Financials and funding 2021

Income statement

Core income (NII and NFCI) up by10.5% in 4Q21 from 4Q20– strong underlying foundations

• Net interest income (NII) grew by 4.7% in 4Q21 compared to 4Q20 and by 2% for the whole year, mainly driven by greater lending volumes along with rising interest rates. The average CB policy rate was 1.7% in 4Q21, as compared to 0.9% in 4Q20 and 1.1% for 2021 compared to 1.5% in 2020. The reduction in NII from 3Q21 is explained by a fall in average loans and deposits, combined with higher subordinated loans and a narrower CPI gap. 
• Net interest margin (NIM) on total assets was 2.4% in 4Q21, as it had been for FY21 as a whole. NIM on loans fell from 2.3% in 4Q20 to 2.1% and NIM for deposits increased from 1.1% in 4Q20 to 1.4% in 4Q21. In terms of full year comparisons, NIM on loans was unchanged at 2.2% from previous year, whereas NIM on deposits was 1.2% in 2021, down slightly from 1.3% in 2020.  
• The rise in net fee and commission income by 27.5% in 4Q21 from 4Q20 and by 22.1% in 2021 is broadly based. Cards and payment processing reached pre-COVID-19 levels and fees from investment banking and brokerage continued to exceed expectations. The Bank´s asset management operations continued to see strong inflows into mutual funds from all client segments. Growth in NFCI is expected to be in line with nominal GDP growth on average through the business cycle. For Iceland Funds, Íslandsbanki’s subsidiary, assets under management grew by 17% in 2021 and amounted to ISK 410bn at year-end 2021.  
• Net financial income lowered by ISK 137m in 4Q21 from 4Q20 but the turnaround for 2021 by ISK 3.9bn is explained by fair value changes and generally favourable market conditions. 

C/I ratioreduced from previous year

• Salaries and related expenses decreased by 3.1% in 4Q21 compared to 4Q20, despite collective salary increases, as a result of lower FTEs. Salaries grew by ISK 480m between years, which is partly explained by one-off cost resulting from the sale of the Bank or ISK 142m. Other factors, such as general wage agreements, layoff costs and increased costs due to early retirement explains this increase.  
• The reduction in other operating expenses in 4Q21 compared to 4Q20 as well as for the year 2021 is related to general cost reduction efforts. A one-off cost related to Íslandsbanki’s IPO totalled ISK 663m in 2021.  
• The number of FTEs at year-end 2021, excluding seasonal employees, was 702 (745 at YE20) for the parent company and 735 for the Group (779 at YE20). 
• The Cost-to-income ratio was 45.3% in 4Q21 compared to 51.7% in 4Q20. For 2021 the C/I ratio was 46.2% compared to 54.3% in 2020.  

Income tax expense 

• The effective tax rate was 19.1% in 4Q21 compared to 6.5% for 4Q20. The effective tax rate for 2021 was 18.5% compared to 26.5% for 2020. The Bank is subject to the special financial tax of 6% on taxable profits over ISK 1bn, financial activities tax and social security charges and also makes contributions to the Depositors’ and Investors’ Guarantee Fund, the Financial Supervisory Authority of the Central Bank, and the Office of the Debtors’ Ombudsman. Total taxes and levies amounted to ISK 9.4bn for the year compared to ISK 6.6bn for 2020. 

Positive net impairment on financial assets in 4Q21 

• The positive net impairment of ISK 0.6bn in 4Q21 ISK 3bn in 2021 is mostly due to a brighter outlook for the tourism industry.1  
• The annualised cost of risk, measured as net impairment charge over loans to customers, was -23bp in 4Q21 compared to 73bp in 4Q20. The cost of risk for FY21 was -28bp compared to 91bp for FY20. The average cost of risk in 2019 and 2020, excluding the effect of COVID-19, amounted to +35bp, which would have been closer to +30bp based on the current composition of the loan book with a higher proportion of mortgages. 

Discontinued operations  

• An increase in profits from discontinued operations in 4Q21, as well as for the year, is explained by a subsidiary’s sale of preferred shares and the sale of land, which was classified as held for sale. 

Good fourth quarter result brought 2021 to a satisfying conclusion 

• Íslandsbanki reported a profit of ISK 7.1bn in 4Q21 (4Q20: ISK 3.5bn), generating a 14.2% annualised return on equity (4Q20: 7.6%). Profit for the year was ISK 23.7bn in 2021 (2020: ISK 6.8bn) and return on equity was 12.3% in 2021 (2020: 3.7%). The ISK 17.0bn increase in net profit between years is mainly explained by higher income and positive loan impairment charges.  

Balance sheet

Strong loan growth with a diversified and highly collateralised portfolio

• Loans to customers grew by 0.5% in the fourth quarter and 7.9% during the year, mainly from lively mortgage lending (ISK 80.6bn increase in 2021). At year-end mortgages accounted for 42% of loans to customers, in a well-diversified loan book. Loans to corporates decreased by ISK 3.7bn from YE20. 
• Loans to customers are generally well covered by stable collateral, the majority of which is in residential and commercial real estate whilst the second most important collateral type is fishing vessels. The weighted average loan-to-value (LTV) ratio for the residential mortgage portfolio at year-end 2021 was 66%, comparable to 64% at YE20. Íslandsbanki’s registered value of commercial real estate is less vulnerable to market fluctuations as collateral has risen at a much slower rate and lagged market prices in prior years. 
• Four line-items, cash and balances with Central Bank, loans to credit institutions, bonds and debt instruments, and shares and equity instruments, amounted to ISK 322bn at year-end 2021, of which ISK 304bn are liquid assets.  
• The Bank’s asset encumbrance ratio was 19.6% at the end of 4Q21, up from 18.7% at YE20 which is explained by issuance of ISK denominated covered bonds. 

High and improving asset quality in line with continued economic recovery following COVID-19 

• At the end of 4Q21, 8.5% of the gross performing loan book (not in Stage 3) was classified in forbearance, down from 10.8% at end of 2020. The majority of forborne loans are those that have had moratoria granted on a case-by-case basis to customers affected by COVID-19, mostly in the tourism sector. Despite still being classified as forborne, 58% of those loans have resumed regular payments. 
• At the end of the 4Q21, the share of credit-impaired loans to customers was 2.0% (gross) down from 2.9% at year-end 2020 primarily as some exposures in Stage 3 were fully repaid.  

Deposits remain the largest source of funding 

• Funding is raised to match the lending programme of the Bank using three main funding sources: stable deposits, covered bonds and senior unsecured bonds. 
• Deposits from customers contracted by 1.4% in 4Q21 but rose by 9.5% in 2021. The main increase was from Business Banking, 26% in the year, while deposits from Personal Banking increased as well, or by 6%. All deposit concentration levels are monitored closely, with concentration falling slightly during the year.  
• The ratio of customer loans to customer deposits declined from 148% at YE20 to 146% at end of 2021. Deposits from retail and corporations are the Bank’s main source of funding, comprising 44% of the Bank’s total funding sources and 83% of the Bank’s total deposit base at period end.  
• The Bank continued its successful issuance of covered bonds during the year to fund the increase in mortgage lending. In 2021 the Bank tapped several outstanding issues, raising ISK 39bn, thereof ISK 7bn in 4Q21.  
• The Bank kept its focus on green and sustainable funding during the year by tapping its outstanding ISK green bond twice for a total of ISK 4bn. 
• The Bank has demonstrated great consistency of access to foreign capital markets even at times of market turbulence with very strong participation from real-money investors across Europe. 
• The liquidity position remains strong with all ratios well above regulatory requirements and internal thresholds. The Bank’s total liquidity coverage ratio (LCR) was 156% at YE21, down from 196% at YE20. The LCR in foreign currencies declined to 235% at YE21 from 463% at YE20 and LCR in ISK increased to 141% at YE21 from 95% at YE20.  
• On 28 June 2021, the Central Bank implemented new regulations for NSFR in all currencies according to the CRR II regulation, setting the regulatory minimum at 100%. Simultaneously, minimum requirements for NSFR in foreign currencies were annulled. 
• The total net stable funding ratio (NSFR) was 122% at YE21 compared to 123% at YE20 and the NSFR in foreign currencies was 157% at YE21 compared with 179% at YE20.  
• As the Bank’s liquidity position remains strong across currencies and above requirements, the Bank may consider debt buybacks or exchanges of outstanding transactions during 2022. 

Capital ratios well above targets, excess capital of ISK >40bn provides significant capital return potential  

• Total equity amounted to ISK 204bn at YE21, compared to ISK 186bn at YE20. 
• The capital base increased to ISK 228bn at YE21 from ISK 215bn at YE20 based on retained earnings and the SEK 750m AT1 issuance in September 2021. The presentation of the total capital ratio was changed in 1Q21, where expected dividend, based on c. 50% of the previous year’s profit, was deducted from 1Q21 onwards.  
• The Financial Supervision Committee announced on 1 July 2021 the results of the SREP concerning additional capital requirements (Pillar 2-R). The Bank shall as of 30 June 2021 maintain an additional capital requirement of 2.5% of risk exposure amount (REA), which is an increase of 0.8 percentage points from the previous assessment. The Bank’s overall capital requirement, taking into account capital buffers, therefore increased from 17.0% to 17.8%. The Pillar 2-R requirements were expected to rise temporarily as a result of COVID-19 and this result is in line with the Bank’s expectations. 
• The Bank’s long-term CET1 target is ~16.5% and takes into account an increase in the counter cyclical buffer to 2.0% and a reversal of the COVID-19 effect on the Pillar 2-R. 
• At YE21, the Bank’s total capital ratio was 25.3% compared to 23.0% at YE20. The corresponding Tier 1 ratio was 22.5%, up from 20.1% at YE20. The CET1 ratio was 21.3% at YE21 compared to 20.1% at YE20. The rise in the capital ratios is based on retained earnings, a reduction in Risk exposure amount (REA) and the issuance of AT1 capital notes in September 2021. 
• Íslandsbanki launched its inaugural issue of Additional Tier 1 notes in 3Q21 as part of its plan to optimise its capital structure. The issue of SEK 750m perpetual notes with a 5-year call was placed with investors across Scandinavia and continental Europe and was considerably oversubscribed. The transaction pays a coupon of 3-month STIBOR +475 basis points and features a temporary write-down structure, with a 5.125% CET 1 trigger. Headroom for further AT1 issuance is approximately ISK 6bn. 
• The Board of Directors will be proposing an ISK 11.9bn ordinary dividend payment to the AGM, in line with the Bank´s dividend policy. Taking into account the ordinary dividend payment, the issuance of Additional Tier 1 instruments and assuming that the countercyclical buffer increases to 2%, the Bank estimates that long-term excess CET1 capital is approximately ISK 40bn.2 The Bank assumes that CET1 capital will be so optimised in the next 12–24 months. In addition, the Bank will propose an ISK 15bn buyback of its own shares in the coming months, subject to the approval of both the AGM and the Central Bank. Three options are to be considered: A share buyback programme, a tender offer or a block sale participation. 
• Íslandsbanki uses the standardised method to calculate its REA, which amounted to ISK 902bn at YE21 compared to ISK 934bn at YE20. REA amounts to 63% of total assets at YE21, compared to 69% at YE20. The implementation of EU regulation 2019/876 in Iceland caused the reduction in REA, contributing to a 60bp rise in the capital ratios.  
• The leverage ratio was 13.6% at YE21, same as at YE20. 

Modest market risk profile 

• The Bank's market risk mainly derives from aggregate balance sheet imbalances in interest rate, inflation and currency positions as well as the Bank's liquidity portfolio managed by Treasury. 
• The Bank is exposed to inflation risk because CPI-linked assets exceed CPI-linked liabilities. At the year-end 2021, the Bank’s consolidated net inflation (CPI) imbalance amounted to ISK 41m, compared to ISK 26.2bn at YE20. The imbalances are managed via CPI-linked swaps, the issuance of CPI-linked covered bonds and CPI-linked deposit programmes.  
• The currency imbalance was ISK -0.3bn (0.1% of the total capital base) at year-end 2021, compared to ISK 5.1bn (2.4% of the total capital base) at YE20. The Bank's imbalances are strictly monitored and are within regulatory limits.