Íslandsbanki CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 2015

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1 Íslandsbanki CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 2015 HIGHLIGHTS Profit after tax was ISK 20.6bn in FY15 compared to ISK 22.7bn in FY14. The difference is mainly due to irregular items and the appreciating Icelandic Krona. Return on equity was 10.8 in FY15, compared to 12.8 in FY14. Underlining profitability rising, earnings from regular operations were ISK 16.2bn in FY15 compared to ISK 14.8bn in FY14. Return on equity from regular operations on 14 CET1 was 13.2 in FY15 compared to 12.6 in FY14. Net interest income amounted to ISK 28.0bn in FY15 (FY14 ISK 27.1bn). The net interest margin was 2.9 in FY15 (FY14: 3.1). Net fee and commission income was ISK 13.2bn in FY15 (FY bn), a 15 year on year increase; thereof 6.7 was achieved in the parent company. Cost to income ratio was 56.2 in FY15 (FY14: 57.7). Cost to incomeratio excludes Bank tax and oneoff cost items. Loans to customers grew by 5 in the year to 665.7bn. The increase is well diversified across various lending units. Total assets amounted to ISK 1,046bn (Sep15: ISK 1,004bn). Deposits from customers increased by 2.1 in the last quarter to ISK 593bn. The Bank issued several successful foreign denominated bond transactions during the period in NOK, SEK, and EUR Total capital ratio remains strong at 30.1 (Sep15: 29.2) and Core Tier 1 ratio was 28.3 (Sep15: 26.9). The Bank s liquidity position is strong and exceeds internal and external requirements. Leverage ratio was at 18.2 at the end of the period compared to 19.5 in FY14, indicating a moderate leverage. Ratio of loans more than 90 days past due and impaired was 2.2 (Sep15: 2.4 and FY14 3.5). S&P placed the Bank s BBB/A3 rating to a positive outlook in January 2016, but earlier in the year the Bank was upgraded to investment grade. Previously, Fitch had assigned a BBB/F2 rating in April, but Íslandsbanki is the only Icelandic bank to have ratings from S&P and Fitch. Birna Einarsdóttir, Chief Executive Officer at Íslandsbanki: 2015 was a successful year for Íslandsbanki, and the Bank s performance exceeded expectations. Fee and commission income grew 14.7 yearonyear and interest income by 3.3. The Bank s core operations continued to strengthen, and the profit on regular operations grew 9.1 from the prior year. Significant changes took place in our customer service and digital channels. About 50,000 people have downloaded the Íslandsbanki app, and the number of active users rose 41 from the prior year. The successful laun ch of our new payment intermediation app, Kass, has helped us to provide our customers with even better service. Two of the Bank s branches merged last spring, when the new Grandi branch was opened. This autumn, three branches will merge to form a new, sta teoftheart branch in the North Tower of Smáralind shopping centre. Íslandsbanki recently received top marks in the banking market, scoring very high on the Icelandic Customer Satisfaction Inde x. We are exceedingly proud of the progress we have made and are moving forward with our vision of providing the best banking servi ces in Iceland. During the year, Standard & Poor s upgraded the Bank s credit rating to investmentgrade, and at the beginning of 2016 it revised the outlook on the rating to positive. The Bank received a BBB rating from Fitch Ratings during the year, making it the only Icelandic bank with investmentgrade ratings from both agencies. It was announced in 2015 that Íslandsbanki would be part of Glitnir s stability contribution to the Icelandic Government. The Bank is well prepared for the sale process when its new owner decides to begin it. NET PROFIT ROE NET INTEREST MARGIN 23,069 22,750 7,672 4,189 4,560 3,535 6,359 20,578 3,889 5, ,623 5,394 4,585 8,296 5,396 ROE ROE 14 CET1 (regular operations) FOR FURTHER INFORMATION PLEASE CONTACT: Investor Relations Tinna Molphy, tinna.molphy@islandsbanki.is: Director of Comunications Edda Hermannsdóttir, pr@islandsbanki.is and tel:

2 Income Statement () Q15 4Q14 Net interest income Net fee and commission income Net financial income Net foreign exchange (loss) gain Other operating income Total operating income Administrative expenses Depositors and Investors Guarantee Fund Bank Tax Total operating expenses Profit before net loan impairment Net loan impairment Profit before tax Income tax expense Profit for the period from continuing operations Profit from discontinued ops. net of income tax Profit for the period 28,010 27, ,003 6, ,170 11,483 1,687 3,235 2, ,881 1,568 2,313 1, (1,490) 165 (1,655) (137) 116 (252) 1,102 2,122 (1,020) (106) 44,673 42,443 2,230 11,959 10,659 1,300 (23,760) (22,901) (859) (6,518) (6,412) (106) (1,067) (1,055) (12) (270) (265) (5) (2,878) (2,444) (434) (818) (565) (253) (27,705) (26,400) (1,305) (7,607) (7,241) (366) 16,968 16, ,352 3, ,135 8,810 (675) 409 3,006 (2,597) 25,103 24, ,762 6,424 (1,663) (5,851) (6,239) 388 (1,147) (1,434) ,252 18, ,614 4,990 (1,376) 1,326 4,136 (2,810) 274 (430) ,578 22,750 (2,172) 3,889 4,560 (671) Stable recurring revenues Total income amounted to ISK 44.7bn in 2015, an increase of 5.3 from Net interest income totalled ISK 28.0bn, an increase of 3.3 from the previous year. The net interest margin was 2.9, compared to 3.0 in 2014, due to lower interest rates in It is expected to remain around 3.0 in the near to medium term. Net fee and commission income rose 14.7, to ISK 13.2bn in Net fee income benefited from feegenerating subsidiaries and increased customer activity within the parent company. Core income (net interest income and net fee and commission income) accounts for 92 of total operating income, which is in line with the Bank s focus on core earnings and its objective of generating stable cash flows over the long term. Net financial income amounted to ISK 3.9bn in 2015, as opposed to ISK 1.6bn in This is due mainly to fair value gains in equity holdings and, to a lesser extent, trading of bonds and shares. The net foreign exchange loss of ISK 1.5bn is attributed to the 9.15 appreciation of the ISK in 2015, as the Bank had a long position in foreign currencies for most of the year. Other operating income, which includes gains on real estate sales, rental income, service level agreement fees, and a share in the profit or loss of associates, totalled ISK 1.1bn in 2015, as opposed to ISK 2.1bn in 2014, when more substantial assets were sold. In November 2015, Visa Inc. and Visa Europe announced a transaction whereby Visa Inc. would acquire Visa Europe. The Bank s subsidiary, Borgun, has a direct ownership interest in Visa Europe. The fair value assessment of Visa Europe s holdings at yearend 2015 affected the Group s accounts and equity in the amount of ISK 5.4bn. The fair value gain was recognised in other comprehensive income (equity). Cost awareness In nominal terms, administrative expenses (excluding oneoff extraordinary expenses) rose by ISK 571m yearonyear, and the real increase excluding oneoff expenses is 0.4. Total salaries and related expenses grew to 13.9bn, a 4 increase from The increase is due primarily to pay rises negotiated in collective bargaining agreements. The costtoincome ratio for the year was 56.2, slightly above the 55 target. The contribution to the Depositors and Investors Guarantee Fund in the amount of ISK 1.1bn was comparable to that in the previous year, while the temporary bank tax increased 18, in line with growth in total liabilities. The profit from discontinued operations, net of tax, was ISK 1.3bn in The profit derives from the sale of noncore subsidiaries and income from foreclosed assets. 2

3 NET INTEREST INCOME NET FEE AND COMMISSION INCOME ADMINISTRATIVE EXPENSES 28,430 27,105 28,009 6,547 6,469 7,003 7,365 7,068 7,457 7,045 6,922 7,359 10,433 2,849 2,462 2,670 11,483 2,962 2,849 2,818 13,170 3,235 3,512 3,518 25,551 22,902 23,760 7,928 6,411 6,518 5,208 5,231 5,310 6,179 5,350 6,109 7,473 6,646 6,191 Net loan impairment gains 2,452 2,854 2,905 6,236 5,909 5,823 Net loan impairment in core activities continues to drive profits, with a gain of ISK 8.1bn in Of that total, ISK 11.3b n is due to a revision of estimated future cash flows from loans and ISK 3.2bn is a charge for specific and collective impairment losses. A large proportion of the revision of estimated future cash flows has already come to the fore and will affect profitability le ss strongly in future years. Taxes and levies rise temporarily Tax on the profit for the year amounted to ISK 5.9bn, as compared with ISK 6.2bn in The effective tax rate was 23.3, a s opposed to 25.1 in The temporary bank tax accounted for ISK 2.9bn in 2015, an increase of 18 from It is expecte d that the bank tax will be discontinued in The Bank is subject to the special financial tax of 6 on taxable profits in excess of ISK 1bn, as well as contributions to t he Depositors and Investors Guarantee Fund, the Financial Supervisory Authority, and the Debtors Ombudsman. Total taxes and levies amounted to ISK 10.8bn in 2015, as opposed to ISK 10.7bn in Asset (ISK m) Cash and balances with CB 216, , ,779 Bonds and debt instruments 78,606 87,347 75,186 Shares and equity instruments 18,320 10,531 9,208 Derivatives 1,980 1, Loans to credit institutions 35,534 35,072 44,078 Loans to customers 665, , ,741 Investment in associates ,563 Property and equipment 7,344 7,402 8,772 Intangible assets 1, Other assets 6,674 8,140 13,709 Noncurrent assets held for sale 12,792 21,649 47,106 Total assets 1,045, , ,009 BALANCE SHEET Assets balanced growth in loans to customers in line with GDP The balance sheet grew 14.8 yearonyear, to ISK 1,045.8bn at yearend The increase is due mainly to a significant rise in deposits and cash levels resulting from a systemwide increase in money supply due to the Central Bank of Iceland s foreign currency purchases during the year. Loans to customers grew 4.9, or ISK 30.9bn, below Iceland s projected nominal GDP growth rate of 6.3 in Demand for new credit was primarily from corporations and, to a lesser extent, from individuals. New lending amounted to ISK 152bn, as opposed to ISK 165bn in the prior year, a decline of 8. 3

4 The development and outlook related to oil production has had an impact on the Bank s exposure in the oil offshore service industry and the Bank has recognised an impairment to this exposure. The Bank has had intermittent presence tied to the Norwegian operators of offshore service vessels for over ten years, but the exposure is now about 1 of the Bank s loan portfolio. Credit quality continues to improve, as can be seen in declining nonperforming loan ratios. The share of loans that are either 90 days in arrears or impaired was 2.2 at yearend 2015, down from 3.5 at yearend This places Íslandsbanki s credit quality securely in the top interquartile range of European banks in terms of the European Systemic Risk Board solvency indicator. A more detailed discussion of the loan portfolio and credit risks can be found in the Bank s 2015 Pillar 3 Report. Real estate remains the Bank s most important type of collateral. The weighted average loantovalue (LTV) ratio for the residential mortgage portfolio was 69 at yearend 2015, compared to 74 at yearend The Bank s asset encumbrance ratio was 10.4 at yearend 2015, as opposed to 10.8 in Shares and equity investments grew to ISK 18.3bn, including ISK 11.2bn in listed instruments and ISK 7.1bn in unlisted instruments, an increase of 74 from the 2014 total of ISK 10.5bn. The rise is due to fair value gains in exposures, the larg est being from VISA Europe, through the Bank s subsidiary Borgun. Liabilities and Equity (ISK m) Deposits from CB and credit inst. 25,631 25,796 29,689 Deposits from customers 593, , ,331 Derivatives and short positions 6,981 3,963 11,176 Debt issued and other borrowings 150,308 96,889 89,193 Subordinated loans 19,517 21,306 21,890 Tax liabilities 8,358 8,388 10,826 Other liabilities 36,677 37,262 37,130 Noncurrent liabilities held for sale 2,825 2,790 9,456 Total liabilities 843, , ,692 Total equity 202, , ,318 Total liabilities and equity 1,045, , ,009 Liabilities deposits still the main source of funding Total liabilities amounted to ISK 843.5bn at the yearend, an increase of 16.2 between years. The Bank maintained a strong liquidity position throughout 2015, and all regulatory and internal metrics were well above the set limits. At yearend 2015, its liquidity coverage ratio (LCR) was 132 for the parent company and 143 at the group level, and the foreign exchange net stable funding ratio (NFSR) was 142 for the parent company and 141 at the group level. The total NFSR was 120 at both parent company and group levels. Total deposits grew by 11.5 between years, to ISK 618.9bn. Deposits are still the Bank s main source of funding, and concentration levels are monitored closely. This increase was due mainly to transfers of funds related to stability contribut ions but also to the growth of shortterm investment funds that invest largely in deposits. The increase can also be attributed to the Central Bank s foreign currency purchases, which increase the domestic money supply. As a result, the ratio of customer deposits to customer loans rose to 88 at yearend 2015, compared to 83 at the end of The Bank s debt issuance increased throughout 2015, primarily reflecting issuance under its Global Medium Term Note Programme (GMTN) and covered bond programme, aimed at mitigating risk through diversification of funding. The Bank issued ISK 24.1bn in covered bonds in It also issued shortterm unsecured bonds (1 to 6month maturity) throughout 2015, with an outstanding yearend balance of just over ISK 10bn. Highlights of FX issuance in 2015 include: In February, the Bank issued a SEK 300m fouryear floatingrate note (FRN) at STIBOR +310 which was tapped by SEK 150m in April and again in July In July, the Bank launched a EUR 100m fixedrate note due in 2018, its second such transaction, which was tapped by EUR 125m in December In October, the Bank issued a threeyear NOK 500m FRN at NIBOR +260bp The Bank has issued a Tier 2 euro denominated subordinated loan currently totalling ISK 19.5bn. It is set to mature in

5 Equity Total equity amounted to ISK 202.2bn at 2015 yearend, as compared with ISK 185.5bn at the end of Of that total, ISK 3.9bn is attributable to minority interests. The nominal value of the Bank s authorised share capital was ISK 10bn at the end of 2015, and paidup share capital amounted to ISK 65bn. At the end of 2015, the Bank s capital ratio was 30.1, compared to 29.6 at yearend 2014, well above the shortto mediumterm target of 23. The Bank s Tier 1 capital ratio was 28.3 at the end of 2015, up from 26.5 at year end Íslandsbanki uses the standardised method to calculate its riskweighted assets (RWA), which amounted to ISK 699.7bn at 2015 yearend, or 67 of total assets, a marginal increase between years. The yearend leverage ratio was 18.1, compared to 19.5 in 2014, indicating moderate leverage. In 2015, ISK 9.0bn in dividends were paid out, or 40 of year2014 net profit. The Board of Directors is proposing dividend payments to shareholders of up to 50 of profits in 2016 Imbalances The Bank is exposed to inflation risk because CPIlinked assets exceed CPIlinked liabilities. At yearend 2015, the Bank s consolidated net inflation (CPI) imbalance amounted to ISK 42.6bn (21.1 of the total capital base), compared to ISK 61.7bn i n 2014 (30.9 of the total capital base). The imbalance is managed via CPIlinked swaps, issuance of CPIlinked covered bonds, and longterm CPIlinked deposit programmes. The consolidated foreign exchange balance at the end of December was ISK 4.3 billion. The Bank s imbalances are strictly monitored and are within the regulatory limits. Ratings Íslandsbanki is the only bank in Iceland that is rated by two international rating agencies, Fitch and Standard & Poor s (S&P ). In 2014, the Bank received a BB+/B rating with a stable outlook from S&P and in April 2015 the Bank received a BBB/F3 rating with a stable outlook from Fitch. In July 2015, as a direct result of the announcement of the Government s capital account liberal isation strategy, S&P upgraded Iceland s sovereign rating and, along with it, the ratings of the Icelandic banks. Íslandsbanki was as signed a BBB rating with a stable outlook. In January 2016, S&P raised the sovereign rating to BBB+/A3, citing further progress towards capital account liberalisation and declining debt levels. Shortly thereafter, Íslandsbanki s ratings were confirmed at BBB/A3 with LEVERAGE RATIO CAPITAL RATIO RWA / TOTAL ASSETS Total capital ratio Tier 1 ratio Financial Calendar Íslandsbanki plans to publish its interim and annual financial statements according to the below financial calendar. 1Q16 11 May Q16 23 Aug Q16 9 Nov Q16 21 Feb 2017 Please note that the dates are subject to change. Investor Presentation in Icelandic At pm Icelandic time, Birna Einarsdóttir, CEO of Íslandsbanki, and Jón Guðni Ómarsson, CFO, will present the FY2015 financial results to market participants, followed by a Q&A session. The meeting is conducted in Icelandic and held at the Bank's headquarters at Kirkjusandur. Investor call in English The Bank will also host an investor call in English to present the results at 2 pm Icelandic time. The call will start with a short macro update on the Icelandic economy, followed by a review of the financial results and Q&A. 5