Íslandsbanki hf. 1Q 2018 Financial Results

Transcription

1 Íslandsbanki hf. 1Q 218 Financial Results 9 May 218

2 Table of Contents 1. First quarter highlights 2. Income statement 3. Balance sheet 4. Financial targets and key points 5. Annex Icelandic economy update

3 1. First quarter highlights

4 This is Íslandsbanki A leader in financial services in Iceland, Íslandsbanki is a universal bank with a proven strategy Satisfaction Index for Leading the Icelandic Customer 217 consecutive years Bank of the year in Iceland 214, 216, Driven by the vision to be #1 for service, our relationship banking business model is propelled by three business divisions that manage and build relationships with our customers. A clear focus is on growth, simplifying our operations and unify our objectives with society - or as we like to say it - we MULTIPLY, SIMPLIFY and UNIFY 1Q18 Key figures ROE (Regular operations) 1 8.2% Leverage Ratio 14.3% Total Capital Ratio 21.4% Total Assets ISK1.1 bn/eur 8.9 bn Employees 843 Number of FTE's for parent company at end og 1Q % Job satisfaction Among Íslandsbanki's employees training courses a year per employee Market share Individuals 33% SMEs Large companies 36% 32% Ways to bank 7, 1 APP users 14 Branches Self-service branch Users 19, online banking 55 ATMs Credit ratings BBB+/A-2 Stable outlook BBB/F3 Stable outlook Personal Banking Provides customers with comprehensive banking services through digital channels and a modern nationwide branch network. FOR INDIVIDUALS Business Banking Responsible for service to SMEs in the Bank's branches, as well as Ergo, Íslandsbanki's asset based financing unit. FOR SMEs Corporate and Investment Banking Provides comprehensive financial services to investors and large companies, including lending, securities and currency brokerage, corporate advisory services, private banking services, and sales of hedging instruments. FOR LARGE COMPANIES AND INVESTORS 1 1. 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. 4

5 Economic highlights Growth is slowing and pressure subsiding in key areas of the economy Tourism sector growth decelerates FOREIGN TOURISTS DEPARTING BY AIR 3, 2,5 2, 1,5 1,,5, 3% 21% 24% 13% 4% 1% 15% 3% -2% -1% 18% 2% 4% 11% 24% housing market remains buoyant but price rises have slowed REAL HOUSE PRICES AND TURNOVER Index, Sep-7= No. of tourists (mio., l.axis) YoY increase (th., r.axis) ISK remains stable in the wake of lifting of capital controls ISK TRADE-WEIGHTED INDEX AND VOLATILITY Easing of capital acct. restricitions Lifting of capital controls announced 3% 25% 2% 15% Real turnover Real prices Real prices YoY %chg (r.axis) while domestic balance sheets become more healthy PRIVATE SECTOR DEBT/GDP AND AVERAGE LOAN-TO-VALUE ISK bn % % Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 ISK index (l.axis) 21d annualized volatility (r.axis) % Household debt Corporate credit LTV, household mortgages (r.axis) 1. Source: Iceland Tourist Board, Statistics Iceland and ISB Research 5

6 Financial highlights Key figures & ratios 1Q18 4Q17 3Q17 2Q17 1Q17 PROFITABILITY ROE 15% CET1 (regular operations)¹ 8.2% 1.8% 8.1% 11.8% 1.6% ROE (after tax) 4.8% 7.% 4.7% 11.3% 7.% Net interest margin (of total assets) 2.9% 2.8% 2.8% 3.% 2.9% Cost to income ratio² 69.8% 69.2% 62.7% 58.3% 6.1% After tax profit, ISK m 2,97 3,112 2,73 4,997 3,44 Earnings from regular operations, ISK m³ 2,881 3,67 2,812 3,86 3, CAPITAL Total equity, ISK m 166, ,45 177, ,928 17,765 Tier 1 capital ratio 2.3% 22.6% 22.5% 23.3% 22.8% Total capital ratio 21.4% 24.1% 22.7% 23.5% 23.1% Leverage ratio 14.3% 16.2% 15.3% 15.7% 15.5% BALANCE SHEET Total assets, ISK m 1,88,38 1,35,822 1,77,623 1,47,221 1,28,88 Risk exposure amount, ISK m 795, , , ,31 73,12 Loans to customers, ISK m 776, , ,38 721,82 73,447 Total deposits, ISK m 588, , ,66 581, ,739 Total deposit / loan ratio 71.5% 74.% 76.9% 78.% 78.4% 1. Return from regular operations on normalised CET1 of 15%, adjusted for risk free interest on excess capital 2. Calculated as (Administrative expenses + Contribution to the Depositors and Investors Guarantee Fund One off items) / (Total operating income one off items) 3. 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. 6

7 Operational highlights Busy first quarter for Íslandsbanki Jan 218 New Kreditkort app launched Íslandsbanki leads customer satisfaction index in 217 for 5th consecutive year Over 4,5 overdraft applications approved through new automated online service Increased savings during Bank s ad campaign in relation to Champions Month Feb 218 IS Funds announces the launching of new housing project, 15 Miðborg, at Íslandsbanki s old HQ location, Kirkjusandur AGM approves ISK13bn dividend payment Mar 218 Fríða loyalty programme launched in Íslandsbanki app Corporate finance completed multiple projects in Q1, including bond issues for HS Veitur, Byggðastofnun and Garðabær municipality #metoo Bank s gender equality policy revised - #metoo lunches & barbershops organised with employees New Íslandsbanki tourism report published Good growth in mortgages loans with new mortgages 5% higher than during same period last year. Overdraft applications in Íslandsbanki s app automatised EUR 3m 6 year bond issued at 75 basis points over mid swaps 7

8 2. Income statement

9 Income statement Strong recurring revenues with stable growth in NII and NFCI contributing 1% of total operating income ISK m 1Q18 1Q17 4Q Net interest income 7,74 7, , ,999 Net fee and commission income 2,778 3,27 (492) 3,632 (854) 13,75 Net financial income (283) 12 (295) 26 (543) (715) Net foreign exchange gain (1) 21 (211) 81 (91) 527 Other operating income (147) 122 (19) 628 Total operating income 1,238 11,4 (82) 11,433 (1,195) 44,189 Salaries and related expenses (3,926) (3,659) (267) (4,297) 371 (15,233) Other operating expenses (2,924) (2,759) (165) (3,358) 434 (11,735) Administrative expenses (6,85) (6,418) (432) (7,655) 85 (26,968) Depositors'and Investors' Guarantee Fund (292) (253) (39) (288) (4) (1,83) Bank Tax (785) (72) (65) (614) (171) (2,892) Total operating expenses (7,927) (7,391) (536) (8,557) 63 (3,943) Profit before net impairment on financial assets 2,311 3,649 (1,338) 2,876 (565) 13,246 Net impairment on financial assets (152) 969 (881) 1,556 Profit before tax 2,399 3,889 (1,49) 3,845 (1,446) 14,82 Income tax expense (1,15) (1,13) 115 (816) (199) (4,151) Profit for the period from continuing operations 1,384 2,759 (1,375) 3,29 (1,645) 1,651 Profit from discontinued ops. net of income tax ,575 Net profit 2,97 3,44 (947) 3,112 (1,15) 13,226 HIGHLIGHTS Total income amounted to ISK 1.2bn in 1Q18, a decline of 7% between years mainly due to lower net fee and commission income and negative net financial income Net interest income totalled ISK 7.7bn, an increase of 4.6% from the previous year The net interest margin was 2.9%, at comparable levels to 1Q17 Net fee and commission income amounted to ISK 2.8bn, compared to ISK 3.3bn in 1Q17 Overall net fee income showed a 15% decline year on year, principally due to lower activity levels from two of the Bank s fee generating subsidiaries. Salary cost increases largely due to the conclusion of the capitalisation of IT contractor expenditure but also due to the introduction of negotiated salary agreements, which along with related expenses, led to a 7% year-on-year increase (ISK 3.9bn) in salary and related costs for 1Q18 9

10 Operating income Decrease in income mostly due to underperformance of two fee generating subsidiaries INCOME LEVEL DOWN DECREASE IN REVENUES TOTAL OPERATING INCOME Excluding one-off income ISKm - 7.3% NET INTEREST INCOME (NII) ISKm + 4.6% NET FEE AND COMMISSION INCOME ISKm - 15% 11,4 11,678 11,433 7,397 7,814 7,45 7,338 7,74 3,27 3,543 3,35 3,632 2,778 1,38 1,238 1Q17 2Q17 3Q17 4Q17 1Q18 1Q17 2Q17 3Q17 4Q17 1Q18 NET INTEREST MARGIN (NIM) % OTHER INCOME ISKm 2.9% 3.% 2.8% 2.8% 2.9% Q17 2Q17 3Q17 4Q17 1Q18 1Q17 2Q17 3Q17 4Q17 1Q18 1Q17 2Q17 3Q17 4Q17 1Q

11 Earnings from regular operations Excludes one-off items and ROE calculation is adjusted to normalised CET1 of 15% ROE FROM REGULAR OPERATIONS ISKm 1Q18 1Q17 4Q Reported after tax profit 2,97 3,44 (947) 3,112 (1,16) 13,226 One-off revenue One-off costs¹ 36 (36) 36 (36) 413 Bank tax ,892 Profit (loss) from discontinued ops (285) 285 (83) 83 (2,575) Tax impact of adjustments (9) 9 (9) 9 (17) Earnings from regular operations² 2,881 3,56 (625) 3,67 (789) 13,848 ROE 15% CET1 (regular operations)³ 8.2% 1.6% 1.8% 1.3% ROA from regular operations (after tax) 1.1% 1.3% 1.4% 1.3% Net interest margin adj. 15% CET1 2.7% 2.6% 2.5% 2.6% Cost / income ratio adj. 15% CET1 69.5% 61.3% 73.2% 66.7% HIGHLIGHTS From 1Q18, regular operations will include profit from discontinued operations as the Bank has successfully divested all non-core business-related assets Had profit from discontinued operations been excluded, the profit from regular operations would total ISK 1,776m, providing a ROE 15% CET1 of 5.9% One off items 218 No one off items identified in 1Q18 ISK 36 m in one-off costs in 217 are a result of ombudsman extra charges Earnings from regular operations Regular earnings decrease by ISK.6bn, mainly as a result of underperformance from two of the Bank s fee generating subsidiaries EARNINGS FROM REG.OPERATIONS (ISK m) 3,56 3,86 2,812 ROE REG. OPERATIONS CET1 15% (%) 1.6% 11.8% 8.1% 3,67 1.8% 2,881 1Q17 2Q17 3Q17 4Q17 1Q18 8.2% 1Q17 2Q17 3Q17 4Q17 1Q18 1. One-off costs include the impact of organisational changes, extra ombudsman charges and expenses related to the old headquarters. 2. Earnings from regular operations is defined as earnings excluding one-off items e.g. fair value gain deriving from changes in accounting treatment, Bank tax, and one off costs 3. Return from regular operations and corresponding ratios on normalized CET1 of 15%, adjusted for risk free interest on excess capital 11

12 Administrative expenses Administrative expenses, excluding one-off expenses, are at comparable levels to previous year EFFICIENCY CHANGING COST STRUCTURE COST INCOME RATIO 1 % 6.1% 58.3% 62.7% 69.2% 69.8% ADMINISTRATIVE EXPENSES 2 ISK m Real change in administrative expenses from 1Q17 to 1Q18: + 2.9% 6,382 6,544 6,1 7,619 6,85 BRANCH NETWORK #, Byr branches due to merger in dark grey Q17 2Q17 3Q17 4Q17 1Q Q18 PERIOD END FTE NUMBERS 3 #, Parent company ANNUALISED ADMIN.EXP vs COST INDEX 4 ISK bn, excl. one-off cost, parent company Admin expenses Actual Admin exps - cost index Q17 2Q17 3Q17 4Q17 1Q18 1Q17 2Q17 3Q17 4Q17 1Q Q18 1. The cost-to-income ratio excludes Bank tax and one-off cost and revenue items. 2. Excluding one off items 3. FTE numbers exclude summer employees. 4. Administrative expense - cost index is calculated as 4% inflation and 6% salary index excluding one-off items. 12

13 3. Balance sheet

14 Assets Total assets are 5.1% up from year-end 217 ISK m Δ Cash and balances w ith CB 177,29 189,45 (12,16) Bonds and debt instruments 49,14 27,9 22,5 Shares and equity instruments 1,28 1, Derivatives 4,673 2,896 1,777 Loans to credit institutions 47,22 26,617 2,63 Loans to customers 776, ,175 2,974 Investment in associates (32) Property and equipment 7,25 7,128 (13) Intangible assets 4,412 4, Other assets 1,732 9, 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 273bn, of which ISK 248bn are considered to be liquid assets Loans to customers New lending amounted to ISK 42bn since year-end 217 The loan book grew by 2.8% since year-end Asset encumbrance The Bank s asset encumbrance ratio was 15.8% at quarter end, compared to 15.2% at end year 217 Non-current assets held for sale 1,48 2,766 (1,718) Total assets 1,88,38 1,35,822 52,486 14

15 Diversified loan portfolio Loans to customers increased by 2.8% in first quarter 218, on the back of strong corporate lending LOANS TO CUSTOMERS by sector, consolidated LOANS TO CUSTOMERS by currency, consolidated FX 17% 39% 39% Individuals Seafood 11% 17% 11% 14% Real estate Commerce and services 15% 8% 7% Industrial and transportation Other 9% 8% Tourism 9% 13% Standard sectors Including tourism sector ISK 48% ISK 776bn ISK CPI 35% HIGHLIGHTS New loans were predominantly granted to corporations within the commerce & services and industrials & transportation sectors and to a lesser extent real estate The mortgage portfolio increased by 1.9% during the first 3 months of the year Outstanding loans to the tourism industry are 13%, unchanged from year-end 217 Real estate (hotels), commerce & services (car rentals, restaurants, tour operators) and industrials & transportation (airport services) are the largest underlying sectors 15

16 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% (63% ) Other collateral Vehicles & equipment Cash & securites Vessels 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 1. 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. 16

17 Asset quality Asset quality measurements have changed due to implementation of IFRS 9 IMPAIRMENT ALLOWANCE ACCOUNT ISK bn Stage 3 Stage 1 Off-bal Stage 3 Stage 2 Stage Off-bal LOANS TO CUSTOMERS Risk class and impairment stage. ISK bn Stage 3 Stage 2 Stage 1 HIGHLIGHTS With the new accounting standard, IFRS 9, collective and specific impairment from IAS 39 is replaced by impairment allowance in three stages In addition, off-balance sheet exposures now contribute to the impairment allowance account The adoption of IFRS 9 also means that non-performing ratios are no longer comparable over time The Bank is in the process of implementing a new, harmonised definition of default that will be used for risk management, impairment calculations, capital requirements and regulatory reporting. This includes a cross-default approach for credit-impaired facilities and the usage of external indicators from credit bureaus The impairment allowance increased on January 1, as a result of the new accounting standard During Q1 the impairment allowance decreased again, mainly due to write-offs of facilities in Stage 3 LOANS TO CUSTOMERS: CREDIT QUALITY Break-down of loans to customers and off-balance sheet exposures Gross carrying amount Impairment allowance (ISK bn) (% of portfolio) (ISK bn) (Imp. %) Stage ,1% 2,7,4% Stage 2 4 5,% 1, 2,6% Stage 3 3 3,8% 8,6 28,4% Total 788 1% 12,3 1,6% UR 17

18 Liabilities Diversified funding strategy ISK m Δ Deposits from CB and credit inst. 13,563 11,189 2,374 Deposits from customers 575, ,29 8,167 Derivatives and short positions 8,14 5,492 2,612 Debt issued and other borrow ings 269, ,748 51,57 Subordinated loans 8,838 9,55 (667) Tax liabilities 7,98 7, Other liabilities 39,28 35,947 3,81 Non-current liabilities held for sale 79 8 (1) Total liabilities 921, ,777 67,194 Total equity 166, ,45 (14,78) Total liabilities and equity 1,88,38 1,35,822 52,486 HIGHLIGHTS Deposits Customer deposits are up by 1.4% to ISK 575bn in the quarter The increase was due mainly to an increase in pension fund positions The deposit-to-loan ratio was 71.5% but is expected to decrease gradually in the future Debt issued and other borrowings Includes covered bonds, commercial papers and bonds in foreign currency Market access for covered bonds remain solid, with issuance of ISK 9.5bn in the first quarter, reinforcing the Bank s position as Iceland s largest covered bond issuer Other liabilities 64% of other liabilities are attributable to credit card liabilities to retailers through the Bank s subsidiary Borgun Equity Íslandsbanki s dividend pay-out ratio target is 4-5% of after tax profits. Due to its strong capital position, a higher dividend payment of ISK 13bn was approved during its March Annual General Meeting (AGM), bringing the Bank s total dividend payments to ISK 76bn since

19 Deposits remain the main source of funding Stable core deposits DEPOSIT DEVELOPMENT AND DEPOSIT RATIO ISK bn, consolidated DEPOSIT COMPOSITION ISK bn, consolidated % 9% 8% 7% 6% 5% 4% % 12% % 12% % 29% 27% 13% 14% 12% 2 1 3% 2% 1% % 59% 52% 56% 6% % Retail and SME Corp., sovgn., CB's and PSE Financial inst. in dissolution Domestic financial institution Foreign enitites Deposit/loan ratio (r. axis) HIGHLIGHTS Less stable deposits Stable deposits Term deposits >3 days Deposits remain the main funding source for the Bank and the deposit to loan ratio remains high At the end of the period, 72% of the deposits were in non-indexed ISK, 16% CPI linked and 12% in foreign currencies At the end of March 218,16% of the Bank s deposits belonged to the 1 largest depositors and 39% belonged to the 1 largest depositors. Compared to 15% and 39% respectively for year-end

20 Borrowings Successful international and domestic market transactions and positive spread development BORROWING SOURCES Book value in ISK bn MATURITY PROFILE OF LONG-TERM DEBT Nominal value in ISK bn HIGHLIGHTS Íslandsbanki is the largest issuer of covered bonds in the domestic market Total covered bonds issuance in Q1 was ISK 9.5bn Successful international funding in Q1 EUR3 m and SEK3 m issued in Jan 218 Continued tightening of the Bank s FX secondary spreads FX BORROWING SPLIT BY CURRENCY % ISK 14bn 2

21 Successful international funding A positive record of spread performance S&P upgrades Iceland to BBB S&P revises S&P upgrades S&P upgrades Fitch upgrades S&P upgrades Fitch upgrades 7 Íslandsbanki outlook Íslandsbanki to Iceland to A- / A-2 Iceland to A- / Iceland to A / A-1 Íslandsbanki to to positive from BBB / A-2 F-2 BBB / F-3 stable 4 35 First international bond SEK 5m FRN Dec 219 at Stibor +4bp SEK 3m FRN Feb 219 launched at Stibor +31bp EUR 125m first tap of 2.875% July 218 at m/s 29bp S&P upgrades Íslandsbanki to BBB+/A Fitch upgrades Iceland to A / F1 Mid-swaps / Discount Margin (bps) SEK 3m Dec 219 tapped at Stibor +33bp First EUR denominated bond EUR 1m 3% May 216 EUR 1m 2.875% July 218 NOK 5m FRN Oct 218 launched at Nibor +26bp 1 2 EUR 75m second tap 2.875% July 218 at m/s +247bp First EUR benchmark EUR 5m 1.75% Sep 22 at m/s +2bp First callable benchmark EUR 3m 1.125% Jan 224 at m/s +75bp 8 First T2 bond SEK 75m FRN 1nc5 Nov 227 at Stibor +2bp SEK 1bn FRN 4NC3 Apr 222 at Stibor +8bp 9 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 ISLBAN 2.875% Jul-18 EUR ISLBAN 1.125% 24NC23 EUR ISLBAN 1.75% Sep-2 EUR ISLBAN 4.% Dec-17 SEK (rhs) ISLBAN 3.1% Feb-19 SEK (rhs) ISLBAN 1.531% 27NC22 SEK (rhs) 21

22 Sound management of liquidity Liquid assets of ISK 248bn well above regulatory requirements with liquidity prudently managed NET STABLE FUNDING RATIO (NFSR) LIQUIDITY COVERAGE RATIO ALL CURRENCIES 18% 25% 16% 14% 12% 1% 14% 116% 2% 15% 1% 158% 146% 8% 6% 4% NSFR all currencies (group level) NSFR foreign currencies (group level) FX NSFR - regulatory minimum HIGHLIGHTS All liquidity measures well above regulatory requirements The LCR increased in 1Q18 due to a EUR bond issue FX liquid assets are composed of government bonds that have a minimum requirement of AA rating and cash placed with highly rated correspondent banks Stress testing of liquidity position is an integrated part of the annual ICAAP/ILAAP process as well the annual regulatory stress test. Liquidity Contingency Plan is in place and shall be tested regularly 5% % Liquidity coverage ratio (parent level) Liquidity coverage ratio (group level) LCR - Regulatory minimum LIQUIDITY COVERAGE RATIO FOREIGN CURRENCIES 7% 6% 5% 4% 3% 2% 1% % % Liquidity coverage ratio (group level) LCR - Regulatory minimum 22

23 Sound capital position The capital ratio in line with target and leverage is low CAPITAL RATIOS HIGHLIGHTS Capital ratios Capital base was ISK 17bn at 31 March 218, compared to ISK 187bn at year-end 217 The decrease is mainly due to an ISK 13bn dividend payment in March The IFRS9 implementation contributed to a ISK 4.2bn decrease in capital base ISK 2.5bn due to impairment charges ISK 1.7bn because the general credit risk adjustments are no longer eligible as Tier 2 capital Risk exposure amount (REA) RISK EXPOSURE AMOUNT (REA) ISK bn 7% 7% 71% 75% 73% The REA increased by ISK 2bn during the quarter, mainly due to increase in loans to customers The ratio of REA of total assets decreased from 75% to 73% The decrease is mainly due to an increase in the Bank s liquidity portfolio which has a low risk weight REA (ISKbn) REA/Total assets 23

24 Íslandsbanki s capital target Based on the regulatory SREP requirement in addition to 5 15bp management buffer ÍSLANDSBANKI S CAPITAL TARGET I CAPITAL REQUIREMENT COMPOSITION 5-15bp mgmt buffer Capital conservation buffer Countercyclical capital buffer O-SII buffer Systemic risk buffer 2.5% 1.2% 2.% 2.9% Total Capital Ratio 21.4% Capital target > % Overall capital requirement 19.8% Capital buffers Tier 2 Additional Tier 1 Common Equity Tier % SREP requirement % Management buffer 19.8%.5-1.5% 2.8% 2.8% 2.1% 2.1% 21.4% 1,1% Pillar 2-R 3.2% Total SREP capital requirement 11.2% Pillar 2-R 14.9% 14.9% 2.3% Pillar 1 8.% Pillar 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) The Financial stability board has recommended that FME increases the countercyclical capital buffer from 1.25% to 1.75%, which would be effective one year after FME s announcement 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 24

25 4. Financial targets and key points

26 Financial targets Medium and long term strategies structured around achieving key financial targets TARGET 1Q Guidance Based on risk free rate + 4-6% ROE REGULAR 8-1% 8.2% 1.3% 1.7% OPERATIONS 1 COST / INCOME RATIO 2 <55% 69.8% 62.5% 56.9% 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 Lower C/I on parent company basis than on a consolidated basis CET1 >15% LT 2.3% 22.6% 24.9% Current SREP requirement plus management buffer means currently a minimum % CET1 ratio TOTAL CAPITAL RATIO DIVIDEND PAYOUT RATIO > % 21.4% 24.1% 25.2% 4-5% % 5% 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 agreed to pay out ISK 13 billion in dividend for the 217 financial year which is higher than the dividend payout target due to a strong capital position 1. 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, and one off costs. 2. Calculated as (Administrative expenses + Contribution to the Depositors and Investors Guarantee Fund One off items) / (Total operating income one-off items) 26

27 Key points Delivering responsible growth driven by the vision to be #1 for service 1 Stable Economy operating stabilising as pressure in key sectors environment following eases, growth slows, liberalisation of capital debt ratios remain stable controls and ISK stays for individuals within a and narrow businesses range following resulting the lifting in of Sovereign capital upgrades controls M:A3 / F:A- / SP:A 42 Continued funding successes such as through Proven business innovative callable strategy of being #1 features in recent EUR for 3m service and SEK renders 1bn high transactions satisfaction while scores, maintaining strong our status as a recurring leader the revenues, domestic and covered resilient bond ROE market 52 MACRO MILESTONES CORE REVENUES BALANCE SHEET FUNDING SUCCESS Good market access to ROE of regular earnings international funding normalised for 15% CET1 demonstrates markets - benchmark the Bank s EUR continued 5m solid issue business performing position, recurring well revenues, aftermarket, focus lowest on efficiency, coupon since strong 28 lending and growth largest and in size healthy at time of profitability issuance against a firm capital base 5 CAPITAL & LIQUIDITY Sound capital and liquidity ratios that compare very well with peers 14.3% leverage ratio and capital optimisation process likely to continue with additional Tier 1 or Tier 2 issuances in order to normalise the capital structure 43 Sound Growing capital balance and sheet, liquidity now at ISK ratios 1,88bn, that compare through balanced very well growth with peers of loan portfolio 15.3% of leverage 2.8%, or ratio ISK 42bn and in capital new lending in 1Q18 and rise in optimisation process deposits from customers continued with 1bn by 1.4% (ISK 8.2bn) in 1Q18 dividend to ISK in March 575bn GOING DIGITAL As part of our vision of being #1 S&P for service, upgrade we to are launching new digital BBB+/A-2 on stable services through our online platforms, outlook in the Oct17 Íslandsbanki, and Kass Fitch and upgrade Kreditkort to apps, and BBB/F3 opening stable up the outlook Bank for third in Jan17 party cooperation as part of preparation for PSD2 GDP growth 3.6% 217 Net profit 2.1bn ROE (Regular operations) 8.2% Capital Ratio 21.4% Loan growth 2.8% Q1 Loan growth 2.8% BBB / BBB+ ratings LCR NFSR Leverage ratio 158% 14% 14.3% Information above is based on the Bank s 1Q18 annual financial results and forecasts by Íslandsbanki Research 27

28 Financial highlights Key figures ROEreg. operations CET1 15% 1 Profit after tax (ISKm) Cost / income ratio 2 1.6% 11.8% 8.1% 1.8% 8.2% 3,44 4,997 2,73 3,112 2,97 6.1% 58.3% 62.7% 69.2% 69.8% 1Q17 2Q17 3Q17 4Q17 1Q18 1Q17 2Q17 3Q17 4Q17 1Q18 1Q17 2Q17 3Q17 4Q17 1Q18 REA / total assets (ISKbn) 71.% 7.3% 71.2% 74.9% 73.1% Loans to customers sector split As of Other Industrial and 9% transport 1% Number of FTEs for Parent Company Excluding seasonal employees ,29 1,47 1,78 1,36 1,88 Real estate 17% ISK 776bn 38% Individuals Total assets REA / total assets Loans to customers (ISKbn) 78.4% 78.% 76.9% 74.% 71.5% Seafood 11 % Leverage ratio 15% 15.5% 15.7% 15.3% Commerce and services 16.2% 14.3% Total capital ratio 23.1% 23.5% 24.1% 22.7% 21.4% Loans to customers Deposit to loan ratio Earnings on regular income now includes profit from discontinued operations. 2. The cost / income ratio for the parent company is 64.4% 28

29 Annex - Icelandic economy update

30 Icelandic business cycle maturing Households and public sector increasingly main drivers of growth GDP AND MAJOR SUBITEMS, YoY CHANGE 1 % 15 7,5 Current upswing peaked in 216 at 7.5% GDP growth, moderating to 3.6% growth 1 3,6 in ,3 2,3 Forecast 2.3% growth per year in Pace of growth shifts from emerging market speed to OECD-peers speed -2 GDP YoY REAL GROWTH 1 % Imports Exports Inventory chg. Investment Public consumption Priv.consumption GDP Iceland World Advanced economies Emerging market and developing economies Source: Statistic Iceland, Central Bank of Iceland, IMF and ISB Research 1. Shaded areas indicate ISB Research/IMF forecasts Households becoming the main driver of growth, with private consumption and residential investment supplanting services exports and business investment Public sector also contributes to growth via consumption and investment Rebalancing of economy happening somewhat sooner than previously expected 3

31 Tourism sector growth decelerates Tourism has become the economy s leading source of FX revenue EXPORT REVENUES BY SECTOR 1 (ISK bn) , 2,5 2, 1,5 1,, % 27% 26% 24% % 27% 29% 16% 29% 17% 3% 22% 2% 32% 16% 14% 26% 27% 26% 23% 15% 25% 2% 26% 22% 26% 24% 22% 21% 2% 2% 19% 2% 24% 26% 29% 31% 39% 43% 45% FOREIGN TOURISTS DEPARTING BY AIR 13%4%1% 15%3%-2%-1%18%2% Other Seafood Aluminium Tourism 21% 24% 3% 4% 11% 24%, No. of tourists (mio., l.axis) YoY increase (th., r.axis) CORPORATE BALANCE SHEETS, TOURIST SECTOR ISK bn and % % 21% 26% 26% 29% 29% Assets Liabilities Equity ratio (equity/liabilities, r.axis) 35% 3% 25% 2% 15% 1% 5% % 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 revenues in recent 1.9 years. ¾ of total export growth in derived from increased services exports. Tourism-related sectors now account for around 45% of total export revenues Following a period of extremely rapid growth, the increase in tourists moderated to 24% in 217 An 11% increase in the number of foreign tourists is expected for 218 Equity ratios in the tourism sector have increased despite rapid growth and large investments. Source: Iceland Tourist Board, Statistics Iceland and ISB Research 1. Shaded areas indicate ISB Research/IMF forecasts 31

32 Moderate growth in goods exports Fishing industry debt ratios stabilising IMPORTS 1 YoY real % change Goods imports Service imports Total imports FISHING COMPANIES DEBT POSITION ISK bn Debt (l.axis) Debt/EBITDA (r. axis) Over 4/5 of export growth will most likely come from increased services exports. We also expect moderate growth in goods exports in the next few years, with marine product 1.9 exports the main driver, owing to increased quotas for cod and other groundfish. On the imports side, however, goods imports account for about 2/3 of total growth in the past few years. EXPORTS 1 YoY real % change Goods exports Service exports Total exports Source: Iceland Tourist Board, Statistics Iceland and ISB Research 1. Shaded areas indicate ISB Research/IMF forecasts FISHING INDUSTRY REVENUES AND EBITDA Revenue (ISK bn) EBITDA ratio (r.axis) EBITDA (ISK bn) 35% 3% 25% 2% 15% 1% 5% % Debt levels of the fishing industry hav stabilized in recent quarters following a broad decline in The contribution of goods and services exports to total growth will be broadly unchanged over the forecast horizon. The outlook for 218 and 219 is for considerably weaker growth in both imports and exports than in the recent past. Import growth will outpace export growth. 32

33 5 years of robust current account surplus Ongoing moderate growth in tourism key to continued C/A surplus INTERNATIONAL INVESTMENT POSITION 1 % of GDP 2% 7,5% % -2% -4% -6% -78% -8% -1% -12% -14% Excluding banks in -16% winding-up process -18% Q3 28-Q % Foreign assets-other Foreign assets-fdi NIIP (r.axis) Foreign liabilities-other Foreign liabilities-fdi Source: Statistics Iceland, Central Bank of Iceland and ISB Research 1. Shaded areasindicate ISB Research forecasts CURRENT ACCOUNT BALANCE 1 % of GDP ,7 3,7 3,5 2, Trade balance * : C/A balance excl. old banks 36% of GDP C/A balance Following a record C/A surplus of 7.7% of GDP in 216, the surplus shrank to an estimated 3.7% of GDP in C/A surplus forecast at 3.5% of GDP this year and 2.3% of GDP in could become the 7 th year of continuous robust C/A surplus, totaling over 1/3 of GDP Contrary to recent decades, a substantial C/A deficit is unlikely in coming years as long as the real exchange rate does not rise too steeply from current levels and terms of trade do not deteriorate excessively. A handsome CA surplus has played a leading role in the vast improvement in Iceland s IIP. Iceland s net external position was positive by ISK 19bn, or 7.5% of GDP, at the end of 217, the best IIP in Iceland s modern economic history. 33

34 Domestic balance sheets healthy Debt ratios stable following substantial deleveraging HOUSEHOLD DEBT % CENTRAL GOVERNMENT GROSS DEBT % of GDP Household debt/gdp Household debt/disposable income (r.axis) LTV for residential mortgages Household debt/net wealth Iceland USA UK Germany Denmark CORPORATE CREDIT AND CREDIT GROWTH % of GDP HOUSEHOLD DEBT % of GDP Credit/GDP (r.axis) Real change Nominal change Iceland Denmark Sweden Netherlands Ireland 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 Corporate credit fell from 155% of GDP in 212 to 84% of GDP by mid-216. Credit growth has picked up in recent quarters but has mostly remained in step with nominal GDP growth. Average LTV ratio of residential real estate has fallen from 55% in 21 to around 34% by end- 217 due to a combination of deleveraging and rising house prices Source: The World Bank, The Central Banik of Iceland, Statistics Iceland 34

35 Households enjoy favourable conditions Private consumption growth supported by rising household net wealth and real wages Demand pressures in the labour market peaked in 217 at 2.8% unemployment Real wage growth has decreased 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 moderating due to slower real wage growth and reduced population growth, However, we expect private consumption to grow by a relatively healthy 4.7% in 218, and by 3.% in 219. Sources: Statistics Iceland, Central Bank of Iceland, ISB Research forecasts 1. Shaded areas/dotted lines indicate ISB Research forecasts UNEMPLOYMENT AND LABOUR PARTICIPATION 1 % of workforce Unemployment (l.axis) Labour participation rate (r.axis) REAL HOUSE PRICES AND REAL WAGES 1 Change from the prior year (%) Real house prices Real wages HOUSEHOLDS WAGES, WEALTH & CONSUMPTION Change from prior year (%) Private consumption Real disposable income Real household net wealth (r.axis) PRIVATE CONSUMPTION AND RELATED INDICATORS Real YoY change (l.axis) and index (r.axis) Private consumption Card turnover, households Real wages Gallup CCI (r.axis)

36 Real estate market buoyant Prices for both residential housing and commercial real estate have risen sharply Housing market still characterised by demand outstripping supply. Real prices for residential housing are at an all-time high and turnover has increased substantially in recent years Supply has been increasing in the residential housing market recently and the average timeto-sale has doubled from recent lows while price increases have slowed. Increased residential investment and more moderate real wage growth likely to slow the rise in house prices in Commercial real estate market has seen large and protracted price increases Retail and office property has led price rises but industrial housing has lagged. COMMERCIAL REAL ESTATE PRICE RATIOS Index, Q4 28= REAL HOUSE PRICES AND TURNOVER Index, Sep-7= CRE price index / Building cost index CRE price index / Gross operating surplus CRE price index / GDP deflator Real turnover Real prices LISTED PROPERTIES, AVERAGE TIME TO SALE AND NEW CONSTRUCTION Properties listed for sale (th.) HOUSE PRICES AND RESIDENTIAL INVESTMENT Completed new dwellings (th.) Average time-to-sale (months, r.axis) Residential investment (ISK bn, 216 prices, l.axis) Real house prices (index, r.axis) Sources: Statistics Iceland, Central Bank of Iceland, ISB Research forecasts 1. Shaded areas/dotted lines indicate ISB Research forecasts 36

37 Inflation close to target Interest rates likely to decline somewhat before end of decade INFLATION, POLICY RATE AND REAL POLICY RATE 1 % INFLATION, CONTRIBUTION OF MAIN SUBITEMS % Inflation target Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Effective CBI policy rate Inflation Real policy rate Inflation rose above the Central Bank s 2.5% inflation target in March 218 for the first time in over 4 years. House prices are the main contributor to inflation for the past 4 years. Less deflationary impact from imports as ISK has stabilized, offset by slower rise in house prices Inflation expected to be close to the CBI s 2.5% inflation target throughout 218 and 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 Interest rates likely to fall somewhat further throughout the yield curve by the end of the decade -2-3 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Other services Public services Housing Imported goods Domestic goods CPI Sources: Statistics Iceland, Central Bank of Iceland, ISB Research forecasts 1. Shaded areas/dotted lines indicate ISB Research forecasts 37

38 ISK stabilises after capital controls end Outlook for relatively strong ISK as long as foreign currency flows remain in balance ISK TRADE-WEIGHTED INDEX AND VOLATILITY TRADE BALANCE AND ISK REAL EXCHANGE RATE 1-2% Easing of capital acct. restricitions 12 Lifting of capital controls announced 145 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 ISK index (l.axis) 21d annualized volatility (r.axis) ISK REAL EXCHANGE RATE AND TERMS OF TRADE 13 3% 25% 2% 15% 1% 5% % Since August 217 the ISK has been relatively stable after a period of increased volatility around the lifting of capital controls The ISK has fluctuated within a 7% range since August 217 and volatility has subsided to 216 levels despite a mostly free capital account and miniscule CBI interventions. 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 -15% -1% -5% The exchange rate forecast to hold broadly steady in , at roughly the 217 average % 5% 1% 15% Trade balance, % of GDP (l.axis) Real exchange rate, index (r.axis) Sources: Central Bank of Iceland, ISB Research forecasts 1. Shaded areas/dotted lines indicate ISB Research forecasts Real exchange rate RER avg Terms of trade Continued C/A surplus, improved external position support high real exchange rate, but need for diversification by institutional investors an offsetting factor 38

39 Iceland s credit rating has improved 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 S&P in Mar-17: Rating upgrade to A on lifting of capital controls; outlook stable Fitch in Dec-17: Rating upgrade to A on economic stability, reduced external vulnerability and improvement in government debt ratios, supported by robust growth AA/Aa2 AA-/Aa3 A+/A1 A/A2 A-/A3 BBB+/Baa1 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 BBB/Baa2 BBB-/Baa3 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 S&P Global Fitch 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 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. Source: Moody s, S&P, Fitch Ratings and Central Bank of Iceland 39

40 Íslandsbanki credit ratings Rating upgrades from both S&P and Fitch in 217 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 4

41 More about Íslandsbanki Learn more about the Bank through its 217 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 41

42 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. 42