CEO's address

2023 was a year of change and reform for Íslandsbanki. In terms of operations, it was an excellent year, with profits exceeding the Bank's targets. External conditions have been difficult in many respects, owing to high inflation and interest rates in Iceland. Íslandsbanki has worked with its customers to adapt to the situation, while holding fast to its goal of being a force for good in the community.

Major reforms undertaken during the year

The Bank underwent substantial changes at the end of June, when Birna Einarsdóttir stepped aside after 15 years as CEO. Birna was a natural leader who steered Íslandsbanki's activities deftly, and she was very popular among the Bank's employees. She led us through the unusually challenging time following the 2008 financial crisis and showed herself to be a forward-thinking leader in the Icelandic business community.

The Bank's activities are at once complex and complicated. Broad-based reforms were put in place because of flaws in the execution of the sale of part of the Government's holding in the Bank in 2022. With a coordinated effort by Bank staff, this reform work was smooth and successful. Chief among the remedial measures undertaken was to make the appropriate amendments to rules and procedures, including those on employee trading and handling of audio recordings. Another key task was to ensure the existence of a strong risk culture throughout the Bank. Furthermore, mandatory training courses were set up for employees, and questions about the Bank's risk culture were added to the semiannual workplace survey.

Another major project undertaken was to respond to the Central Bank of Iceland's comments and recommendations concerning Íslandsbanki's measures to combat money laundering and terrorist financing. The Central Bank's final report, received by Íslandsbanki in September 2023, contained various recommendations and comments on the Bank's responses to the topics highlighted in the Central Bank's inspection. The Bank began working immediately on remedying the flaws identified by the Central Bank and continued these reforms throughout 2023.

Development of digital services continues apace

During the year, we placed particular emphasis on coordination and use of digital data with the establishment of a new department that combines the expertise of our best technology, product development, and data specialists. This approach is in line with the Bank's policy of offering service based on digital solutions and data harnessing. The benefits were quick to emerge with the adoption of new digital solutions for individuals and companies. In this vein, we have continued to develop our highly popular chatbot, Fróði, who uses artificial intelligence to improve the quality of service and responses to customers.

Furthermore, important advances have taken place in digital loan refinancing, automated lending, and automated credit assessments. The Bank has also stressed the implementation of digital business solutions, enabling companies to establish accounts with us electronically and conduct securities transactions through digital channels. The Bank is currently developing a new online bank for businesses, with expanded and improved capabilities.

Digital banking services also bring increased opportunity for even more comprehensive customer service. Choosing appropriate banking services can be a complex process, but our new digital interface simplifies that process for our customers. Good service centres on knowing customers' needs, informing them of the options that suit them at any given time, and being there to help customers at major turning points. Being able to start a credit assessment and receive a determination of debt service capacity within minutes can be vital in making a decision about whether or not to make an offer for a home.

The new digital-only savings account we introduced during the year, the CPI-indexed Ávöxtun account, was well received by customers. The CPI-indexed Ávöxtun account has a commitment period of only 90 days instead of the three years required for older types of savings accounts. It is well suited to individuals seeking higher returns on savings, but with a shorter commitment period. More than 20,000 Ávöxtun accounts have been opened to date.

During the year, we placed particular emphasis on coordination and use of digital data with the establishment of a new department that combines the expertise of our best technology, product development, and data specialists.

Íslandsbanki supports innovation

Last autumn, the Íslandsbanki Entrepreneurship Fund awarded ISK 50 million in grants to 14 projects. Applications for grants from the Fund have increased steadily in number, from 90 in 2022 to 132 in 2023, showing without doubt how strongly Iceland's innovation environment is growing. Since its inception, the Fund has awarded a total of ISK 215 million in grants to a wide range of projects.

It has been enlightening to watch the projects evolve; for example, the high-tech growth company Payday was recently acquired by Norwegian software provider Visma. Íslandsbanki was involved in Payday and acquired a stake in the company three years ago. Íslandsbanki's role – and goal – is to be a force for good, and we think this goal has truly been realised in the Bank's support for and involvement with Payday's growth.

Fintech and automation are highly important to us in our quest to simplify processes and make it easier for customers to carry out their banking business. As an example of this, some 89% of the Bank's key products were sold via digital channels, and 88% of customers use contactless payment solutions to pay for goods and services.

Digital developments and e-commerce require increased vigilance on the part of the Bank and its customers. Increased e-commerce has been accompanied by more frequent online fraud. Íslandsbanki has long offered solutions such as payment card freezes and credit limit adjustment, but during the year the Bank introduced changes in its app, with an eye to enhancing security. An extra layer of authentication is now required for actions involving information such as payment card numbers and expiry dates. Íslandsbanki has also set up a robust fraud monitoring team with the aim of intervening in potential fraud and resolving incidents that arise. The fraud monitoring team works closely with the Bank's emergency service staff, ensuring that customers can receive reliable service 24/7. The Bank has also recently introduced a very well-received authentication process based on confirmation of online payments via electronic identification (e-ID).

Optimising housing

Íslandsbanki's Akranes branch moved to a new location, just a stone's throw from its predecessor. The new branch is 200 square metres in size, down from the previous 320 square metres, and aligns well with the Bank's goal of streamlining its operations. Early in 2024, the Bank will also move its Húsavík branch to a prime location that meets the need for compact, efficient space that guarantees attractive and well-equipped facilities for customers and employees alike.

Iceland Funds offer a range of favourable savings options

For over 30 years, Iceland Funds has offered Icelandic depositors a wide selection of savings options ranging from short-term funds for liquid assets to equity funds suited to long-term savings and investment. About 12,000 customers choose to invest their savings in products offered by Iceland Funds.

Iceland Funds established a new fund during the year – IS Haf fjárfestingar – in cooperation with primary investor UR Seafood. An institutional investment fund valued at ISK 10 billion, IS Haf invests in ocean-related activities ranging from procurement of raw materials and processing to sea-related tech solutions, infrastructure, and biotechnology. The fund invested in two ocean-related companies during the year and is examining additional investment options.

Íslandsbanki and asset management firm Vanguard celebrated 25 years of cooperation during the year. Vanguard is the largest fund management company in the US, and Íslandsbanki was its first non-US partner. To mark the occasion, Íslandsbanki Asset Management held a meeting at which Vanguard representatives gave interesting talks on the company's investment strategy, as well as debunking widely held myths about investment. Vanguard has invested more actively in Iceland since 2022, when international index provider FTSE Russell promoted the country's equity market to secondary emerging market status. Furthermore, Iceland's largest pension funds have invested in Vanguard funds, which now represent some of the pension funds' largest foreign investments. We look forward to the next 25 years of collaboration with Vanguard.

Market volatility

The Icelandic equity market hit a spate of heavy weather during the long, steep monetary tightening phase. Persistent inflation and a range of uncertainties made an imprint on the market. The bond market was sluggish early in the year but then rallied in the second half. It now appears that the monetary tightening phase has peaked or will do so soon. It is hoped that the securities market will rebound in 2024.

FX Sales staff had yet another excellent year in 2023, and it is probably safe to call it a record year, as Íslandsbanki is the leader in the market. Turnover in FX Sales has grown apace, not least because of the surge in tourism and increased use of hedging instruments.

It was highly gratifying to see the success of the initial public offering and listing of Ísfélag hf. on Nasdaq Iceland, in which the Bank participated as one of the arrangers. The offering concluded in early December, and demand for shares exceeded supply by nearly a factor of four.

The Bank stands on solid ground

Global rating agencies S&P and Moody's recognised Íslandsbanki's strong position during the year, and it is gratifying to see the improvements in the Bank's credit ratings. It was a major milestone when Moody's issued the Bank a rating of A3 with a stable outlook. The rating bears witness to Íslandsbanki's strong capital position and sound, stable returns.

In 2023, Íslandsbanki generated a profit of ISK 24.6 billion, and its return on equity amounted to 11.3%, exceeding the Bank's internal targets. Income growth year-on-year measured 12.0%. The expense ratio for the year as a whole was 41.6%, and one of the Bank's financial targets is to maintain a ratio below 45%. Lending growth declined year-on-year in 2023 but grew by 3.0% on an annualised basis, clearly a result of higher interest rates. Customer deposits grew by ISK 60.8 billion, or 7.7%.

The Bank's liquidity position is strong, and well above regulatory requirements. Its capital ratios remain high and are also well above requirements, reflecting Bank management's determination to optimise the balance sheet.

The Icelandic nation was beset by significant challenges in late 2023, with the onset of seismic activity in the Grindavík area. Icelanders have expressed their support for Grindavík residents, who have been forced to live with major uncertainty about their homes and community. Íslandsbanki has made every effort to support its customers in the affected region, both by freezing loans and by cancelling interest and indexation payments. The Bank will continue to monitor the situation closely and will communicate actively with its customers.

Thanks to customers and staff members

I would like to thank Íslandsbanki employees for their outstanding work and professional commitment during the challenges that faced us in 2023. It was truly inspiring to see our staff members join together and support one another last summer, showing their determination to reclaim customers' trust and confidence.

When all is said and done, we can be very proud of the Bank's performance during the year. Íslandsbanki's staff members always make a concerted effort to provide the Bank's customers with exemplary service, guided by the Bank's core values: passion, partnership, and collaboration.

All of us at Íslandsbanki want to thank our customers for their business during the year and to say that we look forward to continuing our collaboration. The Bank is dedicated to standing by its customers when difficulties arise, and as we discovered last year, that commitment goes both ways. We are most grateful to our customers for their support.

Exciting times lie ahead for the Icelandic economy. Íslandsbanki stands strong, has a clear strategy, and is ready and willing, as before, to be a force for good in the community.