Research Update: Iceland-Based Arion Bank Outlook Revised To Negative On Uncertain Capital Trajectory; Ratings Affirmed At 'BBB/A-2'

Rapid corporate loan growth and increased capital distributions have lowered Arion Bank's risk-adjusted capital (RAC) ratio to 13.6% as of Dec. 31, 2022, from 14.3% at year-end 2021, amid Iceland's firm economic rebound from the pandemic-induced recession in 2020. Although we expect Iceland's economic recovery to continue, we remain mindful of shifts in key sectors and housing market dynamics, which could pressure Arion's asset quality. In our base case, we expect the RAC ratio to recover beyond our 15% threshold for a very strong assessment over the next 12-24 months, but risks to capital building and prevailing global macroeconomic uncertainty cloud our forecasts. We have therefore revised our outlook on Arion Bank to negative from stable and affirmed 'BBB/A-2' issuer

...- Rapid corporate loan growth and increased capital distributions have lowered Arion Bank's risk-adjusted capital (RAC) ratio to 13.6% as of Dec. 31, 2022, from 14.3% at year-end 2021, amid Iceland's firm economic rebound from the pandemic-induced recession in 2020. - Although we expect Iceland's economic recovery to continue, we remain mindful of shifts in key sectors and housing market dynamics, which could pressure Arion's asset quality. - In our base case, we expect the RAC ratio to recover beyond our 15% threshold for a very strong assessment over the next 12-24 months, but risks to capital building and prevailing global macroeconomic uncertainty cloud our forecasts. - We have therefore revised our outlook on Arion Bank to negative from stable and affirmed '###/A-2' issuer credit and resolution counterparty ratings. - The negative outlook indicates that we could lower the ratings if the bank is unable to restore its RAC ratio to at least 15% over the next two years or if the bank's...

Research Update