What do you call a bank that has doubled in size every year for the past eight years and that jumps 248 places in The Banker’s latest Top 1000 world banks listing to reach 211th place? Some call it a miracle.

Hreidar Mar Sigurdsson, the youthful chief executive of Iceland’s Kaupthing Bank, takes a more modest approach and calls it sustained rapid growth.

But how has Kaupthing catapulted itself onto the world stage, quintupled its balance sheet in the past three years and more than doubled its net earnings in 2004?

The 35-year-old CEO, who joined Kaupthing in 1994 when it had a staff of 25 people, believes that the liberalisation and privatisation of the financial sector in Iceland in recent years has provided a major stimulus. Also, a reduction in corporate taxes from 45% to 18% at present has provided a great boost.

The key factor, however, has been the realisation, common to all three main Icelandic banks, that continued growth can only come from expansion outside Iceland. After all, Iceland has less than 300,000 people and, although Kaupthing and the other banks have established themselves recently in the lucrative mortgage market, domestic business in Iceland is limited. Having one of the highest GDPs per capita in the world ($40,250 in 2004) does not necessarily help future growth.

Aware of the limitations at home, Kaupthing has focused on achieving a major acquisition every year for the past five years, culminating in the purchase of London-based financial services group Singer & Friedlander (S&F) last month. With S&F in 2005 and Danish bank FIH Erhvervsbank in 2004, Kaupthing now operates in 10 countries (Iceland, Denmark, the US, the UK, Finland, the Faroe Islands, Luxembourg, Norway, Switzerland and Sweden) and in 2004 achieved its longstanding goal of generating more than 50% of earnings outside of Iceland.

Although speculation has surrounded Kaupthing’s spectacular growth, the bank has consistently raised new capital for expansion and in 2004 increased its Tier 1 capital by 172.7% to $2249m, producing a healthy capital adequacy ratio of 14.2% and Tier 1 ratio of 11.5%. An upgrade from Moody’s Investors Service in November 2004 affirms that the bank has historically managed acquisitions well and continues to gain financial strength.

In short, Kaupthing is well on its way to its goal of not only being a leading Iceland bank, but also being one of the prime investment banks in the Nordic region. Following the S&F acquisition, earnings from outside Iceland are expected to exceed 80% by year-end 2005, a formidable management task. But, given that it can maintain its ability to integrate acquisitions successfully, Kaupthing looks set to climb further up The Banker listings next year.



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