Today, S&P Global Ratings (S&P) has affirmed Íslandsbanki's rating at BBB/A-2 with a stable outlook.

In its report, S&P views economic risks facing Icelandic financial institutions as elevated, as the tourism and some commercial real estate segments continue to recover from the pandemic hit. S&P believes these risks are showing early signs of receding, though there remain hurdles in the first half of 2022.

S&P states that the stable outlook reflects the still elevated economic risks emanating from sector-wide loan underperformance in tourism and its dependent sectors following the large pandemic shock, offset by the Icelandic banks’ very strong capitalisation and its expectation for earnings resilience.

S&P notes that the agency could raise ratings of the Icelandic banks if they believe that the strength and resilience of the bank’s earning capacity has improved significantly and sustainably. In S&P´s opinion this is likely to be consistent with the ongoing decline in non-bank participation in the Icelandic mortgage market. In addition, S&P would look for stable asset quality prospects, with loan underperformance continuing to abate.

S&P further notes that the Icelandic authorities are in the process of establishing the resolution regime and setting MREL requirements. In time, the agency could raise the Icelandic bank’s ratings if they see the resolution framework as effective and believe the banks will build and maintain meaningful loss-absorbing buffers that lower the risk to senior preferred creditors.

S&P states that they could lower the ratings on the Icelandic banks if there is a large and disorderly adjustment in the economy, likely due to a slower or weaker than anticipated tourism recovery. According to S&P, this scenario would likely be consistent with a broader and significant economic slowdown in Iceland, large credit impairments, and deteriorating profitability of the Icelandic banks.