Arion Bank

The stable outlook reflects our expectation that the RAC ratio will remain very strong, notwithstanding Arion's larger and earlier-than-peer distribution of excess capital as the economy emerges from the pandemic. In our base case, we anticipate that profitability will remain strong in the coming two years and remain marginally higher than that of peers, as margins rebound from pandemic-induced lows and credit losses revert to about 30 bps of gross loans. In addition, we expect costs to remain contained amid high inflation as the bank continues to service most customers digitally. The stable outlook also reflects our view that Arion should be able to absorb the effects of a moderate correction in the housing market, should it materialize. The most

...Our ratings on Arion Bank balance the bank's established franchise, high capitalization, and robust profitability against its concentration in Iceland's small economy alongside an elevated risk of a housing correction. Arion's capital and earnings strength provide a buffer to absorb higher-than-anticipated credit losses. These could materialize in the event of a housing correction, a prominent risk in view of lofty valuations, rising interest rates, and the recent build-up in household debt. Capitalization is set to fall but remain very strong. We project the risk-adjusted capital (RAC) ratio to be stable at close to, but consistently above, 15.0% over our two-year forecast horizon. Our RAC ratio of 16.2% at year-end 2021 reflects the effect of the bank's planned distribution of Icelandic krona (ISK) 26.7 billion (190 million) of excess capital. We project the RAC to decline to closer to 15.0% because of the application of higher risk weights on household and...

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