Address by the Chairman of the Board

It is safe to say that 2023 was at once an eventful and an educational year for Íslandsbanki. The year started well, with the implementation of a new strategy and strong progress in digital services, but that solid beginning was followed by shocks relating to the settlement with the Central Bank due to the sale of part of the Government's stake in the Bank. The Bank used the second half of the year to restabilise, both internally and vis-à-vis customers, and complete the reforms accompanying the settlement with the Central Bank. All of this will be of benefit in the future, of course, but it is also a necessary element in preparing the Bank for the future.

We were not only faced with internal adversity in 2023, but also with natural disasters such as our people in Grindavík have unfortunately had to experience.  The current conditions in the banking market in Iceland are also very different from what our international competitors operate in, as the capital requirements of Icelandic banks are among the highest seen in the world. It is clear that there are opportunities and a need for consolidation in the Icelandic market, and it will be interesting to see what the future holds in those matters. It is extremely important that the country and the nation, together with the regulators, form a strong vision of what the future ownership and landscape of the financial market should looks like.

The economic environment was challenging when the economy began to readjust after a period of strong growth. In spite of fairly clear signs of tension in the labour market and in the economy more broadly, households and businesses have – fortunately – been relatively careful. The financial position is strong overall, and debt levels are moderate in both historical and international terms.

In the main, the tourism industry has recovered from the pandemic-era shock and has retaken the lead among Iceland's foremost export sectors. The outlook is for record tourist arrival numbers in 2024. Furthermore, it has been gratifying to see growth in export sectors that are based mainly on human intelligence and on better use of Iceland's resources.

The Bank is very strong and has placed great emphasis on standing by our customers in a demanding economic environment. Its capital position is strong as well, and its credit ratings reflect a positive view of its underlying operations. Operations have been stable, and the return on capital has exceeded targets.

Outlook for lower inflation and interest rates

Later this year, after inflation has subsided, it is assumed that the Central Bank will start lowering the policy interest rate. Households and businesses will doubtless welcome declining inflation and interest rates, as the outlook is for real wages to grow this year, even though nominal wages will rise more slowly than in the recent term. Real rates will probably remain high through 2024, however, which could dampen firms' investment appetite and prompt households to save rather than consuming more.

Fixed-interest-rate clauses set to expire

In an environment of high interest rates, it is natural that the composition of household loans should change. There has been a strong shift from non-indexed loans to indexed loans as households seek more manageable debt service burdens. The Bank closely monitors its customers' position and has attempted to meet their needs insofar as it can including by educating customers on ways to decrease monthly payment burden. The Bank has also provided informational material on how to lower debt service. In 2023, some ISK 15 billion in mortgage loans with temporary fixed-interest-rate clauses were subjected to interest rate reviews, and a share of them were refinanced with indexed loans. In 2024, another ISK 43bn in mortgage loans are scheduled for similar reviews, followed by ISK 57 billion in 2025. If developments continue in the current pattern, the Bank's loan composition can be expected to shift increasingly to indexed loans, which could lead to increased growth in the Bank's indexation imbalance.

Development and reform

The year was marked by Íslandsbanki's efforts to shore up its foundations and culture, following the agreement with the Central Bank to settle the case involving violations committed by Íslandsbanki in connection with its sale of a 22.5% Government-held stake in the Bank via auction on 22 March 2022. Íslandsbanki paid ISK 1.16 million in fines and pledged to institute specific reforms centring on unconditional audio recordings, improved customer classification and better information disclosures to customers, clearer risk assessments and assessments of conflicts of interests, among other matters. In addition, strong emphasis was placed on strengthening governance practices that support a robust risk culture within the Bank, both now and in the future. Bank staff dedicated an enormous amount of time and effort during the reform process and benefited from the assistance of consultancy firm Oliver Wyman. There have also been major changes in staffing, both on the Board and within the management team. A new board was elected by shareholders at the July shareholders' meeting, with the result that four new members took seats on Íslandsbanki's Board of Directors. Furthermore, major changes have been made to the Bank's Executive Committee with the appointment of six new members from within the ranks of Íslandsbanki and from other companies in Iceland and abroad. It is important that knowledge and expertise be maintained within the Bank alongside new streams and concepts, and we are convinced that this year of readjustment will enable us to strengthen the foundations of our operations.

Excellent service is of pivotal importance

At the beginning of the year, the Bank developed a new strategy with the assistance of consultancy firm McKinsey. Íslandsbanki's role is to act as a force for good, and its vision is to create value for the future by providing outstanding service. Íslandsbanki has long placed strong emphasis on service, and this focus remains at centre-stage for customers and employees alike.

The Bank's role of providing outstanding service means that we are able to provide digital service in a simple manner, when customers need it. In tandem with this, personal service and advice is needed for major decisions, and we will continue to assist customers as they face such challenges. In addition, we must thoroughly know our customers, know their needs, and thereby discern how we can best work together for their benefit. Furthermore, we consider it very important to provide information to customers and foster their financial health. As with all goals, these objectives are not met in a single day, and the Bank focuses strongly on improving its efforts, one day at a time.

Sustainability remains one of the Bank's four strategic goals. It is safe to say that expectations made of companies in the area of sustainability have increased markedly in the recent term, not only because of the vastly expanded regulatory framework the topic entails, but also because of strong demands made by stakeholders such as employees, investors, and customers. During the year, major strides were taken towards continued integration of sustainability objectives into the Bank's operations, including work on the Bank's double materiality assessment, the assessment of sustainability risk in the Bank's loan portfolio, and the update of the sustainable financing framework, which was published early in 2024. All of this work aims at the same goal: to make the Bank better prepared to support informed decision-making and risk management, respond to more stringent demands concerning sustainability disclosures, and – not least – support customers on their own path towards greater sustainability. The Bank's greatest opportunity to be a genuine force for good lies in its ability to finance the transformation that needs to take place in the Icelandic community so that the country's ambitious climate and equal rights targets can be met.

Operations and the tasks ahead

On the whole, 2023 was a good year for Íslandsbanki's operations. The Bank's operating profit amounted to ISK 24.6 billion, and its return on capital exceeds our financial targets and analysts' projections. Income from core operations is still the main source of the Bank's revenue; asset quality is good and collateral is sound. Íslandsbanki stands on firm ground and is ready and willing to tackle new projects in partnership with our customers.

Digital distribution channels will continue to gain in popularity among our customers, and we are determined to remain at the forefront in expanding digital banking services and improving digital service offerings, so as to meet our customers' needs and help them to realise their goals and succeed in their endeavours.

Thanks

It has been a distinct honour to take a seat on the Íslandsbanki Board of Directors. The Bank employs an outstanding team dedicated to helping its customers to succeed, and it has a long history in bringing this about.

Birna Einarsdóttir, after 30 years with Íslandsbanki – the last 15 years as CEO – left the Bank last summer, and on behalf of the Board, I want to offer her our heartfelt thanks for her invaluable contribution throughout her tenure with the Bank, which focused on equal rights and sustainability as cornerstones of the Bank's culture. Her successor is Jón Guðni Ómarsson, who has led the Bank with a firm guiding hand and has steered it though a demanding period of rebuilding informed by his almost 25 years of employment with the Bank and its predecessors. We are optimistic about the new year and look forward to meeting the challenges ahead, together with our customers.

I would like to thank the Bank's employees for their contribution during a difficult year that was certainly not made easier by societal discourse. The reforms undertaken in the past year have shown incontrovertibly that Íslandsbanki's team of employees are committed to making improvements where they are needed and are determined to stand up stronger than before. With a strong background and our values as a guidepost, we will leave no stone unturned in harnessing the opportunities open to us.