equity to remain at 2%-4% over the next two years, and asset quality to deteriorate so that the bank's nonperforming asset ratio is likely to rise above 5%, from 2.9% as of December 2019. During the next two years, we anticipate that Arion's risk-adjusted capital (RAC) ratio will remain above 15%, on the back of moderate loan growth and contained dividend payments or buy-backs. Moreover, we expect the sale of its subsidiary Valitor to be executed as planned and without a meaningful negative impact for the bank's financials, particularly its capitalization. We could lower the ratings on Arion if the economic environment in Iceland becomes even more difficult, causing profitability prospects for banks to weaken for a prolonged period, declining capitalization and worsening asset quality. Although...

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