Birna Einarsdóttir, Chief Executive Officer

CEO's address

2017 was certainly a transformative year for Íslandsbanki. We introduced a new organisational structure, completed the move to our new headquarters, and revamped the Bank’s core systems. We continued to prepare the Bank for a new international regulatory framework, new technological challenges, and the prospect of new competitors in the market. We saw our credit ratings upgraded, and we took even further steps towards a more economical funding structure, with the first foreign subordinated bond issue by an Icelandic financial institution since 2008. In spite of these major changes, the Bank's operations remained stable, with profit totalling ISK 13.2bn and returns on core operations measuring 10.3%, in line with set targets. The Bank retained its position as Iceland's front-runner in customer service during the year leading the Icelandic Customer Satisfaction Index for fifth consecutive year and topping the rankings in most categories of service surveys carried out among individuals and companies, and was selected Bank of the Year in Iceland by The Banker. In 2018 we look forward to rolling out a number of innovative services that will be beneficial for our customers.

New organisational structure, revamped systems, and completed move to new headquarters

The Bank's new organisational structure features three business-generating divisions that serve our customers: Personal Banking, Business Banking, and Corporate Banking. Our aim is to tailor our organisational structure to the changed needs of our customers and offer them even better banking services. The changes have been successful, and we can already see increased opportunities for growth and advancement. In October 2017, we completed the move to our new headquarters in Norðurturn, where we brought operations from four separate locations together under one roof. We have settled in, and today we carry out our day-to-day tasks in an activity-based work environment, which has proven successful and has given our employees the flexibility to work in the environment that suits them best for each project. Job satisfaction levels are high at Íslandsbanki, as they have been in recent years, and we can feel the increased vitality among our staff members.
The Bank took a major step in deciding to overhaul its core systems, which are due to be relaunched early 2018. This enormous project, which is being carried out in cooperation with RB (the Icelandic Bank's Data Centre), is nearing completion, and the new core systems will be more efficient and will help us to adapt to a changing business environment.

Satisfied customers

In recent years, we have developed our vision of making Íslandsbanki #1 for service, and our staff members have given their all to make this commitment a reality. For five years in a row, Íslandsbanki's customers have been the most satisfied in the country, according to the Icelandic Customer Satisfaction Index, and for the third time the Bank was named Iceland's Bank of the Year by The Banker. We are extremely grateful for this recognition, which encourages us to continue on the same path and perform even better in the future. It is always a challenge to take something that is already good and make it outstanding.
At the same time, we are constantly seeking ways to provide our customers with service that simplifies their banking activity. Today, for example, individuals can do nearly all of their banking by mobile phone, with the Íslandsbanki app, which now offers the possibility to apply for and to change overdraft authorisations, among other features. And a large number of customers use Kass, the payment app selected the best Icelandic app at the 2017 IceWeb conference. The newest addition to our suite of apps is the Kreditkort app, with which users can track their credit card usage in real time, obtain a PIN number, and have their card frozen.

Íslandsbanki's net promoter scores (NPS), which measure the likelihood that customers will recommend the Bank to friends or acquaintances, is at their highest since 2008. The NPS is becoming the most-used service recommendation metric in the world. Among individuals, the Bank ranked 11 points above its closest competitor, and among small and medium-sized enterprises (SMEs) it is 27 points above the second-highest bank. Executives from Icelandic companies report that Íslandsbanki provides excellent service and quality advice and that its employees familiarise themselves thoroughly with firms' operations.

Diversified corporate market

Íslandsbanki has been a leader in the corporate market, and its market share in lending to SMEs grew to 36% by year-end 2017. This group includes firms from greater Reykjavík and regional Iceland in roughly equal measure, with 45% of new loans from the Business Banking division granted to corporate borrowers outside the capital area. Furthermore, the Bank has collaborated successfully with Iceland's largest companies, with new loans to this customer group totalling ISK 129bn during the year, up from ISK 116bn in 2016. Total lending to individuals and firms grew by 8% in 2017.

Loans have been granted to a wide variety of corporate borrowers through the years, and risk on the loan book is well diversified. The tourism industry was most prominent in the loan book in 2017, followed by real estate and fishing companies.

2017 was a busy time for Íslandsbanki Corporate Finance, which completed 16 projects during the year, including overseeing the sale of Keahotels, Iceland's largest hotel chain, and acting as advisor for Vodafone’s purchase of 365 Media's assets. A number of other irons are in the fire, and we look forward to completing these projects with our customers in the new year.

The Bank's securities and currency brokerage staff were also busy during the year, with covered bond issuance approaching ISK 42bn. The brokerage unit oversaw bond issues for real estate company Eik fasteignafélag (just under ISK 10bn) and hotel operator Íslandshótel (just under ISK 3bn). The derivatives desk was busy as well, and we anticipate a strong year for the Bank's brokerage services.

Ergo, the Bank's asset financing arm, had its strongest lending year to date. Survey results have shown that Ergo is customers' first choice in asset based financing. The average age of Iceland's motor vehicle fleet has been falling, which is good news for the environment and for traffic safety, and more favourable terms for customers have greatly simplified motor vehicle financing.


Banking in your pocket

The individual banking services environment is changing radically at present, with the regulatory framework expanding year by year. With the entry into force of a new regulation, banks are required to give other companies access to the banking system's core infrastructure. As a result, we will see increased competition from fintech companies in the coming term, which will be beneficial for consumers. Íslandsbanki has responded strongly to this change. In 2017, we had over 20 million contacts with our customers, most of them through digital communication channels. With the many innovations we have launched, we foresee that our customers will be able to use digital channels to conduct their own banking wherever and whenever they need. We intend to continue on this path and introduce even more innovations in 2018.
Demand for Íslandsbanki mortgages was brisk in 2017, both for new purchases and refinancing of existing debt. Mortgage interest rates are now more favourable than they have been in years, and despite stiff competition in the mortgage lending market, the Bank has retained its market share. We are the market leader for first-time buyers, offering them a special supplemental loan to bridge the financing gap.

As we build up our digital channels, we place strong emphasis on providing individuals and firms with top-flight service in our 14 branches. We are proud of the expertise of our employees, who assist our customers with decisions large and small.

Íslandsbanki's branch network is the most efficient in Iceland. In 2017 the Bank opened its new, renovated Laugardalur branch after merging two branches. The Laugardalur branch's cutting-edge design, like that in the Norðurturn and Grandi branches, marks a new approach in banking services and has drawn considerable attention. Among other things, Norðurturn was voted the most progressive branch in Iceland in 2017 by The Financial Brand.

Continued strong core operations and stable fee and commission income

Even though 2017 was a year of develop-ment and change, the Bank generated excellent returns, with year-2017 profits totalling ISK 13.2bn, returns on core activities measuring 10.3%, and fee and commission income totalling ISK 13.8bn. Loan portfolio quality has continued to improve, and our non-performing loan ratio was 1.0% at the year-end.

The Bank's credit ratings were upgraded by both S&P and Fitch, and funding activities were highly successful during the year. The Bank broke new ground in the post-crisis period by issuing a ten-year bond for SEK 750m, the first subordinated bond issued abroad by an Icelandic financial institution since 2008. The issue represented an important step in improving the Bank's funding structure. It is extremely gratifying to experience investors' increased confidence in the Bank's operations and in the Icelandic economy more broadly.

Increased focus on education and social responsibility

Through the Bank's educational initiatives, which are part of its corporate social responsibility policy, we have held 600 educational talks and welcomed 40,000 guests to meetings on such diverse topics as personal finance at retirement, first investments, the housing market, and even finance in football. We have recently begun producing videos for social media, and over 50,000 people have already viewed the first ones. We are excited about this new means of bringing interesting and informative materials to our customers, and we can see numerous opportunities in this area.

The Bank has also given its wholehearted support to entrepreneurs and, for the second year in a row, was one of the largest sponsors of Startup Tourism, an initiative aimed at fostering innovation in the tourism industry. The Bank has also given grants from its Entrepreneurship Fund, providing important assistance to companies that are bringing good ideas to fruition.

Galvanised for the new year

As we say goodbye to an eventful 2017 and thank our customers for a productive and rewarding year, we look forward to rolling out a number of innovative services in the coming term. We made significant progress last year in strengthening our core systems and structure and adapting the Bank to a new business environment. Just like Iceland's national football team, which will play in its first World Cup this summer, we at Íslandsbanki have set the bar high for 2018, and we look forward to taking on the year’s challenges with energy and dedication.

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