From the Chairman of the Board
The economic impact of the Covid-19 pandemic has been momentous all around the world. Here in Iceland, the blow has been especially hard since travel restrictions imposed by most countries have had a major negative effect on the travel sector, one of Iceland’s main export industries.
Helga Björk Eiríksdóttir, Chairman of the Board
Tourist arrivals in Iceland decreased by 76% between years, a figure that illustrates the difficulties faced by the travel industry better than words. This major blow led to the sharpest contraction in GDP since the foundation of the Republic, by almost 8%.
Find solutions with customers
Since the pandemic became a reality, Landsbankinn has focused on providing support for customers experiencing difficulties. We offered temporary payment holidays to both private individuals and companies and, through consultation and collaboration with both retail and corporate customers, worked to find and implement solutions. Each customer’s situation and conditions are unique, requiring different solutions to fit every need.
Our customers are more satisfied
Since 2017, the Bank has been on a digital journey, developing many new solutions that customers have eagerly received. At the same time, operational efficiency has been improved. The results of the past years’ work provide us with a solid impetus going forward into a future no doubt characterised by growing competition from both domestic and international parties. The Bank will meet these challenges with confidence and continue to offer first-rate services, both on digital platforms and with personal service and advice. We are extremely pleased to see that satisfaction with our services continues to rate high, with Landsbankinn topping the list of banks in the Icelandic Performance Satisfaction Index in 2020, the second year in a row. We are proud of this success.
Customer satisfaction comes first
In 2020, the Bank adopted a new strategy under the heading Landsbankinn, an ever-smarter bank. The Board of Directors participated in developing the strategy along with the entire team of employees, in meetings, workshops and conversations with customers. Landsbankinn has, despite countless challenges and demanding external conditions, showed that its customers always come first. With creative thinking and ambitious solutions, the Bank has managed to strengthen its leading role in the market even further. The strategy will enable the Bank to provide even better services, lead in a time of rapid changes and remain the strongest bank in Iceland. Trust is at the core of our new strategy and we take our role in society seriously. In 2020, the Bank continued enthusiastically on its sustainability journey, working on its initial sustainable finance framework published in January 2021.
We have long emphasised sustainability, social responsibility and responsible investment, and will continue to do so. The Bank has developed extensive expert knowledge in the field of sustainability and the options available to companies. Opportunities abound for the Bank.
Significant post-pandemic opportunities
Soaring unemployment is the most serious consequence of the current recession. Towards year-end 2020, around 26,000 individuals were fully or partially unemployed, bringing unemployment to 12%, including individuals qualifying for partial unemployment measures. Many more, who would choose to work were it available, have without doubt turned to studies or left the labour market. There is no need to waste words describing the serious impact of unemployment on finances and general well-being. It is important that we, as a community, manage to mitigate this situation as soon as possible. We are well placed to do so. I am certain that many eyes will turn to Iceland, once the will and freedom to travel increases. Travellers are enchanted not only by our beautiful natural environment and landscape but also by the hospitality, solidarity and security they experience here.
Successful response by authorities
Public authorities’ action to mitigate the impact of the pandemic has been robust and clearly effective in reducing the negative consequences. The Government of Iceland, the parliament Althing, the Central Bank of Iceland and health authorities are to be commended for their response to this unwelcome guest and its implications. While some instances could have been handled better, I think it is safe to say that Iceland is now far better placed than most other countries.
Back construction of residential housing
The Central Bank’s interest rate cuts have put unavoidable pressure on Landsbankinn’s interest margin, which will continue under low interest rate levels. That being said, lower interest rates are a boon, especially to first-time housing buyers and allow others to refinance older loans to gain more favourable terms. Landsbankinn is leading the field, both in offering very competitive terms on housing loans and by ensuring that the borrowing process is simple and not overly time-consuming.
The Bank has a clear competitive edge in this market, increasing its market share in housing loans considerably in 2020.
The weight of housing loans in the Bank’s credit portfolio increased from 22% to 26% and is clearly demonstrated in the value increase of the housing loan portfolio by ISK 126 billion in 2020, or 32%. There is a clear trend towards non-indexed loans. Total growth in non-indexed housing loans was ISK 153 billion, offset by repayment of inflation-indexed housing loans in the amount of ISK 27 billion. Access to favourable housing loans for private individuals supports the construction sector, development of residential housing in Iceland and thereby employment levels.
The Bank’s funding is diverse, resting mainly on customer deposits which grew by ISK 86 billion in the year. Bond issuance on international markets was successful and the terms offered the Bank in early 2020 were favourable. The Bank was an active issuer of covered bonds in the domestic market, with such issuance having become an important part of the Bank’s funding profile, especially considering increased activity in the housing loan market.
In January 2021, we reached an important milestone when the international rating agency S&P Global Ratings assigned a credit rating for covered bonds issued by Landsbankinn. Preparations have been on-going for over a year and the process is comprehensive, as no international rating agency has ever before issued a rating grade for covered bonds issued by an Icelandic bank. The purpose of achieving a rating grade was to make the Bank’s bonds even more attractive to investors, both international and domestic.
Uncertainty has decreased
In light of the circumstances, Landsbankinn’s performance in 2020 must be considered good and a reflection of sound and efficient operation. In the first half of the year, the economic outlook deteriorated considerably, leading to a significant increase in loan loss provisions. These high precautionary entries, based on the Bank’s conservative assessment of economic developments, were the main explanation for a low profit of ISK 699 million in the first nine months of the year, equivalent to 0.4% annualised return on equity. As the year progressed, it became clear that economic developments were less dire than expected, especially for individuals and companies in sectors other than the travel industry, influenced by action taken by authorities and news of the speedy development of vaccines. This led to a slight reduction in expected credit loss, with a concomitant reduction in provisions for impairment. The Bank’s operation was otherwise successful, not least in the fourth quarter. The result is a profit of ISK 10.5 billion in 2020, despite impairment and loss provisions in the amount of ISK 12 billion.
Intent on achieving long-term ROE target
The Bank’s long-term goal is to achieve a 10% target return on equity, having regard for bank tax. This target was not achieved in 2020 and cannot be expected to be achieved this year either. We are nevertheless set in our course and firmly intend to achieve our target within a few years.
We continue to emphasise minimising operating costs and operational efficiency has increased steadily.
Wages and related expenses increased by ISK 309 million between years while other operating costs decreased by ISK 470 million. Landsbankinn's balance sheet remains robust. The Bank’s equity was ISK 258 billion at year-end 2020 and its CAR was 25.1%, which is high by international comparison.
Construction of new building proceeding apace
Construction of Landsbankinn’s new building at Austurhöfn in Reykjavík is proceeding well and the plan is to move the Bank’s operation in the second half of 2022. The move will create considerable efficiencies and employees’ work environment will undergo a major transformation. The building will ornament the city centre with accessible and inviting public spaces, linked to the surroundings with good walkways. The building will be certified under the BREEAM standard, having regard for environmental management during the construction and operating phases, energy and water husbandry, selection of environmentally-friendly construction materials and minimisation of various pollution during construction.
Dividend proposal to the AGM
It is the Bank’s policy to pay half of the previous year’s profit in dividend to shareholders; additionally, the aim is to make special dividend payments to optimise its capital structure.
At the Bank’s annual general meeting held in April 2020, during the first wave of the pandemic, it was decided to retract the submitted dividend proposal and to not pay any dividend for 2019. This was in response to the great economic uncertainty of the day. While uncertainty remains high, it has receded considerably. The Bank’s financial strength is significant and its operation sound. The Board of Directors deems it appropriate to propose that the AGM, to be held on 24 March, approve the payment of a dividend to shareholders in the amount of ISK 0.19 per share for the 2020 operating year. The total dividend of ISK 4,489 million corresponds to 43% of consolidated profit in 2020 and is 16% of the consolidated profit in 2019 and 2020. Should this proposal be approved, dividend paid by Landsbankinn in 2013-2021 will amount to ISK 146 billion.
There was one change to the Board of Directors of Landsbankinn in 2020 with the resignation of Hersir Sigurgeirsson, who has taken on work for the Central Bank of Iceland he considered incompatible with directorship. On behalf of the Board of Directors, I thank Hersir for successful and effective collaboration ever since 2016.
On behalf of the Board of Directors of Landsbankinn, I thank Lilja Björk Einarsdóttir, CEO, all Landsbankinn’s management team and employees for very successful and pleasant collaboration in the past year.
We thank shareholders, customers, regulators and other partners for pleasant work relations.