Address by the Chairman of the Board

Íslandsbanki had a good year in 2022 despite uncertainties in the domestic and global economies. The Bank launched a wide range of projects with its customers after the demanding years of the pandemic. After the Bank was listed on the stock market in 2021, the State continued to scale down its holding, selling a 22.5% stake in the Bank and meeting its financial targets. It can be said that the sale was broadly successful, although certain parts of the process could have gone better and the transaction was controversial. The sale of the holding in the Bank has generated in total just over ISK 108 billion for the Treasury. The Bank's operations flourished during the year, and its returns exceeded expectations and forecasts.  

Iceland has faced a period of economic headwinds stemming from the impact of the COVID-19 pandemic and the war in Ukraine, both of which have pushed prices sharply upwards worldwide. Iceland has not been spared the repercussions, but fortunately, the inflation outlook has improved after an episode of monetary tightening by the Central Bank. Rising energy prices have made their mark widely, including in our neighbouring countries. While we benefit from our renewable resources, although we cannot escape the effects of higher energy prices on world trade.  

The resurgence of tourism as a key export sector in 2022 made a major difference for the domestic economy, and rapidly growing tourism-generated foreign exchange revenues did much to offset the growing deficit on goods trade in the second half of the year. The Bank's macroeconomic forecast, issued in February 2023, assumes that exports will continue to play a key role, owing largely to the ongoing rise in tourist visits, plus exports of intellectual property and other services and a surge in farmed fish exports. 

Inflation peaked in 2022  

The Bank's customers and others undeniably felt the effects of rising inflation, which peaked during the year. Inflation is expected to ease in the coming term, with slower house price increases and more stable import prices. At the same time, it is clear that the labour market will remain tight, and real wages look set to start growing again as soon as next year. The Central Bank of Iceland (CBI) is expected to maintain a tight monetary stance, as inflation is far from the 2.5% inflation target and the CBI's decisions in 2022 showed its willingness to use the tools it has at its disposal. The Bank's forecasts assumed that the CBI would raise the policy rate to a peak of 6% during the year – which it indeed did with its November interest rate decision – and then ease it downwards over the course of 2023.

The outlook is favourable  

Íslandsbanki has made a determined effort, as it always has, to stand by its customers through times of economic uncertainty. This applies to all of the Bank's divisions. To this end, the Bank has done its utmost to meet the needs of households and businesses, including by amending loan agreements. Icelandic households have increasingly opted for fixed rather than floating interest rates. Even though the CBI was widely criticised for its policy rate hikes in 2022, it is impossible to ignore the fact that the economic policy response from the Government – including that of CBI – played a major role in cushioning against the blows dealt the Icelandic economy by the pandemic and other shocks in the recent term.  

Íslandsbanki can feel the strength of its customers, who made significant advances during the year. Although the pandemic was demanding for many firms, they made a number of positive moves that will benefit them in the future. Many firms made real strides in digital development, and their use of technology is moving forward at a rapid pace. Íslandsbanki is no exception: it has vastly improved and simplified the service it provides to customers, so that nearly all banking transactions can be carried out via smart device. This gives the Bank the chance to make even better use of its employees' time, enabling them to provide more personal and more thorough advisory services to customers who are making big decisions.  

Sale of a 22.5% stake in the Bank  

Íslandsbanki was the topic of much public discussion during the year because of the Government's sale of 22.5% of its share capital in the Bank in March. Íslandsbanki was among the advisors, but as has been reported previously, Icelandic State Financial Investments oversaw the process. In retrospect, there is much that can be learned from it, but the report from the Icelandic National Audit Office states that the sale was favourable for the Government, generating ISK 108billion in revenues, with about a fifth of that amount coming from foreign investors. The CBI's Financial Supervisory Authority has sent Íslandsbanki a preliminary draft of the findings from its investigation of the Bank's execution of the sale in March. It is clear that the Bank should have handled certain aspects of the transaction better. The Bank has requested to conclude the matter through a settlement process and will provide information once the process is complete.

Robust operations  

In general, the year was a good one for Íslandsbanki, and its strong operations reflect a stable, high-quality loan portfolio. The Bank's return on equity has exceeded both internal targets and forecasts published by analysts at the beginning of the year. Income from core operation has continued to rise and expenses to fall. The Bank's assets are of high quality, and its loan portfolio is well secured. Its operations are responsible, and emphasis is placed on sustainability throughout the Bank. It is our belief that the Icelandic economy will remain strong, and Íslandsbanki is committed to making its contribution together with its customers.

Thanks  

It was very satisfying to take a seat on the Board of Íslandsbanki alongside such a talented group of people. We have all been aware of the strength and passion of the Bank's employees under the steady guidance of Birna Einarsdóttir. Thanks are due to the Bank's management team for their deft leadership of the various tasks they have steered – leadership that is reflected in the Bank's favourable operating performance and growing strength from year to year. I would like to close by thanking the staff of Íslandsbanki for their invaluable contribution in 2022. Íslandsbanki stands on solid ground and continues to be a force for good in the community. The future is bright.