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Iceland’s banking sector: Facts & Figures

Updated September 2019 – For earlier editions of Facts & Figures click here

The commercial banking sector now consists of three universal banks, one investment bank, and four small savings banks that operate in the rural areas. Total assets amount to ISK 3,656 billion, the equivalent to around 140% of GDP in 2018.

The banks are predominantly funded by domestic deposits that are around ISK 1,800 billion or little less than 75% of GDP. Bond issuance has been increasing over the last few years: first and foremost, the issuance of contingent and covered bonds. Total loans in the banking sector amount to ISK 3,681 billion. The asset base is predominately domestic: total domestic assets are ISK 2,861 billion, Icelandic banks have also sold bonds on the international market in recent years. Total foreign liabilities are ISK 683 billion and total domestic liabilities are 2,372 billion.

All the major banks have been profitable over the last six years. The return on equity was 6.1% in 2018. The average interest rate margin has risen from pre-crisis levels reflecting partly the increased share of retail deposits in bank funding. Capital adequacy ratios have risen well above the 16% required by the regulator and are now generally in the 20-25% range of risk-weighted assets.

All the major banks have been increasing their funding in European bond markets and that trend has been strengthened with significant improvements in their credit ratings in 2016. In March 2017 authorities removed the last remaining hurdles of the capital controls that were introduced in 2008 to stabilise the currency during the financial crisis. The lifting of the capital controls on individuals, firms, and pension funds marks the completion of Iceland’s return to the international financial markets.

The Icelandic economy has been recording healthy GDP growth in recent years spurred on by a significant increase in tourism along with the contribution from the export sector. GDP growth was 4.3% in 2018 and 4% in 2017. Robust growth has not significantly increased inflation which was around 2.7% in 2018. Strong economic performance along with a healthy current account surplus has led to a general appreciation of the Krona against major currencies in recent years.

At the same time, household and private-sector debt has not increased. Total loan levels in the banking sector have remained stable although there was an increase in loans to the tourism sector.

Since October 2015, ownership of two of the three major banks has been primarily in the hands of the Icelandic government. The government has not introduced detailed plans on how its ownership of the banks will develop. 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.

The banking sector in Iceland bears the largest burden of any sector of the economy when it comes to taxes and government fees. The financial sector paid little less than ISK 40 billion in taxes in 2018. Icelandic financial firms pay three sector specific taxes: bank tax, financial activity tax and a special addition to the financial activity tax. The banking sector currently has around 3,000 employees working in 87 branches around Iceland. Both employment, and the number of branches have decreased in recent years because of ever-increasing digitalisation of the Icelandic financial sector.

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.