2017 Financial Results. 14 February 2018

Transcription

1 217 Financial Results 14 February 218

2 Forward Looking Statements Important information All information contained in this presentation should be regarded as preliminary and based on company data available at the time of the presentation. Due care and attention has been used in the preparation of forecast information. However, actual results may vary from their forecasts, and any variation may be materially positive or negative. Forecasts, by their very nature, are subject to uncertainty and contingencies, many of which are outside the control of Íslandsbanki. Íslandsbanki cannot guarantee that the information contained herein is without fault or entirely accurate. The information in this material is based on sources that ÍSB believes to be reliable. Íslandsbanki can however not guarantee that all information is correct. Furthermore, information and opinions may change without notice. ÍSB is under no obligation to make amendments or changes to this publication if errors are found or opinions or information change. Íslandsbanki accepts no responsibility for the accuracy of its sources. Íslandsbanki and its management may make certain statements that constitute forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as anticipates, targets, expects, estimates, intends, plans, goals, believes and other similar expressions or future or conditional verbs such as will, should, would and could. The forward-looking statements made represent Íslandsbanki s current expectations, plans or forecasts of its future results and revenues and beliefs held by the company at the time of publication. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and are often beyond Íslandsbanki s control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements. Forward-looking statements speak only as of the date they are made, and Íslandsbanki undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. Íslandsbanki does not assume any responsibility or liability for any reliance on any of the information contained herein. Íslandsbanki is the owner of all works of authorship including, but not limited to, all design, text, sound recordings, images and trademarks in this material unless otherwise explicitly stated. The use of Íslandsbanki s material, works or trademarks is forbidden without written consent except were otherwise expressly stated. Furthermore, it is prohibited to publish material made or gathered by ÍSB without written consent. 2

3 Table of Contents 1. Icelandic economy update 2. Overview 3. Income statement 4. Assets 5. Liabilities, liquidity & capitalisation 6. Financial targets and key points

4 1. Icelandic economy update

5 Icelandic GDP growth moderating Relatively soft landing the most likely scenario GDP AND MAJOR SUBITEMS, YoY CHANGE* % HIGHLIGHTS Current upswing peaked in 216 at 7.2% GDP growth GDP growth estimated at 4.1%. Updated forecast predicts 2.3% growth per year in GDP YoY REAL GROWTH* % Imports Exports Inventory chg. Investment Public consumption Priv.consumption GDP Iceland World Advanced economies Emerging market and developing economies * Shaded areas indicate ISB Research/IMF forecasts Source: Statistic Iceland, Central Bank of Iceland, IMF and ISB Research Pace of growth shifts from emerging market speed to OECD-peers speed Households becoming the main driver of growth, with private consumption and residential investment supplanting services exports and business investment Rebalancing of economy happening somewhat sooner than previously expected 5

6 Tourism sector growth decelerates Fishing industry debt ratios stabilising EXPORT REVENUES BY SECTOR ISK bn % 26% 22% 866 3% 25% 26% 96 29% 26% 24% 1,12 28% 27% 26% 23% 22% 1,48 1,68 27% 29% 21% 2% 2% 19% 2% 24% 26% 29% 1,189 1,189 27% 26% 22% 2% 2% 31% 15% 39% 1, Other exports Marine product exports Aluminium and aluminium product exports Revenues from tourists in Iceland and abroad FOREIGN TOURISTS DEPARTING FROM ICELAND BY AIR YoY change 6% 24% 17% 14% 45% FISHING COMPANIES DEBT POSITION ISK bn Debt (l.axis) Debt/EBITDA (r. axis) FISHING INDUSTRY REVENUES AND EBITDA 35 35% 3 3% 5% 4% 3% 2% 18% 2% 21% 24% 3% 4% 24% % 2% 15% 1% 1% 5 5% % Jan-April May-August Sept-Dec Full year Source: Iceland Tourist Board, Statistics Iceland and ISB Research % Revenue (ISK bn) EBITDA (ISK bn) EBITDA ratio (r.axis) 6

7 Current account surplus shrinking Ongoing moderate growth in tourism key to continued C/A surplus IMPORTS YoY real % change* Goods imports Service imports Total imports EXPORTS YoY real % change* Goods exports Service exports Total exports * Shaded areas/dotted lines indicate ISB Research forecasts ** : C/A balance excl. old banks Source: Statistics Iceland, Central Bank of Iceland and ISB Research CURRENT ACCOUNT BALANCE % of GDP** Trade balance 7,7 36% of GDP C/A balance 4,1 3,5 2,3 HIGHLIGHTS Increased services exports due mainly to the emergence of tourism as Iceland s chief export sector have been the main source of the rise in export 1.9 revenues in recent years ¾ of total export growth in derived from increased services exports ISB Research estimates that over 4/5 of export growth in will come from increased services exports Following a record C/A surplus of 7.7% of GDP in 216, the surplus shrank to an estimated 4.1% of GDP in 217 C/A surplus forecast at 3.5% of GDP this year and 2.3% of GDP in 219 Contrary to recent decades, a substantial C/A deficit is unlikely in coming years as long as tourism does not decline materially 7

8 Domestic balance sheets robust Debt ratios stabilising after substantial deleveraging INTERNATIONAL INVESTMENT POSITION* % of GDP 2% -3% -8% -13% -78% -18% * Excluding banks in winding-up process Q3 28-Q % CENTRAL GOVERNMENT GROSS DEBT % of GDP % Iceland USA UK Germany Denmark CORPORATE DEBT % of GDP HOUSEHOLD DEBT % of GDP HIGHLIGHTS Iceland is now a net creditor to the rest of the world, with net IIP around 4.4% of GDP Gross central government debt has decreased from 88% of GDP to 41% of GDP over the past 7 years Private sector credit-to-gdp ratio has decreased considerably in the past decade due to deleveraging and, more recently, also robust GDP growth In recent years, corporate investment has largely been financed by equity, but the share of credit financing is growing Average LTV ratio of real estate has fallen from 55% in 21 to around 34% by end- June 217 due to a combination of deleveraging and rising house prices Source: The World Bank, The Central Bank of Iceland, Statistics Iceland 8

9 Households enjoy improving conditions Private consumption growth supported by rising household net wealth and real wages HIGHLIGHTS Demand pressures in the labour market peaked in 217 at 2.8% unemployment Real wage growth has gone down since peaking at 9.5% in 216, but measured a healthy 5.1% in 217 More moderate real wage growth forecast: 3.% in 218 and 1.9% in 219 Private consumption growth remains marked, supported by sizable real wage growth, increasing net wealth and high employment ratio Housing market still characterised by demand outstripping supply. Substantial increase in residential investment and more moderate real wage growth likely to slow the rise in house prices in UNEMPLOYMENT AND LABOUR PARTICIPATION % of workforce* REAL HOUSE PRICES AND REAL WAGES Change from the prior year (%) * Unemployment (l.axis) Labour participation rate (r.axis) Real house prices Real wages HOUSEHOLDS WAGES & PRIVATE CONSUMPTION Real change from prior year (%)* HOUSE PRICES AND RESIDENTIAL INVESTMENT* Real wages minus private consumption Real wages Private consumption Residential investment (ISK bn, 216 prices, l.axis) Real house prices (index, r.axis) * Shaded areas/dotted lines indicate ISB Research forecasts Sources: Statistics Iceland, Central Bank of Iceland, ISB Research forecasts 9

10 Inflation rising moderately The Central Bank s rate cut process on hold for now INFLATION, POLICY RATE AND REAL POLICY RATE %* 4,5 4, 3,5 3, 2,5 2, 1,5 1,,5 * dotted lines indicate ISB Research forecasts, 214Q1 215Q1 216Q1 217Q1 218Q1 219Q1 5yr breakeven inflation Inflation expectations of market participants Inflation CBI POLICY RATE AND LONG-TERM INTEREST RATES % Inflation target Effective CBI policy rate Long-term ISK T-bond yield Long-term ISK CPI-indexed T-bond real yield Source: Statistics Iceland, Central Bank of Iceland and ÍSB Research HIGHLIGHTS Inflation below CBI s 2.5% target since Q1 214, following 13 years of volatile inflation since the adoption of inflation targeting This monetary policy success has anchored inflation expectations close to the target Inflation expected to be in line with the CBI s 2.5% inflation target throughout H1/18, rise to about 3.% by end of year and then average 2.8% in 219 Stable inflation and moderate inflation expectations have enabled the Central Bank to lower the policy rate in spite of demand pressures in the economy Long-term interest rates have been trending downwards in Iceland in recent decades Interest rates likely to fall somewhat further throughout the yield curve by the end of the decade 1

11 ISK stable as capital controls end Outlook for relatively strong ISK as long as foreign currency flows enjoy a healthy balance EUR/ISK AND THE CBI S FX MARKET TRANSACTIONS TRADE BALANCE AND ISK REAL EXCHANGE RATE -2% -15% Interventions, capital controls Capital acct. liberalisation Interventions, capital controls lifted Minimal interventions, liberalised capital account -2 CBI sells FX to counter Last FX -4 depreciation transaction Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 CBI FX purchase (+) / sale (-), EUR m EURISK HIGHLIGHTS Since August 217 the ISK has been relatively stable, following increased volatility around the lifting of capital controls The Central Bank has halted its interventions in the FX market, having previously accumulated FX reserves equal to over 25% of GDP while leaning against the appreciation in A stable ISK is a sign of a successful capital account liberalisation process in H1 217 and a relatively healthy balance in foreign currency inflows and outflows -1% -5% % 5% 1% 15% Trade balance, % of GDP (l.axis) Real exchange rate, index (r.axis) Source: Central Bank of Iceland and ÍSB Research calculations The exchange rate forecast to hold broadly steady in , at roughly the 217 average Continued C/A surplus, improved external position support high real exchange rate, but need for diversification by institutional investors an offsetting factor 11

12 Iceland s credit rating improves further Upgrades from S&P and Fitch following lifting of capital controls DEVELOPMENT OF SOVEREIGN CREDIT RATING Moody s, Fitch and SP Global AAA/Aaa AA+/Aa1 AA/Aa2 AA-/Aa3 A+/A1 A/A2 A-/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3 S&P in Mar-17: Rating upgrade to A on lifting of capital controls; outlook stable Moody s in Sep-16: The two-notch upgrade reflects the speed and extent of the country's recent progress in recovering from its banking crisis Fitch in Dec-17: Rating upgrade to A on economic stability, reduced external vulnerability and improvement in government debt ratios, supported by robust growth BB+/Ba1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 MOODY S IN SEPTEMBER 216 The two-notch upgrade to A3' from 'Baa2' of Iceland's government rating reflects the speed and extent of the country's recent progress in recovering from its 28 banking crisis. The outlook is stable Moody s S&P Global Fitch FITCH IN DECEMBER 217 The Outlook is Stable. External vulnerability in Iceland has reduced considerably in recent years, and the economy has been resilient to the lifting of capital controls between October 216 and March 217 and repayment of external liabilities The general government debt to GDP ratio remains on a downward trajectory S&P IN DECEMBER 217 S&P Global Ratings affirmed its 'A/A-1' longand short-term foreign and local currency sovereign credit ratings on the Republic of Iceland. The outlook is stable. The stable outlook balances the potential for improvements in Iceland's fiscal position against the risks of the economy overheating in the next two years. 12

13 2. Overview

14 This is Íslandsbanki A leader in financial services in Iceland, Íslandsbanki is a universal bank with a proven strategy * Return from regular operations and corresponding ratios on normalized CET1 of 15%, adjusted for risk free interest on excess capital. Earnings from regular operations is defined as earnings excluding one-off items e.g. bank tax, one-off costs due to headquarters and the impairment of good will, and net earnings from discontinued operations. 14

15 Social responsibility Íslandsbanki is dedicated to being a community leader in the area of social responsibility HELPING HAND Helping Hand is a key Íslandsbanki initiative where employees donate their time to a good cause In 217 over 4 employees participated in Helping Hand Two Íslandsbanki employees travelled to Sierra Leone in 217 and taught a computer course for about 7 people CHAMPIONS MONTH Íslandsbanki participated in Champions Month for the first time in February 217 through an exciting new marketing campaign During Champions Month participants challenge themselves by setting specific goals to become the best version of themselves everyone can participate 45% employees participated by setting a goal 37% of the Icelandic nation participated by setting a goal MARATHON Íslandsbanki has sponsored the Reykjavík Marathon for the past 2 years Over ISK 118m were donated to 152 charitable organisations, a 2% increase from the previous year's total of ISK 97m. Roughly 15, people participated in the 217 marathon, including 4, foreigners from 87 countries 15

16 Productive and eventful year behind us Operational highlights

17 Key financial takeaways from was a year of transformation but the Bank nevertheless performed strongly during the year 1. MACRO 2. STRONG RECURRING REVENUES 3. PROFITABILITY Outlook for 4.1% growth in 217, 2.3% growth per year in * Capital account liberalisation in March 217 Sovereign rating upgrades from all three rating agencies during last year NIM at 2.9%, slight drop due to lower interest rate environment NFC up.2%, mainly due to increased customer activity within the parent company Slight increase in regular underlying costs in the short term, rendering a C/I ratio of 62.5% After tax profit of ISK13.2bn and ROE of 7.6% ROE of regular operations of 1.3% based on normalised CET1 15% 4. SOUND BALANCE SHEET Balanced growth of loan portfolio of 9.8%, ISK 199bn in new lending in 217 Asset quality continues to improve, NPL was 1.%, compared to 1.8% at YE16 Positive impairments due to favourable economic environment 5. RATING UPGRADES, LANDMARK FUNDING DEALS, SOLID CAPITAL AND LIQUIDITY POSITION S&P upgrade in Oct 17 to BBB+/A-2 with stable outlook and Fitch upgrade in Jan 17 to BBB/F3 with stable outlook (affirmed Dec 17) Successful issuance of SEK 75m 1-year non-call 5 Tier 2 bond, the first subordinated bond from an Icelandic issuer since 28 EUR 3m 6 year non-call 5 bond at a spread of mid-swaps +75 basis points in Jan 18 Total capital ratio 24.1% (CET1 22.5%) and leverage ratio of 16.2% Group s liquidity coverage ratio (LCR) was 142% and NSFR 117% * Forecast from Íslandsbanki Research 17

18 Financial overview Key figures & ratios PROFITABILITY ROE 15% CET1 (regular operations)* 1.3% 1.7% 12.4% 12.6% 1.6% ROE (after tax) 7.5% 1.2% 1.8% 12.8% 14.7% Net interest margin (of total assets) 2.9% 3.1% 2.9% 3.% 3.4% Cost to income ratio** 62.5% 56.9% 56.2% 57.7% 58.5% After tax profit, ISK m 13,226 2,158 2,578 22,75 23,69 Earnings from regular operations, ISK m*** 13,848 15,138 16,198 14,846 12, CAPITAL Total equity, ISK m 181,45 178,925 22, , ,318 Tier 1 capital ratio 22.6% 24.9% 28.3% 26.5% 25.1% Total capital ratio 24.1% 25.2% 3.1% 29.6% 28.4% Leverage ratio 16.2% 16.% 18.1% 19.5% 18.6% BALANCE SHEET Total assets, ISK m 1,35,822 1,47,554 1,45, , ,9 Risk exposure amount, ISK m 775,492 74, , ,12 659,757 Loans to customers, ISK m 755, ,84 665, , ,741 Total deposits, ISK m 578, ,11 618, , ,2 Total deposit / loan ratio 74.% 84.9% 88.3% 82.9% 86.7% *Return from regular operations on normalised CET1 of 15%, adjusted for risk free interest on excess capital **Calculated as (Administrative expenses + Contribution to the Depositors and Investors Guarantee Fund One off items) / (Total operating income one off items) ***Earnings from regular operations is defined as earnings excluding one-off items e.g. bank tax, one-off costs due to headquarters and the impairment of goodwill, and net earnings from discontinued operations 18

19 3. Income statement

20 Income statement Strong recurring revenues with stable growth in NII and NFCI contributing 99% of total operating income ISK m Q17 4Q16 Net interest income 29,999 31,82 (1,83) 7,338 8,149 (811) Net fee and commission income 13,75 13, ,632 3,831 (2) Net financial income (715) 6,96 (6,811) Net foreign exchange gain Other operating income (25) 122 (17) 139 Total operating income 44,189 52,716 (8,526) 11,433 12,77 (643) Salaries and related expenses (15,233) (14,789) (444) (4,297) (4,61) (236) Other operating expenses (11,735) (12,332) 597 (3,358) (3,331) (27) Administrative expenses (26,968) (27,121) 152 (7,655) (7,392) (263) Depositors'and Investors' Guarantee Fund (1,83) (1,63) (19) (288) (252) (36) Bank Tax (2,892) (2,843) (49) (614) (691) 77 Total operating expenses (3,943) (31,27) 84 (8,557) (8,335) (221) Profit before net loan impairment 13,246 21,689 (8,443) 2,876 3,742 (867) Net loan impairment 1, Profit before tax 14,82 22,424 (7,622) 3,845 4,226 (38) Income tax expense (4,151) (5,25) 1,54 (816) (1,353) 537 Profit for the period from continuing operations 1,651 17,219 (6,568) 3,29 2, Profit from discontinued ops. net of income tax 2,575 2,939 (364) 83 1,73 (1,647) Profit for the year 13,226 2,158 (6,932) 3,112 4,63 (1,49) HIGHLIGHTS Stable and strong recurring revenues Net interest income totalled ISK 3.bn, a reduction of 5.7% from the previous year due to lower interest rate environment The net interest margin was 2.9% NFCI was at comparable levels to 216 Comparison to 216 skewed due to sale of shares in VISA Europe within subsidiary Borgun under net financial income Continued focus on cost control The cost-to-income ratio was 62.5% and administrative expenses (excluding one-off extraordinary expenses) is above previous year levels Total salaries were ISK 15.2bn in 217, a 3% increase between years, largely due to one-offs related to organisational changes Positive impairments Positive impairments are a result of a favourable economic environment Branch mergers Efforts to merge branches continued to add front-end costs that are expected to be offset by future savings, this includes the four head office locations to be fully merged at new HQ and merger of two largest branches 2

21 Earnings from regular operations Excludes one-off items and ROE calculation is adjusted to normalised CET1 of 15% HIGHLIGHTS One off items 217 ISK 268m in one-off costs in 217 are a result of organisational changes while ISK 145m is a result of Ombudsman extra charges Other extraordinary items: The following items could have been included as one-offs, but are deemed to even out in the future: -ISK 737m due to ruling on CPI / FX loans +ISK 459m due to FX loans in Ergo, release of provision +ISK 388m due to the release of provision from old CB fund and old real estate subsidiary One off income 216 The revenue excluded in 216, was in connection with the sale of shares in VISA Europe within subsidiary Borgun which was recognised in June 216 (ISK 6.2bn) Earnings from regular operations Regular earnings went down by ISK 1.3bn, as a result of lower net interest income due to dividend payments and lower interest rate environment, losses in financial income as a result of swap positions and trading losses and regular costs increasing when excluding one-off costs RESILIENT ROE FROM REGULAR OPERATIONS ISKm Q17 4Q16 Reported after tax profit 13,226 2,158 (6,932) 3,112 4,63 (1,49) One-off revenue (6,186) 6,186 One-off costs* 413 1,76 (1,293) (383) Bank tax 2,892 2, (77) Profit (loss) from discontinued ops (2,575) (2,939) 364 (83) (1,73) 1,647 Tax impact of adjustments (17) (444) 336 (9) (19) 1 Earnings from regular operations** 13,848 15,138 (1,29) 3,67 3,874 (24) ROE 15% CET1 (regular operations)*** 1.3% 1.7% 8.1% 11.7% ROA from regular operations (after tax) 1.3% 1.5% 1.4% 1.5% Net interest margin adj. 15% CET1 2.6% 2.6% 2.5% 2.6% Cost / income ratio adj. 15% CET1 66.7% 55.2% 73.2% 66.% EARNINGS FROM REG.OPERATIONS (ISK m) Q16 1Q17 2Q17 3Q17 4Q17 ROE REG. OPERATIONS CET1 15% (%) 11.7% 1.6% 11.8% 8.1% 8.1% 4Q16 1Q17 2Q17 3Q17 4Q17 * One-off costs include the impact of organisational changes, extra ombudsman charges and expenses related to the old headquarters. ** Earnings from regular operations is defined as earnings excluding one-off items e.g. bank tax, one-off costs due to headquarters and the impairment of good will, and net earnings from discontinued operations. From 218 onwards, earnings will not be fully adjusted for profit (loss) from discontinued operations, as a part of that item is considered part of normal business operations. Only one-off items will be adjusted for. *** Return from regular operations and corresponding ratios on normalized CET1 of 15%, adjusted for risk free interest on excess capital 21

22 Operating income Core earnings, NII and NFCI, continue to generate majority of total income OPERATING INCOME STRONG RECURRING REVENUES TOTAL OPERATING INCOME NET INTEREST INCOME (NII) Excluding one-off income ISKm ISKm - 5.% - 5.7% NET FEE AND COMMISSION INCOME ISKm 42,597 42,443 44,673 46,53 44,189 28,43 27,15 28,1 31,82 29,999 1,433 11,483 13,17 13,723 13, NET INTEREST MARGIN (NIM) % 3.4% 3.% 2.9% 3.1% 2.9% OTHER INCOME* ISKm 3,734 3,855 3,493 7,

23 Administrative expenses Administrative expenses excluding one-off expenses are ISK 1.1bn above previous year; ISK.7bn of which comes from subsidiary Borgun EFFICIENCY COST STRUCTURE IMPROVING OVERALL COST INCOME RATIO * % 62.5% ADMINISTRATIVE EXPENSES ** ISK m Real change in administrative expenses from 216 to 217: + 2.7% BRANCH NETWORK #, Byr branches due to merger in dark grey 58.5% 57.7% 56.2% 56.9% 23,924 23,451 24,23 25,414 26, PERIOD END FTE NUMBERS *** #, Parent company ADMIN.EXPENSE vs COST INDEX **** ISK bn, excl. one-off cost, parent company Admin expenses Actual Admin exps - cost index * The cost-to-income ratio excludes Bank tax and one-off cost and revenue items. ** Excluding one off items *** FTE numbers exclude summer employees **** Administrative expense - cost index is calculated as 4% inflation and 6% salary index excluding one-off items 23

24 Tax & levies Total tax footprint represents a significant contribution to society or close to ISK 24bn TAX & LEVIES ÍSLANDSBANKI S GLOBAL TAX FOOTPRINT INCOME TAX & SPECIAL TAXATION ISKm % 8,48 7,43 4,145 3,319 2,843 2,892 1,6 832 Income tax* Bank tax** FAT*** CONTRIBUTION TO TIF, FME & OMBUDSMAN ISKm 1,453 1, Íslandsbanki s global tax footprint is more than just corporate income tax, it consists of all taxes borne and all taxes collected Taxes borne are the company's cost that will have impact on the Group s results, e.g. corporate income tax payments, property taxes, etc. Taxes collected are not borne by the company, other than the cost of administrating the collection, e.g. VAT, payroll taxes, etc. TAXES BORNE (%) Income tax and special financial activities tax 31% GLOBAL TAX FOOTPRINT ISKm Taxes borne Tax borne Tax collected Tax footprint 217 TAXES COLLECTED (%) Employment taxes and obligations Taxes collected Total footprint % 1,63 1, FME and the Debtors Ombudsman Depositor s Fund Bank tax Depositor s fund Employee taxes and contribution Other taxes 22% 8.% 26% 13% Capital gains tax Other taxes 73% 1.% * Corporate tax is 2%. ** Change in legislation in Q4 213 raised Bank tax from.41% on total liabilities to.376% of total liabilities in excess of 5bn *** In addition, a new special financial activities tax was introduced in 212 calculated as 6% of taxable profits above ISK 1bn 24

25 4. Assets

26 Assets Total assets 1.1% down from year-end 216, contracted 3.9% in 4Q17 ISK m Δ Cash and balances with CB 189,45 275,453-86,47 Bonds and debt instruments 27,9 31,256-4,166 Shares and equity instruments 1,177 1, Derivatives 2,896 1, Loans to credit institutions 26,617 17,645 8,972 Loans to customers 755, ,84 67,335 Investment in associates Property and equipment 7,128 6, HIGHLIGHTS Liquid assets The three line items, Cash and balances with CB, Bonds and debt instruments, and loans to credit institutions, amount to about ISK 243bn, of which ISK 224bn are considered to be liquid assets Deposit outflow from CB in relation to lifting of capital controls (ISK 27bn), dividend payments (ISK 1bn), and loan book growth (ISK 67 bn). Liquidity levels and ratios remain robust Loans to customers New lending amounted to ISK 199bn since year-end 216 The loan book has grown by 9.8% since year-end, despite ISK 174bn in loans being fully repaid Intangible assets 4,231 2,672 1,559 Intangible assets Other assets 9,993 7,64 2,929 Non-current assets held for sale 2,766 6,384-3,618 Total assets 1,35,822 1,47,554-11,732 Have increased throughout year in conjunction with the development of the new core banking system and capitalisation of related costs Non-current assets held for sale Contracted by ISK 3.6bn since year-end 216; with the divestment of assets within the parent company (ISK 2.1bn) and assets in held for sale entities Asset encumbrance The Bank s asset encumbrance ratio was 15.2% at end of December, compared to 14.% at September

27 Development of the loan portfolio New lending in 217 amounted to ISK199 billion MAIN SOURCES OF CHANGES IN CARRYING AMOUNT ISK bn, consolidated 1.1 HIGHLIGHTS New lending amounted to ISK 199 bn in In addition to new lending, loans amounting to ISK 112 bn were refinanced during the year Outstanding loans that are refinanced within the Bank are shown both as an increase and a decrease in the carrying amount Regular installments, prepayments and loans that are fully repaid are shown as installments in this chart 6 5 Carrying amount New lending Refinancing CPI and FX changes Refinanced Instalments Other changes Carrying amount The effect of facilities that do not have a fixed repayment schedule, such as overdrafts and credit cards, is in Other changes 27

28 Diversified loan portfolio Loan portfolio grew by 9.8% in 217, largely reflecting positive economic activity in Iceland LOANS TO CUSTOMERS ISK bn, by sector, consolidated LOANS TO CUSTOMERS ISK bn, by currency, consolidated FX 17% 4% 4% Individuals Seafood 11% 11% Real estate 17% 14% Commerce and services Industrial and transportation 8% 15% 7% Other 9% 7% Tourism 8% 13% Standard sectors Including tourism sector Non-CPI 47% ISK 755bn CPI 36% HIGHLIGHTS The growth in loans to customers is mainly due to diverse new lending to both new and existing customers The growth was balanced across lending units and especially strong in residential mortgages and loans to real estate companies At year-end 217, the Bank had two large exposures amounting to 11% and 1% of its capital base which is well within internal and external limits Tourism continues to be a growing sector in Iceland, but the Bank's loans to the tourism industry have been stable in the year 217. Outstanding loans to the tourism industry are 13% of the loan portfolio, the same as at year-end 216, most are in the real estate (hotels), commerce & service (car rentals, restaurants, tour operators) and industrials & transportation sectors (airport services) 28

29 LTV distribution of loan portfolio Loans generally well covered by stable collateral, majority in residential and commercial real estate LTV DISTRIBUTION BY UNDERLYING ASSET CLASS ISK bn, by type of underlying asset, as of CONTINUOUS LTV DISTRIBUTION OF MORTGAGES TO INDIVIDUALS ISK bn, as of average LTV 63% (67% )* Other collateral Vehicles & equipment Cash & securites Vessels 35 8 Commercial real estate Residential real estate HIGHLIGHTS Most of the Bank s collateral is in the form of residential and commercial real estate. The second most important collateral type is vessels, mostly fishing vessels For seasoned mortgages, the LTV distribution is calculated from tax value of properties, which is published annually in June, but for newly granted mortgages the purchase price of the property can be used as a valuation in the beginning while it is considered more accurate LTV has gone down significantly since year end 216 which is mainly due to the newly published tax value of properties which raised housing valuations around 15.5% from its previous publication. The Bank has exercised caution in its mortgage lending during rising real estate prices, and the Bank s underwriting standards for mortgages has tightened slightly in 217 * The average LTV can be calculated in many different ways and therefore the definition is important for comparison to other banks. The weight is Íslandsbanki s total amount outstanding on the property and the LTV used is the maximum LTV of all Íslandsbanki s loans of the property. The calculation is based on tax value. 29

30 Non-performing loans Asset quality continues to improve with a drop in NPL ratio to 1.%, from 1.8% at year-end 216 NON-PERFORMING LOANS Impaired loans and past due (>9 days) loans. Loans to customers PERFORMANCE OF LOANS TO CUSTOMERS Impaired, past due, and neither past due nor impaired loans 8,% 7,% 7,4% 1% 98% 6,% 96% 5,% 4,% 3,5% 94% 92% 9% 3,% 2,% 2,2% 1,8% 88% 86% 1,% 1,% 84% % % Neither past due nor impaired 4-9 days past due > 9 days past due Impaired HIGHLIGHTS The Bank s loan quality indicators have improved, with the ratio of non-performing loans decreasing from 1.8% to 1.% in 217 The observed default frequency is currently significantly lower than the long-term average This improvement reflects positive economic conditions, prudent lending and the successful restructuring of the loan portfolio More information on credit quality is available in the Bank s Pillar 3 Report 3

31 Rating expired Into default > >3 Out of default Previously unrated Migration of risk classes Improvements in risk classes in 217 MIGRATION OF RISK CLASSES IN 217 Carrying amount, ISKbn OBSERVED DEFAULT FREQUENCY BY RISK CLASS FOR SMALL COMPANIES Small companies Large companies Individuals 1,% 1,% 1,%,1% 1 5,1% ODF 217 ODF 216 OBSERVED DEFAULT FREQUENCY BY RISK CLASS FOR INDIVIDUALS Downgrades Same Upgrades 1, % HIGHLIGHTS 1, % Continued positive migration of risk classes Observed default frequency (ODF) is below the long-term predicted probability of default (PD) The average long-term PD is shown in the figures as a shaded area 1, %,1 % This reflects positive economic conditions in Iceland,1 % ODF 217 ODF

32 5. Liabilities, liquidity & capitalisation

33 Liabilities Deposits reduce from year-end due to end of capital controls, funding diversification continues ISK m Δ Deposits from CB and credit inst. 11,189 4,922 6,267 Deposits from customers 567,29 594,187-27,159 Derivatives and short positions 5,492 4, Debt issued and other borrowings 217, ,468 5,28 Subordinated loans 9,55 9,55 Tax liabilities 7,787 8, Other liabilities 35,947 43,456-7,59 Non-current liabilities held for sale Total liabilities 854, ,629-13,853 Total equity 181,45 178,925 2,119 Total liabilities and equity 1,35,822 1,47,554-11,732 HIGHLIGHTS Deposits Customer deposits decreased by ISK 27.2bn in 217 Primarily due to withdrawals from foreign financial institutions and domestic mutual funds The deposit to loan ratio went down slightly to 74.%, compared to 76.9% at Sep17 Customer term deposits now 29% of total customer deposits Debt issued and other borrowings Includes covered bonds, commercial papers and bonds in foreign currency Íslandsbanki is the largest issuer of covered bonds in Iceland in 217; the Bank issued ISK 3.8bn in covered bonds in the fourth quarter, bringing total issuance in 217 to ISK 41.7bn Other liabilities 67% of other liabilities are attributable to credit card liabilities to retailers through the Bank s subsidiary Borgun Equity In March 217, ISK 1bn in dividends were paid out, or equivalent to around 5% of 216 net income in line with the Bank s dividend policy 33

34 Deposits remain the main source of funding Stable core deposits DEPOSIT DEVELOPMENT AND DEPOSIT RATIO ISK bn, consolidated DEPOSIT CONCENTRATION ISK bn, consolidated % 9% 8% 7% 6% 5% % 29% % 6% 1% 1% 24% 15% 14% 14% 18% 25% 24% 19% 3 4% 2 1 3% 2% 1% 5% 52% 6% 59% 61% % 12/214 6/215 12/215 6/216 12/216 6/217 12/217 Retail and SME Financial inst. in dissolution Foreign enitites HIGHLIGHTS Stable core deposit base Corp., sovgn., CB's and PSE Domestic financial institution Deposit/loan ratio (r. axis) Deposits remain the main funding source for the Bank and the deposit to loan ratio remains high 12/214 12/215 12/216 6/217 12/217 Other Largest depositors (11 1) Largest depositors (1 1) Off-shore deposits Deposit concentration remains stable At year-end 217,14% of the Bank s deposits belonged to the 1 largest depositors The ratio remains the same as at year-end

35 Borrowings Steady progress and good market access domestically and internationally BORROWING SOURCES Book value in ISK bn MATURITY PROFILE OF LONG-TERM DEBT Nominal value in ISK bn % 7.2% GMTN Covered bonds Other borrowing Subordinated loans 2.5% 2.9% ,7% >222 ISK FX Repayment of long-term debt as a % of balance sheet 63 HIGHLIGHTS Good market access and positive spread development Íslandsbanki is the largest issuer of covered bonds in the domestic market Total outstanding covered bonds at YE 217 was ISK 19bn Total issuance in 217 is ISK 42bn Total FX funding outstanding at YE 217 was ISK 11bn Continued tightening of the Bank s FX secondary spreads FX BORROWING SPLIT BY CURRENCY % NOK SEK 6% 8% EUR 86% 35

36 International funding highlights Íslandsbanki issues landmark deals as Icelandic bank spreads outperform the market HIGHLIGHTS First subordinated bond In November, the Bank issued a SEK 75m 1-year non-call 5 Tier 2 bond the first subordinated bond from an Icelandic issuer since 28 Priced at STIBOR +2 basis points, the oversubscribed issue was sold to 25 investors in Scandinavia, 25bps inside initial price talk (IPTs) ÍSLANDSBANKI BENCHMARK 22 BOND VS NORDIC PEERS 217 TO DATE* Liability management In December, the Bank conducted a Tender Offer to buy back EUR 15m of its outstanding July 218 bond in order to manage its NSFR ratio more efficiently The first of its kind for Íslandsbanki Callable senior bond In January 218, a EUR 3m Fixed Rate 6 year non-call 5 was issued at a spread of mid-swaps +75 basis points This was the first such issue from Iceland, and one of the first in Europe executed for the purpose of the management of NSFR ratio * Source Bloomberg 36

37 Q4-216 Q1-217 Q2-217 Q3-217 Q Market risk developments Positive market developments during the year and market risk remains modest MARKET RISK EXPOSURE AND MARKET RISK APPETITE AS PERCENTAGE OF TOTAL CAPITAL BASE AVERAGE POSITIONS, CONSOLIDATED 25% 2% 15% 1% 5% Interest rate risk Currency risk Appetite Equity risk Inflation risk MONTHLY DEVELOPMENT OF THE CURRENCY IMBALANCE ISK bn CONSOLIDATED AND PARENT Consolidated Parent Regulatory limit (parent) % (5) MONTHLY DEVELOPMENT OF INTEREST RATE RISK IN THE BANKING BOOK. WEIGHTED AVERAGE BPV ISK m CONSOLIDATED AND PARENT MONTHLY DEVELOPMENT OF THE BANKING BOOK INFLATION IMBALANCE ISK bn CONSOLIDATED AND PARENT Consolidated Parent Consolidated Parent 37

38 Sound capital position The capital ratio remains above target and leverage is low CAPITAL RATIOS 25,2% 24,9% 16,% RISK EXPOSURE AMOUNT (REA) ISK bn % 67% 74 23,1% 23,5% 22,8% 23,3% ,7% 15,5% 15,7% 15,3% 7% 7% 71% 24,1% 22,5% 22,6% 16,2% Total capital ratio CET1 ratio Leverage ratio 75% HIGHLIGHTS Capital ratios Total capital base was ISK 187bn at year-end 217, compared to ISK 177bn at year-end 216 The increase is mainly due to the issuance of an ISK 9.5bn subordinated debt in November The Bank s leverage ratio was 16.2% compared to 16.% at year-end 216 The Bank estimates the IFRS 9 transition amount will reduce shareholders equity by approximately ISK 4.bn and the CET1 capital ratio by approximately 25 basis points as at 1 January 218 The reclassification of debt securities has an ISK 1.5bn impact on shareholders equity while ISK 2.5bn is due to changes in impairments Risk exposure amount (REA) The ratio of REA of total assets increased from 67% to 75% The increase is mainly due to lending and a corresponding reduction in with the Central Bank Dividends The Bank paid ISK 1bn in dividend during the year, in line with the Bank s dividend policy of 4-5% of after-tax profits to be paid out in dividends The Board of Directors proposes that ISK 13 billion will be paid in dividends to shareholders for the 217 financial year Higher than the Bank s dividend target on this occasion due to its strong capital position REA (ISKbn) REA/Total assets 38

39 Pillar I Pillar 2-R Capital buffers Íslandsbanki s capital target Based on the regulatory SREP requirement in addition to 5 15bp management buffer ÍSLANDSBANKI S CAPITAL TARGET CAPITAL REQUIREMENT COMPOSITION Total Capital Ratio 24.1% Tier bp mgmt buffer Capital conservation buffer Countercyclical capital buffer O-SII buffer Systemic risk buffer 2.5% 1.2% 2.% 2.9% Long-term target > % Overall capital requirement 19.8% Additional Tier 1 Common Equity Tier % 19.8% SREP requirement % Management buffer.5 1.5% 2,8% 2,8% 24.1% 1,4% Pillar 2-R 3.2% Total SREP capital requirement 11.2% 2,1% 2,1% 22.6% Pillar 1 8.% 14.9% 14.9% Capital components Current regulatory requirements Long-term capital target Íslandsbanki s current capital HIGHLIGHTS The sum of Pillar 1, Pillar 2-R and the combined capital buffers form the overall regulatory capital requirement Based on the SREP 217 results the overall capital requirement for Íslandsbanki is 19.8% of risk exposure amount (REA) Íslandsbanki s total capital target ratio is based on the regulatory SREP requirement in addition to a 5-15bp management buffer The size of the management buffer is based on factors such as volatility in the capital ratios for example due to currency fluctuations, volatility in earnings and REA and uncertainties in the regulatory or operating environment 39

40 Sound management of liquidity Liquid assets of ISK 223bn - above regulatory requirements with liquidity prudently managed NET STABLE FUNDING RATIO (NFSR) LIQUIDITY COVERAGE RATIO ALL CURRENCIES 18% 16% 14% 12% 1% 141% 126% 12% 154% 12% 112% 117% 17% 144% 123% 138% 122% 119% 117% 25% 2% 15% 1% 13% 151% 143% 117% 13% 132% 173% 149% 187% 161% 171% 154% 142% 128% 8% 6% 4% 12/214 6/215 12/215 6/216 12/216 6/217 12/217 HIGHLIGHTS All liquidity measures well above regulatory requirements FX-LCR actively managed to reduce liquidity cost FX liquid assets: NSFR all currencies (group level) NSFR foreign currencies (group level) FX NSFR - regulatory minimum FX Government bonds have a minimum requirement of AA rating FX cash placed with highly rated correspondent banks The Icelandic regulatory requirements for the NSFR currently only apply to foreign currency denominated assets and liabilities 5% % 12/214 6/215 12/215 6/216 12/216 6/217 12/217 Liquidity coverage ratio (parent level) Liquidity coverage ratio (group level) LCR - Regulatory minimum LIQUIDITY COVERAGE RATIO FOREIGN CURRENCIES 7% 617% 6% 5% 4% 3% 2% 1% 442% 467% 368% 331% 33% 159% % 12/214 6/215 12/215 6/216 12/216 6/217 12/217 Liquidity coverage ratio (group level) LCR - Regulatory minimum 4

41 Credit ratings from Fitch and S&P Rating upgrade from S&P in October and upgrade from Fitch in January and affirmation in December FITCH BBB/F3 STABLE OUTLOOK Press Release 15 December 217 In December, Fitch Ratings affirmed Íslandsbanki's ratings of BBB/F3 with a stable outlook. Fitch had in January 217, upgraded the Bank to this rating. According to Fitch, the ratings for Íslandsbanki reflect the Bank's leading domestic position with a market share of around 3 per cent and the Bank's satisfactory asset quality, stable liquidity position and high reported capital ratios. Furthermore, Fitch noted that Íslandsbanki's strategy to target continued organic growth in Iceland, combined with its sound risk management framework, would continue to strengthen the Bank's asset quality, with the Bank having seen a sharp decline in its nonperforming loans since 21. S&P BBB+/A-2 STABLE OUTLOOK Press Release 25 October 217 The upgrade reflects our improved view of the economic risks in the Icelandic banking sector, as the economic environment remains supportive following the release of capital controls earlier this year... We see continued strong development in the Icelandic economy, with GDP growth expected at 4% for 217 and a flourishing tourism sector. The sovereign's financial position continues to improve due to a strong economic performance and current account surpluses. As such, we expect the bank to make gradual steps to reduce equity and issue capital instruments, a process that is unlikely to materially affect our view of the bank's ability to absorb losses given the improved domestic economy. The stable outlook on Íslandsbanki reflects our expectation that the bank's RAC ratio will remain sustainably above 16%, even while the bank prepares for an eventual sale over the next two years, and optimizes its capital base by paying extraordinary dividends and issuing capital instruments. ÍSLANDSBANKI S&P FITCH Long-term BBB+ BBB Short-term A-2 F3 Outlook Stable Stable Rating action Oct 17 Dec 17 ICELANDIC SOVEREIGN S&P FITCH MOODY S Long-term A A A3 Short-term A-1 F1 - Outlook Stable Stable Stable Rating action Dec 17 Dec 17 Sept 16 Rating reports and press releases can be found on the IR website: islandsbanki.is/ir 41

42 6. Financial targets and key points

43 Financial targets Medium and long term strategies structured around achieving key financial targets TARGET Guidance Based on risk free rate + 4-6% ROE REGULAR 8-1% 1.3% 1.7% 13.2% OPERATIONS * COST / INCOME RATIO** <55% 62.5% 56.9% 56.2% CET1 >15% LT 22.6% 24.9% 28.3% The risk free rate is considered to be CBI current account rate, currently at 4% (average in 217 = 4.4%) As the Bank retains a large pool of liquid assets, interest rate level in Iceland can have a substantial impact on ROE levels The bank tax, excluded thus far from target returns, will have an impact on profitability if kept at current high levels This is a medium to long term target, C/I ratio can be expected to be higher than target in the near term Headcount and non-headcount related cost control programmes in place Current SREP requirement plus management buffer means currently a minimum % CET1 ratio TOTAL CAPITAL RATIO DIVIDEND PAYOUT RATIO > % 24.1% 25.2% 3.1% 4-5% 5% *** 5% 4% Based on the regulatory SREP requirement with a 5 15bp management buffer Current SREP requirement is 19.8% Short term target removed in Q317 due to less uncertainty regarding lifting of capital controls and IFRS9 implementation Dividend pay-out ability will be impacted if the bank tax will be kept at current high levels The BoD proposes that ISK 13 billion will be paid in dividend for the 217 financial year which is higher than the dividend payout target due to a strong capital position * Return from regular operations on normalized CET1 of 15%, adjusted for risk free interest on excess capital. Results based on CET1 14%. Earnings from regular operations is defined as earnings excluding one-off items e.g. net loan impairment before collective impairment, fair value gain deriving from changes in accounting treatment, Bank tax, one off costs and net earnings from discontinued operations ** Calculated as (Administrative expenses + Contribution to the Depositors and Investors Guarantee Fund One off items) / (Total operating income one-off items) *** The 216 AGM decided that dividends be paid in 217 in the amount of ISK 1bn on 216 profits 43

44 Key points Delivering responsible growth driven by the vision to be #1 for service 1 MACRO MILESTONES Stable operating environment following full environment following liberalisation of capital liberalisation of capital controls for individuals controls and businesses for individuals with little and impact businesses on ISK resulting in resulting sovereign in upgrades Sovereign upgrades SP:A / M:A3 M:A3 / F:A / F:A- / SP:A 52 CORE REVENUES Good market access to Good ROE of regular international funding earnings normalised for markets 15% CET1 - benchmark indicates the EUR Bank 5m strong issue business performing position, solid well recurring aftermarket, revenues, efficiency lowest focus, coupon balanced since lending 28 growth and largest and healthy in size profitability at time issuance against a firm capital base 43 ASSET QUALITY Sound Solid balance capital sheet and with liquidity balanced ratios growth that of loan compare portfolio of very 9.8%, well or ISK with peers 199bn in 15.3% new lending leverage in ratio 217 and positive capital impairments due to optimisation process favourable economic continued with 1bn environment moving NPLs dividend to 1.% in March 217 GDP growth 4.1% 217 Net profit 13.2bn ROE (Regular operations) 1.3% Capital Ratio 24.1% Loan growth 9.8% NPLs 1.% 42 CAPITAL & LIQUIDITY Sound capital and liquidity Proven ratios that business compare very strategy well with peers of being 16.2% #1 for leverage service ratio renders and capital high optimisation satisfaction process scores, likely to continue strong with recurring additional revenues, Tier 1 or Tier 2 issuances in order to and resilient ROE normalise the capital structure 5 CREDIT RATINGS S&P upgrade to BBB+/A-2 on stable outlook in October 217 and Fitch upgrade to BBB/F3 stable outlook in January 217 (affirmed in December 217) 6 STRATEGY Solidifying our business S&P position upgrade and preparing to for BBB+/A-2 the change on ahead stable driven outlook by regulation in Oct17 and and Fitch digitalisation, upgrade improving to operational efficiency and BBB/F3 stable outlook facilitating future growth in Jan17 anchored on our proven strategy of being #1 for service BBB / BBB+ ratings LCR NFSR Leverage ratio 142% 117% 16.2% Above information is based on the Bank s 217 annual financial results and forecasts by Íslandsbanki Research 44

45 More about Íslandsbanki Simultaneous publication of Financials, Annual, Pillar 3 and Social Responsibility* reports Investor material Further investor information can be found at the Íslandsbanki IR website: Please visit the Icelandic IR site for material in Icelandic: For further information, please contact Gunnar S. Magnússon, Head of Investor Relations ir@islandsbanki.is Telephone: * Only available in Icelandic 45