Uncertainty in the Icelandic market has not perturbed Kaupthing Bank from pressing ahead with its expansion into Europe. Stephen Timewell reports.

The sharp decline in the Icelandic krona in late February following Fitch’s lowering of Iceland’s country rating from “stable” to “negative”, due to its current account deficit and rising external debt, may have taken the gloss off the expanding local banks. But strong capital bases and significant geographic diversification helped to affirm Fitch’s ratings of the four Icelandic banks led by the biggest, Kaupthing Bank.

Unperturbed by widening macro imbalances at home or the long-expected currency correction, Iceland’s banks, and Kaupthing in particular, are expanding abroad fast. As Kaupthing chairman Sigurdur Einarsson recently explained to The Banker, the bank has doubled in size every year for the past eight years, with assets at the end of 2005 reaching €34bn following the acquisition last year of the UK merchant bank Singer & Friedlander in a £547m (u794m) deal. In fact, Mr Einarsson notes, UK activities accounted for 34% of total operating income in 2005 of €1357m, the biggest sector in the bank.

Rising star

Mr Einarsson is keen to describe his bank as not just an Icelandic bank but as a northern European investment and corporate bank. And well he might: ranked the 211th largest bank in the world in The Banker’s 2005 Top 1000 listing, up from 449th the year before, Kaupthing has developed five integrated business segments in 10 countries and has full banking licences in six countries with significant employee networks. It had 1046 employees in Iceland at the end of 2005, plus 574 in the UK, 284 in Sweden, 190 in Denmark, 109 in Luxembourg and 95 in Finland. The total of 2368 employees includes its activities in Norway (46), Faroe Islands (12), the US (8) and Switzerland (4).

With the transformational acquisition of Denmark’s FIH Ervhervsbank in 2004 and the UK’s Singer & Friedlander last year, Kaupthing’s operating income has shifted dramatically from 52% from Iceland in 2003 to just 30% from Iceland in 2005. Mr Einarsson believes this trend will continue, with income from Iceland accounting for less than 20% of the total this year.

Local outlook

Can Kaupthing survive with less than 20% of its income coming from its domestic market? “Investment banking and corporate banking is the core of our strategy and we want to be seen as a local bank where we are. We also place a strong emphasis on risk management and we believe we have a unique head of risk management,” says Mr Einarsson. The bank’s focus has been on small and medium-sized enterprises (SMEs) ranging from €30m-€500m with strong cash flow; it uses a private equity approach and restructuring model, providing a full-service investment bank for small/mid-caps.

In corporate lending, growth lies mostly outside Iceland, with 33% of the €23.3bn loan portfolio in Denmark. Retail banking is based around the previous Bunadarbanki network of 33 branches in Iceland with 80,000 customers and 12% market share in domestic mortgages. In a new development, a separate chief executive has been appointed for Icelandic activities.

Capital growth

Capital markets is also seen as a growth area, with the bank’s goal to be fifth in Nordic stock exchange trading by year-end as a team of 40 Nordic analysts is assembled. The bank has a dual strategy of research-anchored institutional sales and product risk taking through market-making and directional trading.

With offices in eight countries, asset management and private banking is also a focus as assets under management at year-end 2005 already amount to €14.4bn. Mr Einarsson expects most of the growth in this area to come from the UK and Iceland and to exceed the 6% of total income achieved in 2005.

While Kaupthing produced a strong 177% increase in pre-tax profits in 2005 to reach €834m and a stunning 34% return on equity, well up on the long-term goal of 15%, Mr Einarsson would like to see an increase in deposits and an improvement in the low deposit/loan ratio of 31.2%. As such, he would like to make a small acquisition in Scandinavia or the UK this year to boost the relatively weak deposit base.

Although Kaupthing’s dramatic growth into the world’s top 200 banks may appear to some to be a bubble waiting to burst, the diversification in profit centres and geographies that the bank has achieved in recent years has helped to spread risks and strengthen profitability. While Iceland may show signs of overheating, Kaupthing’s ratios are well placed for the future and the merging of UK operations into one unit should bring further synergies.


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