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Iceland’s banking sector: Facts & Figures

Updated December 2021 – For earlier editions of Facts & Figures click here

The Covid-19 pandemic had substantial negative effect on the economy in 2020. The economy is expected to rise again in 2021 after contracting by -6.6% in 2020, with GDP forecasts ranging from 3% – 5% growth. The tourism sector is expected to rebound from mid-year 2021 alongside a rise in private consumption and investment. Unemployment is forecast to average around 7% in 2021, which is still high by Icelandic standards.

The commercial banking sector consists of four universal banks and four small savings banks that operate in the rural areas. Of the four commercial banks, three are defined as systemically important parties subject to supervision by the Financial Stability Council in Iceland.

The banking sector currently has around 2,400 employees working in 75 branches around Iceland. Decreasing profitability has pushed the banking sector towards boosting returns by streamlining and cutting costs. Commercial banks and savings banks have therefore closed a considerable number of service points and reduced staff since 2012 with increased emphasis on electronic self-service solutions. Electronic payments, services and signatures have been on the rise over the past years and temporarily reduced services in branches during the pandemic have accelerated the process with online services and interactions surpassing traditional ones.

Since October 2015, ownership of two of the three major banks has been primarily in the hands of the Icelandic government. The government has taken the first steps in deleveraging its holdings in the financial system. One bank is still fully government owned, the Minister of Finance and Economic Affairs has begun the process of selling the governments holding in the second bank. An initial public offering was held in June 2021 and 35% of the governments share was sold. All shares in the bank were listed on the stock exchange in Reykjavík thereafter. The third bank is listed on the stock exchanges in Reykjavík and Stockholm and the sole investment bank is listed on the stock exchange in Reykjavík.

Total assets of the banking sector amount to ISK 4,212 billion, the equivalent to around 140% of GDP in 2020. The asset base is predominately domestic: total domestic assets are ISK 3,789 billion or 90% of total assets. Total loans in the banking sector amount to ISK 3,767 billion. The banks are predominantly funded by domestic deposits which amount to ISK 2,176 billion.

Credit system lending grew by an average of 5.2% year-on-year in 2020. The pace of growth increased over the course of the year, reaching 6.4% by Q4. Lending to households increased over the course of 2020. Twelve-month growth was around 10% at year-end. It stems almost entirely from increased mortgage lending, as the housing market has been lively, fuelled by a significant drop in mortgage interest rates and a modestly leveraged household sector before the pandemic struck. Corporate lending remained broadly flat year-on-year in 2020. The growth rate had slowed in 2019, alongside declining economic activity and higher returns required by banks on corporate loans. Support loans and bridge loans, which bear a partial or full Treasury guarantee, have supported growth in lending to the companies affected most severely by the pandemic.

The Icelandic banks are all contributing to sustainability in Iceland. All have high ESG ratings and are moving towards sustainable financing. The banks have a broad spectrum of green products e.g. green bonds, green mortgage lending, green car financing and green deposits. This subject will continue to be a focus point for the financial sector in the coming years.

The Icelandic banks are all involved in projects to increase public awareness on the importance of financial literacy. The Icelandic Financial Services Association also runs a joint project called Fjármálavit. The project is based on visits from employees from the Icelandic banks to grammar schools where they talk about money and savings. Fjármálavit participates in the European Money Week.

The overall performance of the three systemically important banks has deteriorated in recent years. The banks’ return on equity was positive by 4,6% in 2020, roughly the same as in 2019. The reduction in returns in both 2019 and 2020 is due in large part to negative returns on discontinued operations and Covid-19 related provisions for loan impairment.

The commercial banks in Iceland were well prepared for the operating difficulties brought on by the COVID-19 pandemic thanks to a strong capital and liquidity position, which is well above the levels required. The impact of the pandemic on financial institutions’ balance sheets shows primarily in increased impairment and arrears and a larger share of frozen loans. The vast majority of frozen loans were to companies in tourism and other services.

Contributor: Arnar I. Jónsson