Banks. Kaupthing Bank. Iceland Credit Analysis. Rating Rationale

Transcription

1 Iceland Credit Analysis Kaupthing Bank Ratings Kaupthing Bank Foreign Currency Long-Term Short-Term Outlook A F1 Stable Individual B/C Support 2 Sovereign Risk Foreign Long-Term Local Long-Term Outlook Financial Data Kaupthing Bank AA- AAA Stable 30 Sep Dec 04 Total Assets (USDm) 37,437 25,131 Total Assets (ISKm) 2,309,830 1,543,020 Equity (ISKm) 183, ,749 Net Income (ISKm) 35,592 16,308 ROA (%) ROE (%) Tier 1 Ratio (%) M05 figures under IFRS, FY04 figures under Icelandic GAAP Analysts Alexandre Birry, London alexandre.birry@fitchratings.com Alison Leveridge, London alison.leveridge@fitchratings.com Rating Rationale The Long-term, Short-term and Individual ratings assigned to Kaupthing Bank ( Kaupthing ) reflect its strong position in the Icelandic market, the growing diversification of its revenues, and its good profitability and asset quality. They also take into account the bank s reliance on wholesale funding, its large equity exposures and the integration risks raised by its rapid expansion and recent acquisitions Kaupthing s recent high profitability in 2004 and the first nine months of 2005 ( 9M05 ) was aided by strong financial gains on the back of fairly large Nordic securities holdings and a booming Icelandic stock market. Fitch Ratings views those financial gains as unsustainable in the medium term. However, the bank has managed to develop a broad range of activities and has achieved a strong geographic diversification of its revenues, which are expected to strengthen the stability of its total operating income. The bank s operations are currently divided into five profit centres: Retail and Corporate Banking (41% of 9M05 net operating income), Investment Banking (24%), Capital Markets (21%), Treasury (9%), and Asset Management and Private Banking (5%). With the acquisition of Singer & Friedlander ( S&F ), consolidated as from 1 July 2005, the UK has become the largest revenue generator, with 33% of net operating income in 9M05. Iceland only accounted for 30% of it. Asset quality is good and benefited from the acquisition in 2004 of Danish corporate lender FIH Erhvervsbank Finance for Danish Industry ( FIH ), which has historically experienced low levels of arrears. At end- September 2005, 77% of the loan portfolio was located outside Iceland, mainly in Denmark and the UK. The rapid expansion of the bank, organically and through acquisitions, raises some integration risk, even though management has a proven track record in managing this risk. Despite the acquisition of S&F, which almost doubled Kaupthing s deposit base on a consolidated basis, the bank has become heavily dependent on wholesale funding, as its large Danish operation is not deposit-taking. However, it has managed to finance most of its external growth plans by issuing shares or subordinated debt. Capitalisation at Kaupthing is good, with a Tier 1 ratio of 9.21%. Support There is no legal obligation for Icelandic authorities to rescue banks in difficulties. However, given Kaupthing s domestic importance, in Fitch s view there is a high probability that support would be forthcoming, if required. Rating Outlook and Key Rating Drivers The Stable Outlook reflects the view that the diversification of revenue streams should offset potentially volatile financial income. The maintenance of satisfactory levels of profitability through less favourable financial markets and the successful integration of recently acquired subsidiaries could exert upward pressure on the ratings. Downward pressure would arise from a growing appetite for market risk. Profile Kaupthing is the largest bank in Iceland by equity and total assets, and one of the 10 largest banking groups in the Nordic region, with a market capitalisation of approximately USD6.4 billion as at November It owes its present pre-eminent position to rapid expansion since Today it has a network of offices in 10 countries, including all the Nordic countries, the UK, the US, Switzerland and Luxembourg. 22 November

2 Profile One of three domestically dominant Icelandic banks Strategy centred around becoming a leading Nordic investment bank Although created from a merger of several organisations, some of them dating back to almost a century ago, Kaupthing owes its present pre-eminent position to rapid expansion since Kaupthing Bank was created in 1982, at the beginning of the free capital market in Iceland, and was one of the five founding partners of the Iceland Stock Exchange in It was granted an investment-banking licence in 1997 and a commercial-banking one in The bank was listed in 2000 on the Icelandic Stock Exchange ( ICEX ). Given the small size of the Icelandic market (population of under 300,000) and the presence of two other strong domestic banks, Kaupthing realised the need to expand its activities abroad and reduce its reliance on a single market. In 1998, it was the first Icelandic financial institution to create a foreign subsidiary (Kaupthing Luxembourg). From 2001 to date, it has completed a number of acquisitions that rapidly transformed its profile, starting with Sofi Oyj, a Finish brokerage house. In 2002, it bought Swedish brokerage firm and bank JP Nordiska; following this acquisition, it also gained a listing on the Stockholm Stock Exchange. A merger in 2003 with Bunadarbanki, then the fourth-largest bank in Iceland, transformed the bank, giving it a strong retail and corporate franchise with a fairly extensive branch network, and making it the largest bank in Iceland. The acquisition in 2004 of FIH, a bank with a market share of approximately 15% of corporate lending in Denmark, trebled Kaupthing s loan book and gave it a strong foothold in another Nordic market of a much larger size than the Icelandic one. FIH, which previously belonged to FöreningsSparbanken ( Swedbank ), has a particularly strong position in the SME market. With the acquisition of S&F announced in April, the bank established itself in a third key market, the UK, in addition to Iceland and Denmark. S&F is a merchant bank active in lending across a range of sectors, mainly to medium and smaller UK corporates and private individuals. It also offers asset management services. At end-h105, Kaupthing was the largest financial institution in Iceland and accounted for 40% of the country s total banking assets. It was also one of the 10 largest banking groups in the Nordic region. By market capitalisation, it constitutes the largest Icelandic company, representing 25% of the ICEX s market capitalisation. Kaupthing now has a network of offices in 10 countries, including all the Nordic countries, the UK, the US, Switzerland and Luxembourg. By customer location, Iceland is no longer the most significant market, with the UK generating one-third of the group s operating income in 9M05 and approximately 77% of the loan book in foreign markets. The bank s operations are divided into five profit centres, i.e. Retail and Corporate Banking (41% of 9M05 net operating income), Investment Banking (24%), Capital Markets (21%), Treasury (9%), and Asset Management and Private Banking (5%). Retail and Corporate Banking: In its domestic market, Kaupthing is one of the three main commercial banks, with market shares of 23% in deposits and 25% in lending at end-h105. The retail business is limited almost exclusively to the Icelandic market, where Kaupthing offers a comprehensive range of services through a network of branches (35 at end-2004) and, since 1997, the telephone and the internet. In 2004, it was the first commercial bank in Iceland to start offering residential mortgages, a market in which the government-owned Housing Financing Fund had enjoyed a quasi-monopoly until then. In corporate banking, although Kaupthing is one of the main corporate lenders in Iceland, the largest part of the portfolio is located in Denmark, where, since FIH s acquisition, Kaupthing is the third-largest corporate bank. Kaupthing s strategy is to try to expand its corporate-banking activities in other markets and promote cooperation with other divisions to support cross-selling of products and services. The UK is also expected to offer sound growth opportunities with the recent acquisition of S&F. Investment Banking: Kaupthing is active in mergers-and-acquisitions advisory, capital-market transactions, acquisition and leverage finance, and principal investments. The bank is the market leader in corporate finance in Iceland, particularly in share offerings and M&A transactions. Its franchise has expanded outside Iceland with a growing amount of business originating in other Nordic countries and the UK. Kaupthing s aim is to offer a large and integrated range of investment banking services, targeting mostly SMEs. Capital Markets: Activities are divided between institutional sales and proprietary trading. The activity is also supported by research teams comprising around 50 analysts, located in Sweden, Finland, Norway and Iceland. In 9M05, Kaupthing had a consolidated market share in equity trading on the Nordic stock exchanges of around 3.2%, with a leading position on the ICEX (34% market share). 2

3 Table 1: Comparative Profitability Kaupthing Bank Islandsbanki Landsbanki (%) 9M M M Net Interest Margin Non-Interest Income/Total Income Cost/Income Net Income/Av. Assets Net Income/Av. Equity M05 figures under IFRS, 2004 and 2003 under Icelandic GAAP Source: Fitch database Treasury: The division s key responsibility is the management of the bank s liquidity and foreignexchange ( FX ) exposure, although it is also in charge of the sale of risk-management products to third-parties. The division comprises three main desks: derivatives trading, interbank trading, and FX and derivatives sales and trading. The majority of the team is located in Iceland, but operations are also managed through smaller teams in Denmark, Sweden, the UK, Luxembourg and Finland. Asset Management and Private Banking: Main activities are fund management, private banking, institutional asset management, and services to institutional investors. At end-q305, assets under management amounted to ISK1,035bn, 37% of which was attributable to the UK (S&F), 35% to Iceland, 14% to Finland, and 8% to Sweden. Kaupthing s strategy is now to consolidate its positions in northern Europe and increase crossselling between the different divisions and markets. It also intends to take an opportunistic approach to the external growth for its Capital Markets and Asset Management and Private Banking divisions. As at November 2005, two shareholders had stakes of more than 5% in Kaupthing, Exista (21.1%) and Egla Holding (10.8%), both Icelandic investment companies. The investor base is widely spread, with more than 33,000 shareholders, mostly Icelandic. Presentation of the Accounts: Two spreadsheets are attached to this report: full-year results until end reported under Icelandic GAAP and H1 and Q305 data under IFRS. FIH is included in Kaupthing accounts from Q304, and S&F from Q305. The overall impact of the implementation of IFRS was relatively limited. Performance Diversification in terms of geography and product offering expected to mitigate risk of volatile revenues Profitability boosted by financial gains on the back of buoyant Icelandic stock exchange Following the rapid expansion of its overseas operations, Kaupthing s performance is much less reliant on the Icelandic economy than it used to be: in 9M05 the UK became the largest revenue generator, with 33% of net operating income. Iceland only accounted for 30% of it, followed by Scandinavia (27%) and Luxembourg (9%). As a comparison, in 2003 Iceland still represented 52% of net operating income. However, Kaupthing s recent performance was also supported by a favourable domestic environment, with the rapid expansion of Iceland corporates resulting in a strong demand for financing and investment-banking services. It also benefited from the strong though unsustainable performance of the ICEX of the past two and a half years, which helped Kaupthing achieve significant trading gains on the back of a growing equity portfolio. Net Interest Revenue remains the main source of income for Kaupthing. Its net interest margin appears to be lower than its peers. This is partly due to the larger amount of non-interest-bearing assets on Kaupthing s balance sheet. Another reason is the nature of its loan book, which has a lower average margin but also a lower level of NPLs; the acquisition by Islandsbanki of BNbank s lower-risk book is expected to push its margin closer to Kaupthing s. Net interest revenue increased significantly in 2004 as a result of the acquisition of FIH, which trebled the bank s loan portfolio. The additional growth in Q305 mainly related to the acquisition of S&F. The introduction of mortgage products in 2004 also diversifies the nature of Kaupthing s net interest revenue by adding a relatively stable and secured retail base. Commercial banks have rapidly achieved a market share of almost 25% of the residential mortgage market in Iceland but future growth is expected to be slower. The recently acquired subsidiary S&F should benefit in the future from the lower cost of funding achieved by Kaupthing. Fitch views positively the fact that Kaupthing now has three strong lending platforms, which reduces its reliance on a single credit market and improves the sustainability of the bank s net interest income. 3

4 Table 2: Income by Profit Centre (9M05) (ISKm) Banking Investment Banking Capital Markets Treasury Asset Mgnt & Private Banking Elimination s Net Interest Revenue 22,356 (1,417) (686) 3, (486) 23,180 Net Fees & Commissions 2,459 6,318 3,218 1,028 2, ,225 Net Financial Income 94 10,480 11,059 1, ,321 Other Income 1, ,716 6,129 Total Income 26,108 15,595 13,591 5,659 3,406 4,496 68,855 Total Income includes items classified as Other Income and Expenses in the attached spreadsheet Source: Kaupthing Total Net Fees and Commissions experienced strong growth in 9M05, boosted by a surge in income from the Investment Banking division. Investment Banking was the largest contributor to the group s net fee and commission income in 9M05, supported by a buoyant corporate advisory business, especially with Icelandic corporates. Even though Fitch views the income from the Investment Banking division as potentially volatile, the Capital Markets, Asset Management and Private Banking, and Banking divisions represented more than half of the group s net fee and commission income (see Table 2), and are expected to constitute a relatively stable income stream. Other Operating Income mainly comes from exceptionally high financial gains (ISK23.3bn in 9M05 compared with ISK16.3bn in 2004), which Fitch views as unsustainable in the medium term. These gains result from Kaupthing s growing Nordic equity portfolio as well as the rapid growth in the domestic stock market; the ICEX-15 rose c.59% in 2004 after +c.56% in 2003 and the growth has continued in 2005 to date. This level cannot be expected to continue in the longer term and financial gains should moderate. Non-Interest Expenses are growing fast but at a lower pace than total assets and net operating income. The acquisitions among others of Bunadarbanki, FIH and S&F make it harder to analyse the evolution of the cost ratios over the period. Nevertheless, it has to be noted that part of the rapid decrease in the cost/income ratio from 58.2% in 2003 to 36.7% in 9M05 is to a great extent due to the significance of the financial gains recently experienced by the bank. A large increase in headcount has accompanied Kaupthing s rapid expansion and the recent performance also resulted in significant bonusscheme payments. The 9M05 profit-and-loss statement includes a ISK3.1bn profit from the sale by Kaupthing of its subsidiary Lysing hf. (under Other Income and Expenses in the attached Income Statement Analysis). Prospects: The strong growth and performance recently experienced by the bank was aided by a favourable domestic environment, with a strong demand from expanding Icelandic corporates for financing and investment-banking services, and a booming stock exchange. However, in addition to these revenues, Kaupthing has managed through organic and external growth to establish itself a diversified range of relatively stable income streams. These are likely to enable the bank to achieve its target of a long-term ROE of 15%. Risk Management Increased diversification of the loan book Sound asset quality Market risk mainly arises from relatively significant investment portfolio, partly hedged Proven track record in managing integration risk Risk policies are set up by the Board of Directors, and implemented by the Risk Management division, which regularly reports to the Board of Directors and senior management on risk exposures, usage of limits and any special matters. Risk Management consisted of around 60 employees at end-q305 and is organised in four groups: Credit Risk, Market Risk, Operational Risk, and Research and Development. Research and Development primarily deals with the development of analytical tools supporting the other groups. Under Basel II, Kaupthing plans to implement the Foundation Internal Ratings ( IRB ) approach for credit risk, and then move to the Advanced IRB approach. The Standardised approach will be adopted for market and operational risks. Credit Risk: The Central Credit Committee controls the credit-application process and, in particular, decides on large credit applications and exposure limits and sets up limits on lending authority. However, exposures in excess of 10% of the bank s capital have to go through a Board Credit Committee. At subsidiary level (FIH, KB Sweden, KB Luxembourg, S&F, KB Finland), the same process 4

5 applies. The local Management Credit Committee deals with large credits but the local Board Credit Committee is in charge of the largest credits over a certain limit. To ensure cohesion across the group, Kaupthing s CEO or his Deputy is a member of all the local Board Credit Committees. Loans or exposures in excess of ISK500 million (USD8m) need also pre-approval from Risk Management. The bank has developed and tested an internal creditrating system for corporate lending, based on both quantitative and qualitative factors. At end-q105, ratings had been assigned to around 80% of corporate lending and at end-2005 all corporate exposures should be rated. The model currently used mainly derives from FIH s but it is not yet implemented by S&F, which had been developing its own model before its acquisition by Kaupthing. However, in 2006, management expects to implement a single model across the group, which may integrate some of the concepts developed by S&F s model, in particular in terms of qualitative assessment. All retail credit applications go through credit scoring. But other aspects such as the purpose of the loan or quality and amount of collateral have also to be taken into account. Deviations from the recommendations of the system must be authorised by the Head of Retail Banking or the Credit Committee. In line with the Icelandic banking sector, Kaupthing has seen a very rapid expansion of its loan portfolio. Organic growth was supported by the rapid overseas expansion of Icelandic corporates but also by the successful entry of banks in the residential mortgage market. However, a large part of Kaupthing s growth was due to transformational acquisitions, which resulted in the outstanding lending balance being multiplied by 4.8 between end-2003 and end- September The acquisition of Danish corporate bank FIH almost trebled Kaupthing s portfolio, creating a key market for the group in Denmark, while the acquisition of S&F in 2005 strengthened Kaupthing s UK presence and added a large portfolio of mostly senior secured lending. Those acquisitions, in addition to increasing the size of the portfolio, improved its diversification, in terms of geographic location as well as type of customers. At end-2004, around 85% of the bank s loan portfolio was in non-isk-denominated loans. At end-q305, 40% of loans were to borrowers located in Denmark, 25% in the UK, and around 23% in Iceland; the location of a corporate borrower is defined as the market where the company derives most of its revenues and costs from, and as a result the figure for the Icelandic market does not include some companies of Icelandic nationality with a larger presence in the UK. The introduction of residential mortgage products enabled the bank to grow its retail franchise, but the latter only represented 18% of total customer loans at end-september. The exposure to the different corporate sectors is fairly well-diversified, with services representing 23% of customer loans, industry (including manufacturing and foodprocessing) 20%, real estate 14%, trade 13%, holding companies 11% and transportation 1%. At end-september 2005, there were only two exposures in excess of 10% of equity, which represented 3.4% of total customer loans and was equivalent to 23% of equity. Asset quality has been improving since the merger with Bunadarbanki in 2003, with the ratio of NPLs to gross loans decreasing from 3.4% at end-2003 to 1.2% at end-september The acquisition of FIH contributed to part of the improvement by adding a portfolio of a very good quality, with NPLs to gross loans of 0.5% at end During the same period, Kaupthing s reserve coverage of gross NPLs increased from 68.9% to 80.8%. A large proportion of the loan book is collateralised (over 80%), the collateral being quite evenly split between corporate receivables or inventory, commercial property, securities, industrial and residential properties and guarantees. Market Risk: Kaupthing s main market risks arise from its large trading portfolio. Interest-rate risk increased quite significantly at end-2004 following the introduction of fixed-interest mortgage products (about 86% of the mortgage lending portfolio) but remains closely monitored. A 100bp jump in the yield curve would result in a loss of ISK3.1bn in the income statement and an additional ISK10.4bn in calculated mark-to-market loss in the held-tomaturity banking book at end-september Kaupthing is also exposed to some FX risk, in particular regarding the repatriation of non-isk results. However, the FX risk within the recently acquired subsidiaries, FIH and S&F, is relatively limited. FX exposures are reported daily to the Central Bank of Iceland. Market risk limits are set for the absolute size of positions and on sensitivity analysis. While Value at Risk ( VaR ) is measured, it is not used for establishing limits In line with its other Icelandic peers, Kaupthing holds large bonds and equity portfolio, which represents a significant market risk. Profit and loss and turnover are reported daily to the CEO and managing directors of Capital Markets, Finance and Risk Management. A risk-assessment report using in particular a VaR model and stress tests is communicated to the CEO, Board of Directors and the managing director of Capital Markets on a 5

6 monthly basis. At end-june 2005, Kaupthing held a bond portfolio totalling ISK235.8bn, but 43% of it was hedged off, leading to a net exposure of ISK134.1bn. Similarly, 29% of the total equity exposure was hedged off, resulting in a net exposure of ISK77.1bn. The majority of equity exposures are to listed Icelandic entities. However, these Icelandic entities are less and less reliant on the Icelandic market, many of them having rapidly expanded their overseas activities over the past few years. The private equity portfolio is expected to grow as well after the creation by Kaupthing of a principal investments team in London. The bank held around 0.7% of assets in unlisted equity at end-q305 and its strategy is not to exceed 4% of assets in unlisted equity. Operational Risk: Kaupthing s rapid expansion, both organically and through acquisitions, results in a higher operational risk, in particularly as regards integration risk. However, management s proven past track record in integrating those newly acquired businesses mitigates this risk. The manager of each business unit is responsible for the management of its own operational risk. Key risk indicators are in place and the bank is in the process of establishing a centralised database to collect loss events. Kaupthing has also taken out insurance policies to cover some specific operational risk exposures. Funding and Capital Funding heavily reliant on wholesale markets Sound liquidity management Acquisitions mostly financed through equity issuance The acquisition of S&F, consolidated in the group s accounts as from 1 July 2005, doubled the size of Kaupthing s customer deposit base in addition to diversifying its geographic origin. However, in line with the other two large Icelandic banks, the customer deposit base only finances a minor part of total assets (19% at end-september 2005). Kaupthing s reliance on wholesale funding increased considerably as a result of the acquisition of FIH, which is entirely wholesale-funded. FIH has retained its independence as regards funding and is expected to continue issuing debt under its own name. To mitigate the risks inherent in its reliance on wholesale funding, Kaupthing has made significant progress in diversifying its investor base and lengthening the maturity profile of its funding. In November 2005, the bank marketed its first issue targeted at Australian investors. Unlike its other two Icelandic peers, Kaupthing has not sold mortgages back to the HFF, and could consider issuing a covered bond programme in the near future. The size of Kaupthing s EMTN programme was extended to EUR12bn in September Liquidity management at Kaupthing appears sound. It is centralised but also takes into consideration the prudential requirements of the various countries where its subsidiaries are located. The lengthening of the maturity of wholesale funding is an aid to liquidity, even if the bank remains vulnerable to external market sentiment. The bank s policy is to be able to operate for at least six months without access to capital markets. Liquidity is supported by the bank s very large portfolio of liquid assets and by the existence of unconditionally committed lines of credit totalling ISK40bn at end-q305. Capitalisation at Kaupthing is good, with a Tier 1 ratio of 9.21% at end-september 2005 and a total capital ratio of 12.22%. Excluding hybrid instruments, the core Tier 1 ratio still reaches 7.60%. Acquisitions over the past four years have been mostly financed through the issuance of shares and subordinated debt. The bank s strong profitability and flexible dividend policy have also helped the bank maintain a Tier 1 ratio comfortably in excess of its minimum target of 8%. Fitch views the minimum target as only adequate given the risk inherent in Kaupthing s large equity portfolio. 6

7 Balance Sheet Analysis: IFRS 30 Sep Jun Months - 3rd Quarter 9 Months - 3rd Quarter As % of Average 6 Months - Interim As % of USDm ISKm Assets ISKm ISKm Assets Preliminary Preliminary Preliminary Preliminary Preliminary Preliminary A. LOANS 1. Loans and Advances < 3 months n.a. n.a. - n.a. n.a Loans and Advances 3-12 months n.a. n.a. - n.a. n.a Loans and Advances > 1 year n.a. n.a. - n.a. n.a Loan Loss Reserve (deducted from above) n.a. n.a. - n.a. n.a Loan Loss Reserve (memo) n.a. n.a. - n.a. n.a. - TOTAL A 27, ,679, n.a. 1,383, B. OTHER EARNING ASSETS 1. Loans and Advances to Banks n.a. n.a. - n.a. n.a Government Securities n.a. n.a. - n.a. n.a Other Trading Securities 4, , n.a. 264, Derivatives , n.a. 4, Other Securities and Investments 2, , n.a. 120, Equity Investments , n.a. 10, TOTAL B 7, , n.a. 399, C. TOTAL EARNING ASSETS (A+B) 34, ,129, n.a. 1,783, D. FIXED ASSETS , n.a. 6, E. NON-EARNING ASSETS 1. Cash and Due from Banks , n.a. 39, Other 1, , n.a. 70, F. TOTAL ASSETS 37, ,309, n.a. 1,899, G. DEPOSITS & MONEY MARKET FUNDING 1. Due to Customers < 1 year n.a. n.a. - n.a. n.a Due to Customers > 1 year n.a. n.a. - n.a. n.a Due to Customers, no breakdown n.a. n.a. - n.a. n.a Deposits from Banks , n.a. 62, Other Deposits 7, , n.a. 234, Other Liabilities - Derivatives , n.a. 17, Trading , n.a. 29, Fair Value Portion of Debt , n.a. 24, TOTAL G 9, , n.a. 368, H. OTHER FUNDING 1. Long-term Borrowing 22, ,413, n.a. 1,217, Subordinated Debt 1, , n.a. 86, Hybrid Capital n.a. n.a. - n.a. n.a. - TOTAL H 24, ,502, n.a. 1,304, I. OTHER (Non-int. bearing) 1, , n.a. 46, K. OTHER RESERVES n.a. n.a. - n.a. n.a. - L. EQUITY 1. Perpetual Preference Shares n.a. n.a. - n.a. n.a Common Equity 2, , n.a. 180, TOTAL L 2, , n.a. 180, M. TOTAL LIABILITIES & EQUITY 37, ,309, n.a. 1,899, Exchange Rate USD1 = ISK USD1 = ISK

8 Income Statement Analysis: IFRS 30 Sep Jun 2005 Income As % of Income As % of Expenses Total AV Expenses Total AV ISKm Earning Assts ISKm Earning Assts Preliminary Preliminary Preliminary Preliminary 1. Interest Income 24, , Interest Expense n.a. - n.a NET INTEREST REVENUE 24, , Net Fees & Commissions 16, , Other Operating Income 24, , Personnel Expenses 13, , Other Operating Expenses 10, , Loan Loss Provisions 2, , OPERATING PROFIT 39, , Other Income and Expenses 3, , PROFIT BEFORE EXCEPTIONAL ITEMS 42, , Exceptional Items n.a. - n.a PRE-TAX PROFIT 42, , Taxes 7, , Profit/(Loss) from Discontinued Operations n.a. - n.a PUBLISHED NET INCOME INCLUDING MINORITIES 35, , Memo: FITCH NET INCOME 35, , Ratio Analysis: IFRS 30 Sep Jun 2005 Preliminary Preliminary I. PROFITABILITY LEVEL 1. Operating Profit/Total Assets (av.) % Net Income/Equity (av.) % Net Income less Pref. Div./Common Equity (av.) % Net Income/Total Assets (av.) % Non-int. Expenses/Operating Revenue % Net Interest Rev/Total Assets (av.) % II. CAPITAL ADEQUACY (year end) 1. Internal Capital Generation % Equity/Total Assets % Equity/Loans % Regulatory Capital/Risks - Tier 1 % Regulatory Capital/Risks - Total % Common Equity/Total Assets % III. LIQUIDITY (year end) 1. Liquid Assets/Deposits & Money Mkt Funding % n.a. n.a. 2. Liquid Assets & Marketable Debt Sec./ % Deposits and Money Market Funding 3. Loans/Deposits & Money Mkt Funding % IV. ASSET QUALITY 1. Provision for Loan Losses/Loans Gross of Loan Loss Reserves (av.) % Provision for Loan Losses/Profit Before Provisions and Taxes % Loan Loss Reserves/Gross Impaired Loans % n.a. n.a. 4. Loan Loss Reserves / Loans Gross of Loan Loss Reserves % n.a. n.a. 5. Impaired Loans Gross / Loans Gross % n.a. n.a. 6. Impaired Loans net / Equity % n.a. n.a. 8

9 Balance Sheet Analysis: Icelandic GAAP 31 Dec Dec Dec 2002 Year End Year End As % of Average Year End As % of Year End As % of USDm ISKm Assets ISKm ISKm Assets ISKm Assets Original Original Original Original Original Original Original Original A. LOANS 1. Customer Loans n.a. n.a. - n.a. n.a. - n.a Foreign Currency Loans n.a. n.a. - n.a. n.a. - n.a Other Loans 18, ,104, , , , (Loan Loss Reserves) , , , , TOTAL A 17, ,088, , , , B. OTHER EARNING ASSETS 1. Deposits with Banks 1, , , , , Government Securities n.a. n.a. - n.a Other Securities 2, , , , , Equity Investments 1, , , , , TOTAL B 5, , , , , C. TOTAL EARNING ASSETS (A+B) 23, ,454, , , , D. FIXED ASSETS , , , , E. NON-EARNING ASSETS 1. Cash and Due from Banks , , Other 1, , , , , F. TOTAL ASSETS 25, ,534, ,046, , , G. DEPOSITS AND MONEY MARKET FUNDING 1. Demand Deposits 1, , , , , Savings Deposits n.a. n.a. - n.a. n.a. - n.a Foreign Currency Deposits n.a. n.a. - n.a. n.a. - n.a Inter-bank Deposits 2, , , , , Other short-term Funding 2, , , , , TOTAL G 5, , , , , H. OTHER FUNDING 1. Long-term Debt 14, , , , , Subordinated Debt , , , , I. OTHER (Non-int. bearing) 1, , , , , J. LOAN LOSS RESERVES (See A) K. OTHER RESERVES n.a. n.a. - n.a. n.a. - n.a. - L. EQUITY 2, , , , , M. TOTAL LIABILITIES & EQUITY 25, ,534, ,046, , , Exchange Rate USD1 = ISK USD1 = ISK USD1 = ISK

10 Income Statement Analysis: Icelandic GAAP 31 Dec Dec Dec 2002 Income As % of Income As % of Income As % of Expenses Total AV Expenses Total AV Expenses Total AV ISKm Earning Assts ISKm Earning Assts ISKm Earning Assts Original Original Original Original Original Original 1. Interest Received 53, , , Interest Paid 34, , , NET INTEREST REVENUE 18, , , Forex & Inflation Adjustment n.a. - n.a. - n.a Other Operating Income 29, , , Other Income n.a. - n.a. - n.a Personnel Expenses 12, , , Other Overheads 11, , , Exceptional Items n.a. - n.a. - n.a Provision for Loan Losses 3, , , PRE-TAX PROFIT 20, , , Taxes 4, , Minority Interests Net Income 16, , , Memo: NET INCOME INCLUDING MINORITY INTERESTS 16, , , Ratio Analysis: Icelandic GAAP 31 Dec Dec Dec 2002 Original Original Original I. PROFITABILITY LEVEL 1. Pre-tax Profit/Total Assets (av.) % n.a. 2. Net Income/Equity (av.) % n.a. 3. Net Income/Total Assets (av.) % n.a. 4. Non-int. Exp./Net Interest Rev. + Other Operating Income % Net Interest Rev./Total Assets (av.) % n.a. II. CAPITAL ADEQUACY (year end) 1. Internal Capital Generation % n.a. 2. Equity/Total Assets % Equity/Loans % Capital/Risks - Tier 1 % n.a. 5. Capital/Risks - Total % n.a. III. LIQUIDITY (year end) 1. Liquid Assets/Deposits and Money Market Funding % Loans/Deposits and Money Market Funding % IV. ASSET QUALITY 1. Provisions/Loans (av.) % n.a. 2. Equity (av.)/provisions % n.a. 3. Net Income before Loan Loss Provs & Taxes/Provisions % Loan Loss Reserves/Loans %

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