Fourth quarter 2021 (4Q21) financial highlights – ROE exceeds financial targets and market consensus
- Íslandsbanki reported a profit of ISK 7.1bn in the fourth quarter (4Q20: ISK 3.5bn) generating an annualised return on equity (ROE) of 14.2% (4Q20: 7.6%) which is above both the Bank’s financial targets and market consensus. Main drivers were strong income generation, good cost control, positive net impairment and rise in profit from discontinued operations.
- Net interest income (NII) grew by 4.7% YoY and totalled ISK 8.6bn in 4Q21 compared to ISK 8.3bn in 4Q20, mainly explained by growth in loans to customers during the year. Net interest margin was 2.4% in 4Q21 compared to 2.5% in 4Q20.
- Net fee and commission income (NFCI) grew 27.5% YoY and amounted to ISK 3.7bn in 4Q21 compared to ISK 2.9bn in 4Q20. Cards and payment processing, investment banking and brokerage as well as asset management are primary drivers for the increase.
- The Bank focuses on core banking operations with NII and NFCI accounting for around 94% of total operating income in 4Q21 compared to 92% in 4Q20. Combined, these two items grew 10.5% from 4Q20 to 4Q21.
- Net financial income was ISK 646m in 4Q21 compared to ISK 783m in 4Q20. Fair value changes account for a considerable part of net financial income in 4Q21.
- Administrative expenses were ISK 5.8bn, a decline of 5% YoY as a result of continued cost awareness.
- Cost-to-income ratio (C/I ratio) was 45.3% in 4Q21, at the Bank’s revised target of 45.0%, down from 51.7% in 4Q20 due to strong revenue generation and cost reduction efforts.
- A positive ISK 0.6bn net impairment on financial assets in 4Q21 is mainly attributable to a brighter outlook for the tourism industry. This is compared to an impairment charge of ISK 1.8bn in 4Q20. The net impairment charge over loans to customers, the annualised cost of risk, was -23bp in 4Q21 compared to +73bp in 4Q20.
- Profit from discontinued operations amounted to ISK 1.1bn during the quarter compared with ISK 173m in 4Q20. The increase YoY is explained by a subsidiary’s sale of preferred shares and by a sale of land, which was classified as held for sale.
- Loans to customers rose by ISK 4.9bn in the quarter, or by 0.5%, to ISK 1,086bn in which mortgage lending led the increase.
- Deposits from customers decreased by ISK 10.4bn in the quarter, or by 1.4%, to ISK 744bn after a strong increase earlier in 2021.
- The Bank´s liquidity position remains strong with all ratios well above regulatory requirements and internal thresholds.
- Total equity amounted to ISK 203.7bn at the end of 2021 and the Bank’s total capital ratio was 25.3% compared to 23.0% at YE20. The corresponding CET1 ratio was 21.3%, up from 20.1% at YE20 This is considerably higher than the revised CET1 target of ~16.5%.
2021 (FY21) financial highlights – net profit turnaround led by higher income and positive net impairment
- Íslandsbanki’s net profit for 2021 was ISK 23.7bn (FY20: ISK 6.8bn) with annualised return on equity for 2021 of 12.3% compared to a 3.7% in 2020.
- Net interest income totalled ISK 34.0bn in 2021, a growth of 2.0% YoY which is explained by higher lending volumes. Net interest margin was at 2.4% throughout 2021, down from 2.6% in 2020 as average interest rates were lower in 2021.
- Net fee and commission income rose by 22.1% from the previous year and totalled ISK 12.9bn for 2021. The rise is evenly distributed between income types, demonstrating strong income generating foundations.
- Net financial income was ISK 2.5bn in 2021 compared to a loss of ISK 1.4bn for FY20 as markets were more benign in 2021 compared to 2020.
- Administrative expenses increased by 2.0%, that includes an ISK 521m one-off cost in relation to the Bank’s IPO. Salaries rose by 3.7% in 2021 mainly due to rise in general wage agreements, one-off cost resulting from the sale of the Bank and higher redundancy costs.
- The cost-to-income ratio dropped significantly YoY from 54.3% in 2020 to 46.2% in 2021.
- Net impairment on financial assets was positive by ISK 3.0bn in 2021, mainly due to the improving outlook for the tourism industry, compared to a charge of ISK 8.8bn in 2020 which reflected the economic situation following the start of the COVID-19 pandemic. The net impairment charge over loans to customers, cost of risk, was -28bp in 2021 compared to +91bp in 2020.
- Loans to customers grew by 7.9% during 2021, mostly driven by mortgage lending.
- At the end of the reporting period, the share of credit-impaired loans to customers was 2.0% (gross) down from 2.9% at YE20 following full repayment of exposures in Stage 3.
- In 2021, deposits from customers grew by ISK 64.6bn, or 9.5%, mainly as a result of a strong increase from Business Banking but also from Personal Banking.
- The leverage ratio was 13.6% at the end of 2021, same as at year-end 2020, indicating low leverage.
- Directive 2014/59/EU on Bank Recovery and Resolution (BRRD I) was i.a. transposed into Icelandic law with Act No. 70/2020 on the resolution of credit institutions and investment firms (the Act). On 8th of December 2021, the Icelandic Resolution Authority published its policy on minimum requirements for own funds and eligible liabilities (MREL) according to Art. 17 of the Act. The policy does not yet fully specify the requirements that each bank will have to fulfil, but it does give an indication on the Resolution Authority’s methodology and timing of implementation. According to the policy, the Resolution Authority aims at publishing its decision on MREL for Icelandic banks early in 2022 and it would appear that Íslandsbanki will fulfil the MREL requirement by a good margin from the outset. The subordination requirement of Directive 2019/879/EU on Bank Recovery and Resolution (BRRD II) has not been defined, but the policy states that the requirement will be published once BRRD II has been transposed into Icelandic law. In any event, in common with most European jurisdictions, it is likely that Icelandic banks will have to comply with MREL requirements of BRRD II in January 2024.
- Parallel to the publishing of the financial statements, the Bank publishes its Annual and Sustainability report and Pillar 3 report, along with an Impact and Allocation report for Íslandsbanki's Sustainable Financing Framework.
Revised financial targets
- The Board of Directors approved revised financial targets in 4Q21 as strong historical performance and higher interest rate environment called for revised targets.