Financials and funding 2022

Low cost-to-income ratio  

Salaries and related expenses increased by 13.5% in 4Q22 compared to 4Q21.  

The YoY increase in other operating expenses of 24.4% in 4Q22 derives from various sources but is mainly explained by a higher inflation, normalisation of travel and other activities after Covid-19, strategic projects and a provision relating to an administrative fine. 

The number of FTEs at the end of 2022, excluding seasonal employees, was 700 (702 at end of 2021) for the parent company and 739 for the Group (735 at end of 2021). 

The cost-to-income ratio was 42.5% in 4Q22, compared to 45.3% in 4Q21.  

Taxes and levies 

The effective tax rate was 26.7% in 4Q22, compared to 19.1% in 4Q21. The effective tax rate for 2022 was 25.8% compared to 18.5% for 2021. The higher effective tax rate in 4Q22 is mainly explained by the tax effect of positive fair value changes in equity shares in 4Q21 compared to negative fair value changes in equity shares in 4Q22. The Bank is subject to the special financial tax of 6% on taxable profits over ISK one billion, a financial activities tax and social security charges. It also makes contributions to the Central Bank of Iceland Financial Supervisory Authority and the Office of the Debtors’ Ombudsman. In line with newly enacted legislation, the Bank will not be charged premiums by the Depositors‘and investors‘ Guarantee Fund after 1Q22. This can however change in the future based on the status of the fund and the size of the deposit system. Total taxes and levies amounted to ISK 3.1 billion for the period, compared to ISK 2.3 billion for 4Q21. 

Net impairment on financial assets in 4Q22 

The net impairment of ISK 0.6 billion in 4Q22 (4Q21: positive net impairment of ISK 0.6 billion) is due to less favourable economic environment related to inflation and a few distressed credit cases. Current impairment outlook is relatively benign due to low unemployment and good economic growth outlook. 

The annualised cost of risk, measured as net impairment charge as a share of loans to customers, was  
+22bp in 4Q22 (-23bp in 4Q21) and -14bp FY22.  

Growth in core income key driver in a strong result 

Íslandsbanki reported a profit of ISK 6.0 billion in 4Q22 (4Q21: ISK 7.1 billion), generating a 11.1% annualised return on equity (4Q21: 14.2%). The ISK 1.1bn fall in net profit between years is mainly due to an increase in administrative expenses and negative net financial income and impairment charges  

Loans to customers continue to rise and the portfolio remains well diversified and highly collateralised  

Loans to customers grew by 2.9% in the fourth quarter and 9.2% during the year. Mortgages increased by ISK 4.6 billion during the quarter and at the end of December accounted for 43% of loans to customers. Loans to corporates rose by ISK 27.1 billion during the quarter. Personal Banking saw an increase of ISK 5.4 billion, Business Banking growth of ISK 9.1 billion, and Corporate & Investment Banking an increase of ISK 18.2 billion.  

Loans to customers are generally well covered by stable collateral, the majority of which is in residential and commercial real estate, while the second most important collateral type is fishing vessels. The weighted average loan-to-value (LTV) ratio for the loan portfolio was 58% at the end of 4Q22 (63% at YE21) and the LTV for the residential mortgage portfolio at the end of 4Q22 was 60% (66% at YE21). The lower LTV is mostly explained by updated official real estate valuation that is used for around half of the mortgage portfolio. The valuation reflects market prices from 1Q22 and therefore carries a buffer for potential market price fluctuations in the near term.  

Variable NIL mortgages rates have risen by 3.95% since year-end and are not expected to rise much further. The Bank tests the resilience to higher rates and sensitivity analysis does not indicate any need for additional impairment despite higher debt-service 

In 2024 and 2025 a substantial part of the non-index linked, fixed rate mortgages have an interest rate reset. According to Íslandsbanki’s macroeconomic forecast, published on 1 February, the policy rate is expected to start to fall again in 4Q23 with a gradual easing towards the equilibrium real rate, probably around 1-1.5%. The nominal policy rate could therefore be around 4.0% at the end of the forecast horizon in 2025, lower than the year-end 2022 6.0% policy rate. 

The Bank’s liquid assets are represented in four line-items – cash and balances with Central Bank, loans to credit institutions, bonds and debt instruments and shares and equity instruments – and of the total of ISK 351 billion for those line items at the end of 2022 liquid assets amounted to ISK 312 billion.  

The Bank’s asset encumbrance ratio was 26.5% at the end of 4Q22, compared with 19.6% at YE21. 

High asset quality  

At the end of 4Q22, 3.8% of the gross performing loan book (not in Stage 3) was classified as forborne, down from 5.3% at the end of 3Q22 and down from 8.5% from year-end 2021.  

At the end of the 4Q22, the share of credit-impaired loans to customers, Stage 3, was 1.8% (gross), up from 1.7% at the end of 3Q22. For the mortgage portfolio, the share was 0.7% at end of 4Q22 , unchanged from the end of 3Q22. 

Loans to customers in Stage 2 was 2.5% at year-end 2022, down from 4.4% at the end of 3Q22. For the mortgage portfolio the share of loans in Stage 2 was 0.8% at the end of 4Q22, unchanged from the end of 2Q22.  

Deposits remain the largest source of funding 

Funding is raised to match the Bank’s lending programmes using three main funding sources: stable deposits, covered bonds and senior preferred bonds. 

Deposits from customers grew by 1.1% during the fourth quarter. Personal Banking had an increase of ISK 7.1 billion, Corporate & Investment Banking an increase of ISK 17.7 billion and Business Banking a decrease of ISK 15.6 billion. All deposit concentration levels are monitored closely, with concentration remaining stable in 4Q22.  

The ratio of customer loans to customer deposits was 150% at the end of 4Q22, from the previous 148% at the end of 3Q22. Deposits from retail, businesses and corporations are the Bank’s main source of funding, comprising 45% of total funding sources and 86% of the Bank’s total deposit base at the period-end.  

On 15 November the Bank launched two new ISK-denominated senior bonds in the amount of ISK 9.1 billion. The bonds were green bonds issued under the Bank’s sustainable programme. During 4Q22 the Bank exercised a call option on outstanding SEK 750 million Tier 2 bonds due 2027 and bought back EUR 262.7 million of a EUR 300 million senior bond due January 2024 and callable in January 2023. 

The liquidity position remains strong, with all ratios well above regulatory requirements and internal thresholds. The Bank’s total liquidity coverage ratio (LCR) was 205% in YE22, up from 156% at YE21. The LCR in foreign currencies was 492% for YE22, up from 235% at YE21 and the LCR in ISK decreased from 141% at YE21 to 109% at YE22.  

The total net stable funding ratio (NSFR) was 118% at YE22, compared to 122% at YE21 and the NSFR in foreign currencies was 198% at YE22, compared with 157% at YE21.  

As the Bank’s liquidity position remains strong across currencies and is above requirements, the Bank may consider debt buybacks, calls or exchanges of outstanding transactions during 2023. 

Capital ratios well above targets  

Total equity amounted to ISK 218 billion at the end of 4Q22, compared to ISK 212 billion at the end of 3Q22 and ISK 204 billion at YE21. 

The capital base was ISK 222billion at end of 2022, compared to ISK 213 billion at end of Q3 2022 (ISK 228 billion at year-end 2021). The Bank’s board of directors proposes to the Bank’s annual general meeting (AGM) that dividends amounting to ISK 12.3 billion shall be paid to shareholders. This equates to approximately 50% of 2022 profits and is in line with the Bank’s dividend policy. 

The Bank plans to buy back own shares amounting to ISK 5 billion over the coming months through a share buyback program. This is a reduction from the previously planned ISK 15 billion share buyback. The ISK 10 billion difference will be added to the Bank’s capital base, which results in a 100bps increase in the Bank’s capital ratios. The Bank has seen a profitable growth in loans to customers during 2022 which exceeded initial plans and sees further opportunities to grow the loan portfolio. Furthermore, due to the turmoil in the global economy and international capital markets, the ECB and the Central Bank of Iceland recently encouraged banks to maintain capital buffers that are consistent with the prevailing level of risk to help ensure banking sector resilience. The Bank plans to optimise its capital structure before year-end 2024, subject to market conditions. 

On 22 June 2022, the Central Bank Financial Supervision Committee announced the results of the SREP process concerning additional capital requirements (Pillar 2-R). As of 1 July 2022, the Bank must maintain an additional capital requirement of 2.6% of the REA, which is an increase of 0.1 percentage points from the previous assessment. The Bank’s overall capital requirement, including capital buffers, was therefore raised from 17.8% to 17.9%. At the end of September, the counter-cyclical buffer increased from 0% to 2.0% which, in turn, raised the Bank’s capital requirement from 17.9% to 19.9%. 

At the end of 4Q22, the Bank’s total capital ratio was 22.2% compared to 21.4% at the end of September (25.3% at YE21). The corresponding Tier 1 ratio was 19.8% compared to 19.2% at the end of September. (22.5% at YE21). The CET1 ratio was 18.8% (350bp above requirement), and above the Bank’s target of about 16.5%. The change in the total capital ratio from the end of 3Q22 is due to Q4 profits and a lowering of REA.  

Íslandsbanki uses the standardised method to calculate its REAs, which amounted to ISK 999 billion at the end of 2022, compared to ISK 1.013 billion at the end of June (ISK 902 billion at YE21). The reduction in REA in the fourth quarter is a result of lower loans to credit institutions and a reduction in risk-weights of certain mortgages due to recent changes in legislation. The REA amounts to 63.8% of total assets at the end of 2022, compared to 65.4% at the end of 3Q22.  

The leverage ratio was 12.1% at the end of 4Q22 compared to 11.9% at the end of September (13.6% at YE21). 

Meeting MREL requirements 

Directive 2014/59/EU on Bank Recovery and Resolution (BRRD I) was i.a. transposed into Icelandic law with Act no. 70/2020 on the resolution of credit institutions and investment firms (the Act). On 8 December 2021, the Icelandic Resolution Authority of the Central Bank of Iceland published its policy on minimum requirements for own funds and eligible liabilities (MREL-Requirement) according to art. 17 of the Act (hereinafter the MREL-Policy). 

On 29 September 2022, the Icelandic Resolution Authority of the Central Bank of Iceland announced that a resolution plan had been approved for Íslandsbanki and thereby an MREL-Requirement for the Bank. The decision is based on the aforementioned MREL-Policy. 

The Bank´s MREL-Requirement is 21.2% of the Bank‘s Total Risk Exposure Amount (TREA) as per year-end 2021 and applies from the date of the announcement. The MREL-Requirement including Combined buffer requirement was 30.5% at year-end 2022. The Bank’s ratio was 34.5% at the end of December 2022. The subordination requirement provided for in Directive 2019/879/EU on Bank Recovery and Resolution (BRRD II) has not been defined.  

Modest market risk profile 

The Bank’s market risk derives mainly from aggregate balance sheet imbalances in interest rate, inflation, and currency positions, as well as the Bank’s liquidity portfolio, which is managed by Treasury. 

The Bank is exposed to inflation risk because CPI-linked assets exceed CPI-linked liabilities. At the year-end 2022, the Bank’s consolidated net inflation imbalance amounted to ISK 27.7 billion, compared to ISK 41 million at YE21. 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 -1.6 billion (0.7% of the total capital base) at year-end 2022, compared to ISK -327 million (0.1% of the total capital base) at YE21. The Bank’s imbalances are strictly monitored and are within regulatory limits.