Fridrik Sophusson, Chairman of the Board

Chairman's statement

Íslandsbanki had an eventful and a favourable year in 2017. The Bank's operations were successful, and a variety of innovations and improvements have been put in place. At the same time, the Bank's operating environment has continued to improve. The domestic economy has strengthened, capital controls have been lifted, and foreign markets are broadly stable, all of which have had a positive impact on the funding terms available to the Bank. Parliamentary elections were held towards the end of the year, and the new Government oversaw the passage of a fiscal budget authorising the sale of the State's holding in Íslandsbanki. Hopefully, the process will be started as soon as possible, and in an ambitious, transparent, and professional manner.

Icelandic economy well balanced

After a strong upswing lasting several years, developments in GDP growth suggest that Iceland has reached the top of the business cycle. Output growth measured 4.1% in 2017, just over half the growth rate in 2016. Import growth has far outpaced export growth, and private consumption contributes much more to GDP growth than before.

The tourism boom dating from the start of this decade is unequivocally the main contributor to the recent surge in export revenues and the sizeable trade surplus. The Icelandic economy has flourished in the past few years, with low unemployment and inflation at or below the Central Bank's inflation target. Even though forecasts provide for more modest output growth in the next few years as growth in tourism, private consumption, and investment eases, it is considered quite likely that the domestic economy will rebalance successfully after the upswing. It is therefore important that we utilise the investment that we have already made while building up the economy. Furthermore, more moderate private sector growth gives the public sector a chance to step up investment in infrastructure without jeopardising stability. The economy now stands on a firmer foundation, thanks to declining public and private sector debt over the course of the decade. Iceland's external assets now outweigh its external liabilities, which will deliver increased well-being for Icelanders over time.

There are a great number of opportunities for growth in Iceland's key economic sectors. Íslandsbanki has served the fishing industry ever since its predecessor was founded in 1875. Trawler operations began soon thereafter, with the Bank's direct involvement. Serving the fishing industry is therefore an important part of the Bank's history, and it is gratifying to see how Icelandic firms are working to enhance export values in this important sector. Íslandsbanki seeks to maintain its close ties to the fishing industry and other sectors with which it collaborates, in line with its dedication to supporting innovation in the Icelandic economy.

Treasury position improving

Íslandsbanki's credit ratings were upgraded during the year by S&P Global Ratings and Fitch Ratings, to BBB+/A-2 and BBB/F3, respectively. As a result of the upgrades, which were based on positive developments in the Icelandic banks' operating environment, the terms offered to the Bank in foreign credit markets have improved. Iceland's sovereign credit ratings were also upgraded by S&P and Fitch, owing to the strengthening of the domestic economy and reductions in public debt. This is extremely favourable, as Treasury debt has declined significantly. It totalled some ISK 1,500bn in 2012 and has been reduced by nearly ISK 600bn in the past five years, and the outlook is for further deleveraging in the years to come, if the most recent projections are borne out. This will further reduce interest expense, which is still far too high and constitutes a large share of Treasury expenditure.

Special bank taxes erode competitive position

Fair taxation is a foundation for successful business operations. It is appropriate and just that everyone should pay their taxes, but as we have pointed out regularly, taxes and levies on Icelandic financial institutions are among the highest in the world. Financial institutions' tax burden is four times heavier in Iceland than in neighbouring countries.

In 2017, the Bank paid ISK 9.5bn in tax, including ISK 4.5bn in special bank taxes. A financial administration tax is levied on wages paid by Icelandic banks, and a special tax is imposed on profits in excess of ISK 1bn. And on top of this is the bank tax, which is currently just under 0.4% of the Bank's total liabilities in excess of ISK 50bn. All of these are in addition to regular income taxes, payroll taxes, and other conventional taxes.
It continues to disappoint that the authorities have not yet lifted the bank tax, as was the intention when it was introduced as a temporary measure. In 2018, the bank tax is expected to generate ISK 9.2bn in revenues for the State. This erodes the Bank's competitive position, which is extremely unfortunate at a time when competition has never been stiffer – from Icelandic and foreign fintech companies and tax-free entities in the shadow banking sector.

It is our hope that the authorities will realise just what is at stake for the Government, as owner of Íslandsbanki, when the time comes to sell the Bank. The bank tax cuts into Íslandsbanki's profits, reduces its value, and acts as a deterrent to sensible and desirable long-term investors.

Improved funding structure

The capital position of Iceland's banks is a frequent topic of discussion, and the idea of reducing their capital has surfaced. Íslandsbanki's capital position is indeed strong, and efforts to build up the Bank with a sound loan portfolio have been successful. In 2017, Íslandsbanki was the first Icelandic bank since 2008 to issue subordinated bonds abroad, thereby taking a large step towards improving its funding structure. Therefore, opportunities to reduce the Bank's capital do exist, but this must be done carefully so as not to weaken its balance sheet. Íslandsbanki paid ISK 37bn in dividends in 2016 and ISK 10bn in 2017.

Sound governance and equal rights

Íslandsbanki has been recognised for “excellence in corporate governance” four years in a row. Its executives follow a set of rules that ensure that the Bank is operated responsibly. Receiving this recognition of its governance practices encourages the Bank to continue on this successful path.

Equal rights are important to the Bank, as they are to Icelandic society as a whole. Employee diversity is an absolute prerequisite for strong business operations, and it is beyond doubt that gender equality benefits everyone.

Íslandsbanki has been at the forefront of equal rights in Iceland for years. Among other things, the Bank has received the Equal Rights Incentive Award and has been awarded the gold standard for wage equality by PwC.

Equality is of vital importance to the Bank as can be seen in the relatively equal gender distribution among the Bank's executive staff. In our company culture, equal rights is one of the Bank's key social responsibility projects.

In closing, I would like to thank Íslandsbanki's employees for their collaboration in 2017, a year of development and solidification within the Bank. It has been extremely inspiring to see the vigour and dedication of our highly talented staff.

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Ábending þín er notuð til að bæta gæði þjónustu og upplýsinga á vef Íslandsbanka. Vantar þig aðstoð sem krefst þess að við svörum þér má hafa samband við Þjónustuver Íslandsbanka.

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