In its report, S&P expects Íslandsbanki to enter this crisis on a more solid foothold than the 2008 financial crisis. The 'BBB' rating level and stable outlook factor in the solid market position of the bank in Iceland, which has a relatively advanced digitalized banking platform. In S&P’s view, the bank is well ahead of many other European banks in its preparation for technological disruption. S&P also notes the Bank’s funding and liquidity metrics are adequate for the Bank’s risk profile, with comfortable liquidity ratios and liquid assets covering more than 3x the average short-term funding in 2019. Moreover, S&P states that the wholesale funding needs are limited in 2020, which coupled with the additional central bank liquidity facilities announced recently by the Icelandic Central Bank, eases pressure on liquidity needs.
S&P’s rational for the change is mostly derived from its view that economic activity will reduce in Iceland and Europe in 2020 and thus could impair Islandsbanki’s asset quality, increase credit losses, reduce business and revenue generation, and potentially erode its capital. S&P’s view is that Iceland's operating environment will remain challenging, affected by the 2020 economic recession, declining interest rates, stiff competition from pension funds in mortgage lending and thus contributing to the declining profitability of the Bank.
S&P notes that it could raise their ratings if Islandsbanki proves able to strengthen significantly the performance of its returns, efficiency, and risk profile above domestic peers, with no further widening of the gap it has with foreign peers. They could lower the ratings on Islandsbanki if the economic environment in Iceland becomes even more difficult, causing profitability prospects for banks to weaken for a prolonged period and the RAC ratio to decline below 15%.