Chairman's statement

2018 was a year of significant change and development at Íslandsbanki. It has seldom been more obvious than in the past year how rapidly the financial system is changing with the introduction of new technology — change the Bank has embraced.

The domestic economy has slowed down after the swift growth of the past few years, and further concentration and streamlining can be expected in key sectors. The Government’s new White Paper on a Future Vision for the Financial System was published at the end of 2018, and it will be exciting to see the outcome of that work in the near future. Íslandsbanki is a leading company in Iceland in terms of social responsibility and corporate governance, and the Bank will continue to rely on its employees to provide customers with even better service than before.

Changed banking system with digital advances

Rapid technological advances are changing the activities of conventional banks, and the entry of fintech companies into the financial markets stimulates competition, to the benefit of consumers. Íslandsbanki is well prepared, however, to face the challenges entailed in these changes in its operating environment. For example, the Bank passed an important milestone in autumn 2018 with the launch of a new core system, its largest tech project to date. We kick-started a tech campaign during the year, developing a number of new business solutions to meet the needs of the ever-increasing number of customers who choose to handle their banking activities themselves via digital channels rather than visiting a branch office.

Time to tidy up the economy

GDP growth was robust last year, even though the phenomenal growth phase in the tourism industry ended in 2017. This year, GDP growth is expected to ease, owing to a contraction in business investment and moderate growth in private consumption. In addition, service exports are now growing more slowly than in the past few years. As a result, it can be expected that these drivers of GDP growth in the past few years will slow down for the present, although growth is expected to pick up again in 2020. Iceland’s largest economic sectors have seen significant change, including increased concentration in both tourism and fishing. According to a report prepared for Íslandsbanki last year, small and medium-sized companies are the drivers of domestic GDP growth. They are better prepared for various types of shocks and have built up sound operations, which is extremely satisfying. As a result, this is an opportune time for Icelandic firms to use the new year to restructure, streamline their operations, and prepare themselves well before the next growth phase starts.

Challenges facing the financial system

The Government’s White Paper on a Future Vision for the Financial System, published at the end of 2018, presents a number of excellent comments and suggestions for possible improvements to the Icelandic financial system. The sale of Íslandsbanki has been under discussion for some time, and the White Paper notes that there are indeed arguments for reducing the Icelandic state's substantial ownership of financial undertakings in order to reduce the risk, opportunity cost and negative impact on competition. The Bank has been privately owned through the years, and it culture reflects this. It is clear that Íslandsbanki is ready to be sold after several years of streamlining and investing in strong foundations. Based on the figures that have been floated, the sale could generate the equivalent of four to five new teaching hospitals. It is therefore of vital interest to Icelandic taxpayers that the sale of Íslandsbanki be undertaken successfully, and foreign ownership or listing on foreign and domestic equity markets would be desirable. Naturally, it is the owner — the Icelandic Government — that will decide the matter, but it is exceedingly important that the sale process be fair, trustworthy, and transparent. The White Paper also discusses financial market efficiency and the importance of pressing for operational streamlining that could improve the terms offered to consumers. Íslandsbanki is always working towards lowering operating expenses in pursuit of that goal. But by the same token, it is the responsibility of the authorities to ensure that taxes and levies on financial institutions are not so onerous that they undermine the Bank’s competitive position. Taxes on Icelandic financial institutions are still many times higher than those in neighbouring countries. This is extremely unfortunate in an environment where pension funds and fintech companies have joined the ranks of our competitors without having to pay commensurate levies to the State. Competition is a good thing, but it is vital to maintain a level playing field, with the same ground rules for all.

Responsible participant in the community

Last year Íslandsbanki joined an organisation called Nordic CEOs for a Sustainable Future, whose members include several of the largest companies in the Nordic region. The objective is to work towards the UN Sustainable Development Goals in cooperation with governmental authorities. Íslandsbanki has placed strong emphasis on social responsibility, in keeping with our belief that it is important for large companies to set a good example and be a positive force in the community. Responsible business practices affect firms’ long-term competitiveness, and banks have an important part to play, through investments and through financing responsible projects. Equal rights have long been a priority in Iceland, and the Bank has been a leader in the discourse, including through its annual equal rights meetings. Íslandsbanki has also been active in environmental issues, particularly to include its participation in the establishment of the Wetland Fund, which will have significant impact on climate issues in the future, and the establishment by Íslandssjóðir, its subsidiary, of Iceland’s first green bond fund at the end of 2018.

Professional governance practices

Íslandsbanki believes in managing its activities in line with best practice in corporate governance. Its employees and Board of Directors are determined to adhere to the Bank’s core values and to be professional, positive and progressive. It has implemented a sound corporate governance practice policy, an element of which is to improve the decision-making process and enhance stakeholders’ confidence in the Bank. Íslandsbanki was first recognised for excellence in corporate governance by the University of Iceland Institute of Business Administration’s Centre for Corporate Governance in March 2014. The award was granted following an in-depth examination of the practices of the Bank’s Board of Directors, Board subcommittees, and management. It was renewed in 2015, 2016, 2017, and 2018.

Thanks to Bank employees

Íslandsbanki employees have done an outstanding job in recent years — often under difficult conditions. There is every reason to thank both employees and managers, who will continue to do their utmost to strengthen the Bank and boost confidence in it. Exciting times lie ahead in the financial sector, which is changing at an ever more rapid pace. I have every confidence that this strong and competent group will lead us successfully through those changes.