The big, profit-hungry banks that have emerged from consolidation in Iceland are now hoping to gain a following abroad, reports Michael Imeson.

Iceland does not hit the international headlines often but it did so last October. Kaupthing Bunadarbanki, the country’s biggest bank, acquired 9.5% of UK investment bank Singer & Friedlander. It was widely seen as a prelude to a takeover.

Not long after that, in November, Iceland’s prime minister David Oddsson withdrew all his savings in Kaupthing. He was protesting against what many regarded as an over-generous share option scheme for executive chairman Sigurdur Einarsson and joint chief executive Hreidar Sigurdsson.

Since Kaupthing merged with the former state-owned Bunadarbanki last May, its shares have increased rapidly, making its two top executives potentially much richer. Fearing wider protest and a run on the bank, they were forced to abandon the scheme in November for a less lucrative deal.

These events not only highlight the sudden expansion and greatly enhanced performance of the bank, but also encapsulate what has been happening on the Icelandic banking scene during the past 12 months. It has been a remarkable story of privatisations, mergers, rising profitability, falling cost-income ratios and international expansion.

With a population of only 280,000 in a land mass the size of England, Iceland has been over-banked for too long. Despite recent consolidation, there are still four commercial banks – the biggest being Kaupthing Bunadarbanki, Islandsbanki and Landsbanki – with about 100 branches between them, plus 24 small savings banks and a number of insurers and fund managers.

The search for growth

So more mergers are on the cards. Ratings agency Moody’s says it “would not be surprised if the state housing fund is privatised, possibly being sold to one of the banks”. And the only way to achieve significant future growth in a nation so small is to expand overseas.

Iceland is famous for cod, volcanoes, geo-thermal energy (underground-heated water is piped directly to every home in the capital Reykjavík), long winter nights, surnames ending in “sson” and the singer Bjork.

GDP is forecast to grow 3.5% this year, up from a predicted 2.75% last year, a healthy turnaround from the 0.5% contraction of 2002. Work will soon start on a third aluminium smelter, and hydro-electricity plant to power it, which will help to further diversification away from fishing.

Kaupthing Bunadarbanki

Iceland was a latecomer to the joys of privatisation. But last year, the government completed the sale of stakes in two banks, Bunadarbanki and Landsbanki, the former being rapidly snapped up by Kaupthing.

Kaupthing Bunadarbanki is Iceland’s biggest bank, the second biggest quoted company in the country (drug company Pharmaco is the biggest) and among the 10 largest banks in the Nordic countries. In January, it rebranded itself as KB Banki in Iceland and Kaupthing Bank abroad, although Kaupthing Bunadarbanki remains its legal name in Iceland. Total assets at the end of 2003 were Ikr559bn (E6.5bn). It has 36 branches and sub-branches, operations in 10 countries and employs nearly 1300 people.

Last year it turned in an after-tax profit of Ikr7520m, up 40% on 2002. In June, it completed a E500m two-year floating rate note issue, the first entry by the newly-merged bank into the European bond market. Moody’s upgraded the bank’s ratings in December from A3/P-1/C Positive to A2/P-1/C+, which the agency says “reflects the successful merger”.

Mr Sigurdsson says the merger process has been smooth. “In the short term, the bank will focus on continuing to integrate the merged entities both in Iceland and abroad to achieve greater synergy effects from the larger group and a lower cost base,” he says.

“The creation of Kaupthing Bunadarbanki means that Icelandic clients for the first time have a bank that is both strong locally and has a significant presence internationally,” he says. “For business clients looking to expand abroad, this is especially important. No other Icelandic bank has a comparable network and established expertise in as many markets outside of Icelandic.”

Shareholders have seen an “excellent return on their investment with solid gains in the share price based on the strong fundamentals and growth of the bank”, says Mr Sigurdsson. Staff enjoy being part of a larger and more international organisation because of the greater opportunities and responsibilities it brings, though there were some redundancies after the merger, he says.

“The increased power in the Icelandic financial sector is of great economic benefit to the country, and we believe that Kaupthing Bunadarbanki’s strength and capabilities are powerful levers in driving business growth in Iceland,” he says.

In December, Kaupthing announced that it would acquire the Savings Bank of Reykjavik (SPRON), once it had turned itself into a limited company. The deal fell apart last month when SPRON decided not to convert to limited liability status after all.

Although the bank is still looking for domestic acquisitions, organic growth is important. “The pension fund system, one of our largest clients, continues to grow at 15% per annum, so we see room for increased business”, says Mr Sigurdsson. “Our retail network is the third largest, so we have some way to go to achieve the number one spot.”


Landsbanki Islands, the second biggest bank by assets, with Ikr448bn assets at the end of 2003, is the oldest full service commercial bank, having been created in 1885. Like Kaupthing Bunadarbanki, Landsbanki has two chief executives, Halldor Kristjansson and Sigurjon Arnason, the latter defecting from Bunadarbanki last April along with a senior management team.

Privatisation – which began in 1998 and was completed last year – has helped to make the bank more profitable and efficient. Its after-tax profits in 2003 were Ikr2956m up 46% on 2002. Return on equity after tax was 17.6%, compared with 13.5% in 2002. The cost-income ratio fell to 57%, down from 61% in 2002. Moody’s rates the bank A3/P-1/C, with a positive outlook.

A big cost-cutting exercise was announced last October, when Landsbanki embarked on branch rationalisation. It is scrapping its regional system, which is organised around six regional branches. All branch managers in the 26 full-service branches and 26 smaller branches now report directly to the head office.

“Privatisation means the bank has a shareholder group that is able to actively support our activities,” says Mr Kristjansson. “Following full privatisation, we have streamlined our branch network and speeded up the decision-making process so we can respond quicker to customers.

“We wish to strengthen our position in retail banking, emphasising personalised financial services. Asset management services have been streamlined and fund products now form an integral part of our services.”

Being no longer state-owned has “helped leverage our very strong brand to new customers and strengthen our market position”, says Mr Kristjansson. “With the addition of a team of 40 highly-qualified professionals in securities, trading and investment banking who joined us from Bunadarbanki following the merger, we have been able to attract new customers and increase our market share in securities, trading and investment banking.”

Landsbanki sold its 50% stake in life insurance company LIFIS in June and its 44% stake in insurance company VIS in 2002. “We have divested [ourselves] of our insurance holdings and moved away from the bancassurance model we set up in 1997,” says Mr Kristjansson. Instead the bank distributes products from other providers. In the middle of last year it was granted an exclusive licence by Swiss Life UK to sell life and health insurance in Iceland.

“We have been increasing our co-operation with savings banks,” he says. The bank bought 51% of leasing company SPF in 2002, the remaining 49% being owned by a group of smaller savings banks, and there is speculation that Landsbanki could acquire some of them.

Another opportunity could arise if the state’s Housing Finance Fund, the biggest mortgage provider, is privatised or sold to the banks. However, bankers were disappointed by the government’s announcement in November that it planned to increase the fund’s role in mortgage lending.

“We had hoped this important part of lending to households would move from the state to the private sector,” says Mr Kristjansson. But before the government can increase the fund’s lending, it has to obtain an opinion from the European Economic Area secretariat that this does not break state aid rules. Most bankers think it will break the rules, and will not be allowed to go ahead.


Islandsbanki, the country’s third biggest bank, with Ikr444bn assets at December 31, 2003, was briefly the biggest bank when it merged with FBA in 2000 but it lost top slot to Kaupthing Bundarbanki mid-year.

Bjarni Armannsson, Islandsbanki’s chief executive, says that since the merger with FBA “we have streamlined our operations, resulting in advantages to both customers and shareholders”. In 2003, return on equity was 30% and the cost/income ratio was 50%. Last September, the bank bought Iceland’s leading insurance company, Sjova-Almennar. It has generally had a higher credit rating than its domestic peers, which “has improved our access to capital at more attractive rates”, he says.

The bank’s E2.5bn medium-term note programme and E500m commercial paper programme have been its main providers of funds. The capital raised is mainly re-lent to local industries.

International expansion

Kaupthing and Landsbanki are expressly going for significant international growth, by acquisition and organically, to supplement the small home market. The former’s purchase of nearly 10% in Singer & Friedlander late last year was the latest foray. A few weeks earlier it acquired Finnish investment company Norvestia for E62m and in September it bought Norwegian asset management company Tyren Holdings.

Kaupthing’s Mr Sigurdsson says: “Our ambition is to be the first choice for investment banking services for mid-size businesses within and around the Nordic region. We are opportunistic in our approach to future acquisitions and keep an open eye for interesting targets.”

Landsbanki bought a small Luxembourg private banking and asset management operation from Kaupthing Bunadarbanki in June. In 2000, it bought Heritable Bank in London from the US’s First Union National Bank. It specialises in lending to residential property developers but has pulled out of private banking and fund management.

Mark Sismey-Durrant, Heritable’s managing director, says in the past few months the bank has expanded into other areas of home loans and now takes deposits. “We’re looking to grow organically and make some acquisitions of secured lending businesses in the UK in the coming years,” he says.

In contrast, Islandsbanki – which has branches in London and Luxembourg, and a small private bank, Raphael & Sons, in the UK town of Aylesbury – has more modest ambitions. Chief executive Bjarni Armannsson says: “At this stage, we are not looking for acquisition targets abroad. We intend to build up our foreign operations further from our head office in Reykjavík and the branches in London and Luxembourg.”

These are modest ambitions, perhaps. But it is one of three Icelandic institutions that are making themselves more visible on the international scene.


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