Iceland’s banks not only recovered following Covid-19, but are in a better position than they were before the pandemic.
Net income for Arion Bank, Íslandsbanki and Landsbankinn was higher at the end of 2021 compared with end-2017, after a dip in the intervening years. For example, Arion Bank, the country’s third-largest bank by Tier 1 capital, reported $219.47m in net income at the end of 2021, up 59% from $138m five years ago.
A decline in operating costs over the past few years partially explains this result.
Íslandsbanki, the country’s second-largest bank, had $287m of operating costs in 2017 but brought this down to $185m in 2021, while Arion Bank’s dropped from $297m to $195m during the same period.
Despite the overall positive picture for income, net interest income for the three lenders has not yet fully recovered and has been flat, if not decreasing, since 2019. Net non-interest income, on the other hand, saw a sharp increase from 2020 to last year, although it is still below 2017 levels.
And there are headwinds ahead. The main risk the Icelandic banking system is facing lies in the housing market, according to Standard & Poor’s. The country has seen property prices escalate in recent years. In the two years to April 2022, they have risen 30% above the general level of other consumer prices in the economy. In addition, the jump in household debt to above 80% of gross domestic product is unlikely to be reversed, according to S&P.
As in other economies, Iceland is battling against inflation. The figure accelerated to a rate of 9.9% in July, well above the Central Bank of Iceland’s (CBI’s) 2.5% target and the highest since 2009.
As a result, CBI has raised the policy rate by 400 basis points since April 2021 to 4.75% in August.
Despite these challenges, the central bank still expects the economy to grow almost 6% this year, fuelled by a healthy tourism rebound and increased consumer spending.
