From the Chairman of the Board and the CEO

Helga Björk Eiríksdóttir was elected Chairman of the Board of Directors of Landsbankinn in April 2016. Lilja Björk Einarsdóttir took up the position of CEO of Landsbankinn on 15 March 2017.
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Address of the Chairman of the Board of Landsbankinn

Landsbankinn took advantage of favourable winds in 2017. Good economic conditions in Iceland were reflected in improved customer finances and a stronger position of the Bank. Defaults continued to decrease and developments in the Bank's credit portfolio were favourable. On the other hand, wage increases, a strong Icelandic króna and an increasingly competitive labour market have set boundaries to corporate growth. The year 2018 looks to be challenging for corporates in most sectors and Landsbankinn is no exception.

Operation in line with plans

Landsbankinn's operation in 2017 was in accordance with plans. The Bank's operating profit amounted to ISK 19.8 bn, as compared to ISK 16.6 bn in 2016. Operating income increased by ISK 4.8 bn, or 9.9%, and operating expenses grew by ISK 336 m, or 1.4%. The cost-income ratio was 46.1% in 2017, decreasing from the previous year. Return on equity net of tax was 8.2%, which is under the long-term target, and the Bank's core operations still need improving.

Landsbankinn was well received on foreign bond markets in 2017 and in June, the Bank financed final payment of its debt to old Landsbanki Íslands, now LBI ehf., in the amount of ISK 16.2 bn with the issuance of FX bonds. The Bank's credit rating is of major significance, not least on international capital markets, and it was thus gratifying that S&P Global Ratings raised Landsbankinn's rating grade a notch last fall, to BBB+/A-2 with a stable outlook.

Helga Björk Eiríksdóttir, Chairman of the Board

Landsbankinn's balance sheet is robust. The Bank’s equity at year-end 2017 amounted to ISK 246 bn and its capital ratio was 26.7%. This capital ratio is high by any measure and remains so despite the Bank paying the lion's share of the previous year's profit to shareholders since 2013.

Ownership of Landsbankinn

Name Holding
National Treasury of Iceland 98.20%
Landsbankinn hf. 1.50%
Other shareholders* 0.30%
*In 2013 around 1,400 employees and former employees received shares in Landsbankinn under a settlement agreement between LBI hf. and the Icelandic State. Upon the mergers with Sparisjóður Vestmannaeyja and Sparisjóður Norðurlands, former guarantee capital holders in the savings banks received shares in the Bank.

From 2013 the Bank has paid a total of ISK 107 bn in dividend, almost all of which goes to the National Treasury.

In 2017, Landsbankinn paid ISK 24.8 bn in dividend for the year 2016. During the period 2013-2017, the Bank has paid a total of ISK 107 bn in dividend, almost all of which goes to the National Treasury. At the Annual General Meeting of Landsbankinn on 21 March, the Board of Directors will propose that the Bank pay ISK 15.4 bn in dividend for the year 2017.

In 2016, the Board of Directors decided to avail itself of an authorisation granted by the Bank's AGM, to buy back own shares. The buy-back programme could amount to a maximum of 480 million shares, or 2% of issued stock. The objective was to reduce equity and give shareholders the opportunity to sell their shares in the Bank in a transparent manner, since restrictions on the transfer of shares in the Bank expired on 1 September 2016. The buy-back programme was executed in three periods, with the last one being from 13-24 February 2017. During the third buy-back period, Landsbankinn purchased a total of 8,509,625 own shares for the total amount of ISK 90,394,085. Landsbankinn acquired a total of 142,031,497 own shares under the buy-back programme, or the equivalent of 0.6% of issued shares in the Bank, for a purchase price of ISK 1,481,500,289.

Lilja Björk Einarsdóttir was hired as CEO of Landsbankinn on 23 January 2017 and took up the position on 15 March, or a week before the Bank's AGM. Lilja took over from Hreiðar Bjarnason, Managing Director of Landsbankinn's Finance division, who acted as temporary CEO after Steinþór Pálsson stepped down on 30 November 2016.

At the Bank's AGM on 22 March 2017, Berglind Svavarsdóttir, Einar Þór Bjarnason, Hersir Sigurgeirsson, Jón Guðmann Pétursson and Magnús Pétursson were re-elected to the Board of Directors of Landsbankinn. Sigríður Benediktsdóttir was elected to the Board and replaced Danielle Pamela Neben, who had been a Director of the Board since the 2013 AGM.

In 2017, the Bank, in collaboration with the Icelandic Banks' Data Centre (RB), deployed a new deposit and payment system from international IT company Sopra Banking Software. The system replaces systems some of which date back 40 years and is both more effective and flexible than the older systems.

Renewal of the systems lets the Bank respond to developing customer needs and paves the way for the continued evolution of digital services, on which the Bank sharpened its focus in 2017. Landsbankinn thus builds its future on sound and secure foundations.

A hindrance to competition

The financial market is in a unique position as compared to many other sectors in that supervision of operations has in recent years become ever more extensive and complex, and more costly. There is no denying this reality. Banks, alone among Icelandic financial undertakings, pay a special tax on liabilities, a special tax on employee's wages, and a 6% added income tax on profit exceeding ISK 1 bn. These taxes amounted to around ISK 5.3 bn in 2017 and, in the past ten years, the Bank has paid a total of ISK 30.5 bn in taxes on its operation, in excess of what other types of companies are liable for.

This arrangement skews the competitive position of Icelandic banks severely against foreign banks, Icelandic pension funds and fintechs, a growing industry in the past couple of years. At a time when Icelandic banks are finally reaching a competitive position as regards foreign banks, due to the improved credit rating of the sovereign and easier access to international credit markets, they are nonetheless losing out on business from established Icelandic companies to foreign banks. Obviously, the strategy of Icelandic authorities to levy special taxes on Icelandic banks, which foreign banks are not encumbered by, is a handicap for Icelandic banks.

New and more fitting facilities

Efforts to respond to growing competition and fast-paced changes in banking services include consolidating the Bank's centralised activities under one new roof. Landsbankinn's current housing situation in central Reykjavík is both disadvantageous and ill-suited to the Bank's operation. Last spring, the Board of Directors of Landsbankinn decided to build on the Bank's plot at Austurhöfn. The Bank will construct facilities tailored to suit the needs of a modern financial undertaking and one that enables collaboration between departments. The Bank advertised for partners for the design process and in January, six architect teams handed in proposals. In February, the Bank will select one of these teams to partner with on the final design of the building. During the design and construction process, the Bank's employees will begin adjusting work processes and organisation to ensure that the new facilities lead to efficiencies and improved customer services right from the start.

Landsbankinn has a highly capable team of employees ready to make the effort to ensure that the Bank provides first-class service. Surveys carried out in 2017 revealed high and growing satisfaction with the Bank's services. Confidence in the Bank is also growing. These results are very gratifying and stand us in good stead going forward. On behalf of the Board of Directors of Landsbankinn, I thank customers for placing their trust in us and employees for their good work. I also wish to thank shareholders and regulators for positive dealings in the past year.

Dividend paid by Landsbankinn 2013-2017 (mISK)

Address of the CEO of Landsbankinn

Lilja Björk Einarsdóttir, CEO

Landsbankinn is a leading provider of banking services in Iceland and its objective is to be a trusted financial partner. This year, the Bank will focus on sound operations and further development of digital solutions in both service provision and internal operation. The Bank grows sustainably, in line with developments in the community, and its operation is generating a reasonable return on equity. Efficient liquidity management has allowed the Bank to pay considerable dividends to its owners in recent years.

Landsbankinn had positive results in 2017. The Bank's performance was good and in line with expectations. The Bank's market share continued to grow, surveys showed increasing confidence in the Bank and customers are better satisfied with its services. The Bank's operations are solid and, despite general cost increases, the Bank’s expenses have remained more or less stable between years, measured in Icelandic króna. Commission income increased in 2017 as a result of growing economic activity and effective marketing. The increase was mostly from services to corporates and institutional investors.

Landsbankinn's financial standing is strong. At the end of 2016, the Bank's equity amounted to ISK 246 bn and its capital ratio to 26.7%. The Bank's operation is stable and so-called one-off items less impactful now than in previous years' results.

Increased trust on global financial markets

The Bank enjoys a growing measure of confidence on overseas financial markets, as evidenced by its successful FX bond issuances in 2017. The terms offered the Bank were more favourable than before and significant over-demand by investors signifies that the Bank has ready access to foreign funding. The lion's share of proceeds from FX bonds issuances in 2017 was allocated to the pre-payment of unfavourable funding, as well as to strengthening the Bank's liquidity position. In coming years, the Bank will continue to seek to further optimise its capital structure through, among other things, the issuance of subordinated bonds.

The main role of Landsbankinn is to serve a diverse community and industry. The Bank adjusts to changes in its environment and the activities and organisation of the Bank have regard for the need of customers and stakeholders at any given time. It is an important part of the management's work to be alert to opportunities for economisation and to increase efficiency in the Bank's operation. This will lead to improved profitability in the long term.

Full-time equiv. positions at year-end

* Main influencing factor was the merger of Landsbankinn and SpKef.

Most comprehensive IT project undertaken by Landsbankinn

The year 2017 was eventful at Landsbankinn. The single largest milestone was the deployment of a new deposit and payment system in collaboration with the Icelandic Banks' Data Centre (RB) and Sopra Banking Software. Landsbankinn is the first Icelandic bank to implement the system. Renewal of the Bank's deposit and payment systems was long since due, as the new systems replaced older RB systems, many of which were quite old. The undertaking was extensive and complex, for one thing because this was the first attempt at replacing deposit and payment systems in real time. All main aspects of the transition went smoothly. There were nevertheless some disruptions to the Bank's services. Our customers faced these disruptions with a great deal of stoicism and patience, and the same can be said of our business partners. For that we extend our warmest thanks.

Implementation of the new deposit and payment systems was the most comprehensive IT project Landsbankinn has undertaken to date and further strengthens the Bank‘s robust infrastructure in the area. Evolution in banking is not least focused on utilising digital technology and the information the Bank has access to in order to provide customers with the best possible service.

Increased emphasis on digital solutions

Around mid-2017, the Bank re-focused its strategy for the next three years to place increased emphasis on offering digital solutions that facilitate banking for customers. Even stronger emphasis will now be placed on ensuring the efficiency and accessibility of the Bank's services. Employees are encouraged to show initiative, both as with respect to customers or to improve the Bank's overall services, and importance is placed on ensuring that the Bank's services are value-adding for customers.

New rules on financial undertakings which enter into force soon will presumably lead to even stiffer competition in the field of digital banking and payment services in coming years. Landsbankinn is well prepared to handle these changes, as its foundations are stronger than ever before.

In the meantime, the Bank continues to work to automate its processes. Many tasks that previously required considerable work will be a thing of the past. This improves services and lowers costs.

New legislation creates opportunities for Landsbankinn

A new Payment Services Directive, PSD2, obliges banks to provide unhindered access to certain data, given the account holder's consent. This creates an opportunity for fintech companies to provide payment services via direct access to accounts. Landsbankinn considers that the legislation will also create as many opportunities for the Bank to provide even more diverse services.

The new EU General Data Protection Regulation will also occasion a great deal of change. The reglulation gives private individuals increased authority over how companies and organisations utilise their personal information. Personal data are both sensitive for individuals and valuable for companies. Landsbankinn has put considerable effort into preparing for the implementation of the regulation, as the storage of personal data is important and customers need to understand the purpose of data processing. As ever, Landsbankinn places great emphasis on security, transparency and data protection.

Landsbankinn is well prepared to handle coming changes in the banking system and will continue to strive to offer individuals and corporates throughout Iceland first-class services. I thank our customers for their trust in us and Landsbankinn's employees for their zealous efforts this past year.