Interview with Benedikt Gíslason, CEO, Arion Bank, Iceland

Arion Bank is one of Iceland’s leading universal banking franchises, with a 29% share of the market. As its CEO, could you provide an insight into the country’s resilience when dealing with shocks of the magnitude of COVID-19? To what extent has the Icelandic economy been affected by the pandemic?

We have suffered an impact to our economy like most countries. If you compare us to the rest of Europe, Iceland is positioned somewhere in the middle in terms of the magnitude of its economic downturn. Part of this is due to our reliance on tourism, a sector that developed quickly over the last decade and has turned into our largest export industry today. Our economy has not faced an emergency downturn because we have other solid sectors — like our fisheries and energy-intensive industries — and we also have a robust fiscal position. In addition, fiscal measures introduced by the government have helped support the economy through furlough schemes, subsidies and grants to companies.

We have one of the largest fully funded private pension schemes in Europe and that has helped during such an unusual situation. The pensions have been opened up to the holders so they can tap into their savings. Pensions have been built up quite rapidly over the past few years and, if we look at the savings rate in Iceland, we have had a positive current account surplus for the last seven years. The accumulated national savings rate over this period is approximately 60% of gross domestic product. Going into this downturn, both households and corporations had a relatively low level of borrowing compared to historical levels.

In an international context, and coupled with the fact that the fiscal debt position of the Icelandic government has been reduced quite dramatically since the 2008 financial crisis, the low level of borrowing has allowed us to effectively tackle the collapse of income in 2020. It has made tackling this downturn significantly easier than it was in 2008, when we had a much more leveraged economy on all fronts except for the fiscal side, where we had a relatively low debt ratio. You also have to take into account that our net external investment position was fairly weak back then, which led to the collapse of the Icelandic krona currency and inflation. The impact on leveraged balance sheets was quite high and this led to a banking system collapse.

From a financial standpoint, revenue loss this time has been substantially easier to deal with because balance sheets are much stronger. The banking system in particular has gone from being in a light-touch regulatory environment with ambitious external growth targets to being a purely domestic industry with one of the highest leverage ratios and one of the highest capital ratios in Europe. From a light-touch to a heavy-touch approach, you can face the downturn with a solid and strong banking system, one that has not incurred higher credit losses than banks in neighboring countries.

Despite the challenging economic environment brought about by COVID-19, Arion Bank has demonstrated a robust financial position in its second-quarter results, posting growth in earnings but also hitting its 10% return on equity target. Can you tell us how the bank’s commitment to the principles of responsible banking is helping to not only contribute to the bank’s positive development, but is also supporting the economic recovery of Iceland at this time?

It may sound obvious but the key to responsible banking is to have your operations responsibly run while being profitable. It’s clear that a company that is not profitable loses its ability to provide services at competitive prices or to invest in new services or to develop its business and service its clients in the best way. Having your house in order comes first and that’s been a primary focus of ours over the last 12 to 18 months to improve our underlying operating performance.

We have been privileged to have a diversified business model that includes an insurance business and the largest asset manager in Iceland for investment services. On top of that, we own the largest payment solutions company in Iceland. In addition to our retail and corporate banking, we are strong in investment banking operations as well.

We have a diversified business model with an emphasis on supporting our clients. From the outset of the pandemic, we were the first bank to roll out a payment holiday scheme. We have demonstrated through this scheme that we are working with our clients and making sure that they are able to navigate through these challenging times. In cases where our corporate clients need restructuring, we have always made sure that we come to the table as a constructive creditor trying to facilitate that process. In some cases, it is a mixture of new equity coming into the company and part of the debt being restructured, both of which are very important.

We build relationships over decades, not just years. That’s our approach to maintaining our market share and hopefully increasing it. Despite the challenging downturn, a focus on environmental goals and sustainability cannot be put aside. On the contrary, many companies are looking to make new investments that bring about improvements in environmental factors and sustainability. One of the positive things to come out of COVID-19 is the fact that it has slowed down decision making, and allowed companies and households to broaden their horizons in terms of how they approach their finances and investment. It has permitted both to have a better thought-through strategy about what they are investing in and how they deploy their savings and manage their finances on a wider spectrum.

The recently leaked files from the U.S. Financial Crimes Enforcement Network have once again put the spotlight on global banks and the issue of transparency. As an institution that has consistently been ranked among the leaders in Iceland for corporate governance, how important is transparency?

These repeated data leaks do not depict a pretty picture of the banking system on a global scale, unfortunately. In Iceland, we enjoy a position outside the scope of these money-laundering schemes, because we had capital controls in place for such a long time following the 2008 financial crisis. We were not high on the radar of anyone who was trying to launder money. Following the collapse of the banking system in 2008, all our international operations were shut down. To begin with, Iceland does not have any operations in the Baltic countries, for example, which have been the gateway for these unlawful money flows through the Scandinavian banking system. Following the liberalization of Icelandic capital controls, we have one of the smallest currencies in the world and a small economy. All irregular money flows will catch the eye of the regulator and the banks immediately.

Moreover, Iceland has been subject to scrutiny until recently through the prelisting of the Financial Action Task Force’s gray list, which we were finally removed from in October — a really important step for Iceland. The list almost serves as an advertisement for those who are actively engaging in money laundering. Being part of that list shows that there’s a weakness in the financial system of that country. As a publicly listed company, with half of our investors based abroad, the operating of a sound banking system in Iceland that is not prone to international money laundering is very important for us. We want to keep it that way.

The new decade at Arion Bank also ushered in a new environment and climate policy, with a focus on contributing to the green economy and sustainability. You launched an innovative Green Deposit product a few months ago — can you tell us more about this, how the market has reacted to the product and if you envisage similar innovations being adopted by banks around the world soon?

It’s a product that reflects both what is important to us and the journey that we are on. I’m sure that it is going to develop into a very popular savings product. Banks play a really important role when it comes to environmental targets for countries and companies who are actively trying to achieve the Paris climate goals. The reason why banks play such an important role is because they actively fund most new investments and they can make an impact as such because they decide which projects should be funded. A good example of this in Iceland is our credit portfolio in the energy space, which is 100% renewable. We only fund hydro, geothermal and windmill projects here in Iceland. We also have a car-financing product where we offer better rates on electric cars. The reason is not only to promote the use of environmentally friendly cars, it is also commercial — the hypothesis and argument is that these cars tend to have a better resale value than other types of vehicles. You could argue that the credit risk is lower, but this has proved to be a very sought-after product.

In the first half of the year, the bestselling car in Iceland was the Tesla Model 3. We had a good market share in financing the purchase of these new cars coming to Iceland. We are seeing a renewal of the country’s car fleet, which means that Iceland will be able to fulfill its climate change goals hopefully sooner than expected. We’ve had to import many electric cars because the majority of the car fleet in Iceland will run on renewable electricity within a few years time.

Two major global shifts that were brought about by COVID-19 have been the creation of more flexible corporate structure, and the need for businesses to go online. Arion Bank was ahead of the game in online banking and has been a frontrunner in that area over the last decade. How has the bank’s digital strategy been impacted by the crisis?

The bank’s digital investment has been key and has proved to be our most important investment in recent years, especially during the pandemic. Our ability to service our clients was greatly enhanced by this investment and we have seen the widespread adoption of our digital services. By the end of last year, our app had outgrown our online web portal in terms of utilization. When it comes to behavior adopted during lockdown, we have seen that those who were previously not keen to use these services are now learning and wanting to use them. We had introduced touchless payments into phones and smart watches before the pandemic in Iceland, and that has been very helpful as well.

We were able to service our clients through these difficult times even though our branches closed for a few weeks, except to people with an appointment, and most of our staff are working from home. We’re operating our call center from the kitchens and living rooms of our employees, and I would like to say a big “thank you” to all of them for offering their homes as part of our bank’s office space.

Our systems have functioned well and we’ve brought in new users to our online services and banking app. This has been helped by a collective approach led by the government that enabled more e-signatures for contracts. For example, you could execute the payments’ holiday measure through our online web portal or banking app and sign it electronically. This has demonstrated that there is a willingness and collective effort to continue to digitize Iceland. This work is led by the Ministry of Finance, which has a special task force and a project management team leading the effort.

Furthermore, the electronic signature process is gradually being introduced to the few remaining types of business that still require people to visit branches. We are seeing with our banking app that it can be further developed to sell third-party services as well. We acquired a small fintech company last year that is the market leader in the house rental market — bringing together those who own a flat with those who want to rent. This service will also be included in our app. We started selling insurance products last year as well. We see our digital channels, and in fact the bank, developing into an ecosystem orchestrator where people can buy financial services and financially related services in many different categories. Not only from us but other vendors or service providers too.

The U.S. is Iceland’s single largest trading partner and biggest investor. Until recently, most of this investment was aimed at the aluminum sector, thanks to Iceland’s energy resources. However, U.S. investments have diversified into areas such as hotel chains, consumer goods and retail, with the entrance of several U.S. brands and franchises. What is your assessment of the overall state of U.S.-Icelandic relations and why would U.S. firms choose Arion Bank as a local partner rather than other institutions in or outside Iceland?

We have demonstrated that U.S. and other international investors choose Arion Bank as their partner when they operate or invest in Iceland. We are currently working with U.S. partners on the largest hotel development project here in Iceland. We have also been privileged and fortunate to have U.S.-based investors. In fact, three out of ten of our largest shareholders are U.S.-based investment funds or investment banks.

After the 2008 financial crisis and the rebuilding of Iceland’s economy and banks, the resolution of the failed banks was enacted. The aftermath of the collapse of the Icelandic financial system involved creditors in more than one hundred jurisdictions. It was a very complicated resolution, especially when you have proceeds of the state that end up actually being majority owned by U.S.-based investment funds. As a result, these investment funds got to know Iceland and have continued to invest in Iceland.

Since then, U.S.-Icelandic business relationships have strengthened. You can see how the U.S. has invested in its new embassy here and the growing portfolio of investments coming into Iceland has been mainly from U.S.-based funds rather than our neighboring European countries. This demonstrates a longstanding and strong relationship between the two countries, even though our population is just 1,000th of the size of that in the U.S. We occupy a strategic geographic location and have a lot to offer when it comes to trade.

We power our economy with renewable energy sources. We have U.S.-based energy intensive companies operating in Iceland as well. With climate change and global warming, and Iceland being a relatively cold country, you will see further interest from the U.S. when it comes to investments and building up businesses here. The best example is data centers. This has been a recent development in Iceland and I’m sure that we will enjoy a further strengthening of that relationship and hopefully see more investments, with Iceland being the perfect home for high-net-worth individuals from the U.S.

Do you have a final message for the readers of Foreign Policy around the globe?

When it comes to transatlantic flights, Iceland’s connections are incredibly favorable. We have more flights a week to North America from Iceland than all the major airports in the other Nordic countries put together and, when the situation normalizes again, I think this will be a huge advantage. Stay positive — we’ll get through this pandemic together. Things will become normalized again globally but, in the meantime, it is important we continue learning from each other.