Arion Bank

The stable outlook indicates that while we see Arion as well placed to benefit from a gradual economic recovery in Iceland over the next two years, residual risks relating to the pandemic and the withdrawal of fiscal and monetary policy remain. Asset quality may yet deteriorate such that the bank's NPA ratio is likely to rise above 3.5% from 2.9% as of June 2021. We expect Arion's risk-adjusted capital (RAC) ratio to remain above 15%, supported by steady loan growth and capital distribution flexibility. Moreover, we expect the sale of Valitor to be executed as planned, with a modest positive financial impact. We could lower the ratings on Arion if the economic environment in Iceland were to become more difficult,

...We project Arion Bank's capital to remain a rating strength. The risk-adjusted capital (RAC) ratio stood at 18.5% as of end-2020 and we expect it to moderate toward 17.5% in the next 18-24 months as capital distribution policy normalizes. In H1 2021, Arion proposed a dividend of Icelandic krona (ISK) 2.9 billion and a planned buyback of ISK 14.9 billion. Our RAC forecast incorporates these adjustments and assumes a 50% dividend payout ratio in the next 18-24 months. On a positive note, earnings will be supported by increasing cost efficiencies, management of funding costs, strong lending growth on the back of increased demand for mortgages, and solid corporate and investment banking and capital market activity levels. Despite the ISK 812 million impairment release in Q2 2021, Arion Bank's asset quality indicators remain dependent on the recovery of international tourism. The bank has material exposure to sectors heavily exposed to the pandemic and concentrated in a small and volatile country...

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