Arion IPO Marks Breakthrough For Icelandic Bank

Iceland's banking system is back from the brink.

Höskuldur Ólafsson

Adecade after the financial crisis that plunged Iceland into a ruinous depression, Arion Bank—the domestic arm of the failed Kaupthing Bank—has officially announced plans to return to the stock market by the end of June. Arion will list its shares on the Nasdaq Iceland exchange, and depositary receipts representing its securities on Nasdaq Stockholm.

In late 2008, Iceland was the first Western nation in more than three decades to request a bailout, forced to take a $2.1 billion IMF loan and another $2.5 billion from its Scandinavian neighbors. Kaupthing, once a major international bank and Iceland’s largest, went into administration and its domestic assets were separated into Arion Bank in 2009. The IPO will be an important test of investor sentiment toward Iceland and its banking sector.

“Arion Bank has been fully restructured for several years now, and today is a strong, profitable and leading bank in Iceland,” stated Höskuldur Ólafsson, CEO of Arion. “With this step, Arion Bank will be the first Icelandic bank to be listed on the Nasdaq Main Market in more than a decade.”

However, not everyone in Iceland is pleased with how the process leading to the IPO has been conducted so far. Arion has been separately trying to sell Valitor, a leading payment-solutions company that operates internationally. “There is some game being played here and the players are the government, the current owners of the fallen Kaupthing, the pension funds that are commanding 1.5 GDP of Iceland in their portfolio and potential investors,” says Thórólfur Geir Matthíasson, a professor of economics at the University of Iceland. “The attempt has been to siphon the most valuable asset out of Arion before the IPO, at nominal price and not at market price.”

Despite such concerns, Arion’s rise from the ashes of the financial crises remains a major success story. “The banking system in Iceland has changed dramatically since the crisis. It now serves the domestic market. Banks have faced stiffer equity requirements than the Basel standards, but they have been increasing their leverage for the past year,” says Matthíasson.

Still, he adds, given that the system is too big for profitability from “ordinary” business, liquidity is unlikely to be stellar for the foreseeable future: “The market for financial services in Iceland is characterized by monopolistic competition or oligopoly. Hence, you may find it a paradox that they do not earn extra profits. The explanation is in their history, as they inherited the oversized structure from the system existing before the crisis. They have done some downsizing, but there is still some way to go.”