From the Chairman of the Board and the CEO

“Increasing market share, growing trust and satisfaction with Landsbankinn’s services are reflected in its performance.”

- Helga Björk Eiríksdóttir, Chairman of the Board of Directors.

“The year 2018 was characterised by many exciting innovations in digital services and it can safely be said that the Bank’s services have never changed as dramatically in as short a time before.”

- Lilja Björk Einarsdóttir, CEO.


Fara neðar

Address of the Chairman of the Board of Landsbankinn

Landsbankinn's position and operation remained strong in 2018, despite challenging conditions in most sectors. Economic growth was robust early in the year yet cooled after the middle of the year. This cooling of the economy occurs under rather different circumstances than previously as household and corporate debt is more moderate now, increasing the likelihood of a milder effect. The increase in tourist arrivals in Iceland decreased as compared to previous years, in line with most forecasts. Unrest in the labour market and the operating results of the Icelandic airlines contributed to uncertainty in the economy. Political stability, on the other hand, was greater than previously in the domestic arena. This was not the case abroad, where BREXIT and increased tension in global trade had a significant impact on financial markets. All of the above leads to the conclusion that 2019 can be expected to be both interesting and challenging.

Operation and position of Landsbankinn

A growing market share, increased trust and satisfaction with Landsbankinn’s services are reflected in its performance. Landsbankinn's profit in 2018 amounted to ISK 19.3 billion, as compared to ISK 19.8 billion in 2017. Revenue from operations increased by ISK 398 million and operating costs, including salaries, increased by ISK 87 million. Salaries and related expenses increased by 3.8% while general operating expenses decreased by 4.5%. The Bank’s cost-income ratio was 45.5% at the end of the year, decreasing from the previous year. After-tax return on equity was 8.2%, unchanged between years; the Bank’s long-term ROE target is 10%.

Helga Björk Eiríksdóttir, Chairman of the Board

Landsbankinn's balance sheet is robust. Equity at year-end 2018 amounted to ISK 239.6 billion. The capital ratio was 24.9%, which is high in an international context, and considerably well above regulatory minimums as determined by the Financial Supervisory Authority, Iceland (FME). Solid and robust operation and favourable economic conditions have allowed Landsbankinn to pay considerable sums in dividends. Since 2013, the Bank’s dividend payments have totalled ISK 132 billion. These dividend payments have accrued almost in their entirety to the National Treasury, thus benefiting the entire country.

Upon the establishment of Landsbankinn hf. in fall of 2008, the Icelandic State provided the Bank with equity in the amount of ISK 122 billion. Taking into account the State’s interest expense, dividend payments, the initial investment and the State’s share in the Bank’ equity capital, the State’s net profit up to and including 2018 amounts to ISK 168.7 billion.

In recent years, Landsbankinn has not only paid the lion’s share of the previous year’s profit in dividends to shareholders, the Bank has also paid special dividends to shareholders. The purpose of these payments has been to lower the Bank’s equity to contribute to a more favourable capital structure. The Bank’s capital ratio was 30.4% at year-end 2015 and now stands at 24.9%, as mentioned above.

A new dividend policy, approved by the Board of Directors, states that Landsbankinn aims to pay regular dividends to shareholders amounting in general to over 50% of the previous year's profit. In line with Landsbankinn's target capital ratio, the aim is also to make special dividend payments to optimise the Bank's capital structure. In determining the amount of dividend payments, it shall as before be ensured that the Bank maintain a very strong financial position. Regard shall be had for risk in the Bank's operating environment, growth prospects and the maintenance of long-term, robust equity and liquidity positions, as well as compliance with regulatory requirements of financial postition at any given time.

The Board of Directors of Landsbankinn will propose to the AGM on 20 March 2019 that shareholders be paid a dividend amounting to ISK 0.42 per share for the year 2018, a total amount of ISK 9.9 bn. The dividend payment represents around 52% of the year's profit. Should the proposal be approved, the Bank will have paid ISK 141.6 billion in dividend in the years 2013-2019. This dividend payment will lower the Bank’s equity by one percentage point, to 23.9%.

In December, the Board of Directors decided to avail itself of the AGM’s authorisation to buy back own shares in the Bank. The buy-back programme could amount to a maximum of 72.5 million shares, or 0.3% of issued stock. Landsbankinn acquired a total of 14,995,121 own shares at a share price of 9.9787, for the total amount of ISK 149.6. Shareholders in the Bank numbered 931 at the beginning of the year and that number had decreased to 883 at the end of the year.

Ownership of Landsbankinn

Name Holding
National Treasury of Iceland 98.20%
Landsbankinn hf. 1.56%
Other shareholders* 0.24%
Number of shareholders 883
*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.
Dividend paid by Landsbankinn 2013-2018 (mISK)

Improved service through new digital solutions

Towards the end of 2017, Landsbankinn finalised the implementation of a new deposit and payment system in collaboration with the Icelandic Banks' Data Centre (RB), retiring systems that were up to 40 years old. This change allows the Bank’s employees to concentrate even more on meeting customer needs. The sights were set high and in 2018, several new digital solutions were introduced. All the new solutions share the characteristic that they provide speedier and better service to customers, accessible anytime and anyplace. It was gratifying to see how well customers responded to these innovations and the reception serves as an encouragement to carry on along this path. The focus will not least be placed on improving even further financial services to undertakings throughout Iceland. We wish to lead the change in banking services in Iceland, guided by a focus on quality service, data security, data protection and responsibility.

Housing matters

The digital solutions launched by the Bank are in steady use. There is no doubt that banking service is increasingly being provided via the Internet and telephones and is changing with the advent of various fintech solutions. This development has led to considerable changes in Landsbankinn’s activities. The proliferation of digital banking services has altered the Bank’s housing needs, both in terms of branches and service outlets, and at the head office. The Bank has responded by, among other things, commencing construction of a more advantageous and efficient building for de-centralised activities in the capital region. Design of the building at Austurhöfn is proceeding apace and the first competitive tenders will be advertised in the coming weeks and months. As banking business can increasingly be tended to via computer or phone, visits to bank branches grow fewer and fewer. Landsbankinn has adopted the policy of adjusting branch services to these developments, by changing opening hours and amending the services offered in branches and service outlets. Landsbankinn operates the largest branch network in Iceland, comprised of 37 branches and service points.

Landsbankinn continues to emphasise offering quality service throughout Iceland, as its customers reside in all parts of the island. While it is clear that the Bank’s branch network will continue to develop, care must be had not to rush.

Changes in banking services have also translated into new demands on the knowledge and skills of employees. In many cases, the Bank now needs a different set of skills, experience and qualifications than just 5-10 years ago. New work processes in customer service, product development and implementation of new solutions calls for increased collaboration, across departments and divisions. Branch employees have taken up new duties, new roles and amassed new knowledge. Further changes are on the horizon and it will be challenging for employees to meet them. The Bank stands very well as regards human resources. Landsbankinn’s employees are ambitious, hard-working and driven to conquer any challenges the future holds.

Competition from new quarters

The implementation of new laws and rules coloured Landsbankinn’s activities in 2018 and it is clear that new regulations will impact its operation and competitive environment for the future. Most significant among such new rules are new data protection laws (GDPR) and a directive on payment service (PSD2). The GDPR, which entered into effect in 2018, changes the rights of consumers with respect to all companies and institutions that collect personal data. The Bank successfully integrated the new law and when new rules entered into effect around the middle of the year, the Bank was already able to provide individuals with the information to which they are entitled. Since the rules entered into force and to the end of 2018, around 250 individuals had requested access to their personal data and the information about the processing thereof.

When the new EU directive on payment service (PSD2) enters into effect in Iceland, consumers will have the right to grant other companies access to their banking information. These changes bring great opportunities in fintech and it is clear that competition will increase and competitors multiply. We at Landsbankinn intend to embrace these changes and look to the opportunities they bring to provide both corporate and retail customers with even better service than hitherto. Landsbankinn builds on good IT systems, safety, and secure data processing to differentiate itself in the market.

Increased competition both at home and abroad requires that authorities consider how to decrease taxation and the cost of supervision of financial undertakings. This cost hinders the banks in offering customers more favourable terms. The decision to merge the activities of the Central Bank and the Financial Supervisory Authority (FME) will undoubtedly boost efficiency. In 2018, Landsbankinn paid ISK 10.1 billion in taxes, with a special tax on total liabilities, the so-called bank tax, amounting to ISK 3.3 billion thereof. Landsbankinn paid ISK 471 million to the FME and ISK 76 million to the Debtors' Ombudsman. The Bank’s contribution to the Depositors' and Investors' Guarantee Fund was just over ISK 1.3 billion.

Important to continue building trust

December 2018 saw the publication of the White Paper on a Future Vision for the Financial System. The White Paper is a good summary of the current status of key challenges facing the financial system. It addresses the State's large holdings in Landsbankinn and Íslandsbanki. It is for the owners to determine whether and when to sell shareholdings in the banks. It is for us, the directors of the boards of these banks, to ensure the efficient and advantageous operation of the banks. The White Paper discusses the results of a survey that showed that people generally have little confidence in the banking system yet more trust in their own commercial bank. While it is gratifying that trust in Landsbankinn grows surely and steadily, according to surveys Gallup carried out for the Bank, it is also clear that we have some way to go to regain the trust that was lost a decade ago. It is the duty of the Board of Directors to continue to build confidence in the Bank. The Board of Directors of Landsbankinn takes the results of the aforementioned survey to heart and will place even greater emphasis on increasing the trust of both customers and the general public in the Bank. This has been one of the key focus points of the Board of Directors since 2016 and will continue to be so.

At the Bank's AGM on 21 March 2018, Berglind Svavarsdóttir, Einar Thór Bjarnason, Hersir Sigurgeirsson, Jón Guðmann Pétursson and Sigríður Benediktsdóttir were re-elected to the Board of Directors of Landsbankinn. Samúel Guðmundsson was elected as replacement for Magnús Pétursson; Samúel resigned from the Board in November 2018.

Landsbankinn’s employees showed their strong dedication and drive in 2018 and they are prepared to go to great lengths to improve the quality of customer service. I thank the Bank’s employees for our good partnership in 2018 and I trust them to continue to deliver positive results.

On behalf of the Board of Directors of Landsbankinn, I thank customers, shareholders and regulators for effective co-operation in 2018.

Address of the CEO of Landsbankinn

Landsbankinn places key emphasis on ensuring that services meet customer needs and that the Bank’s operation is sound in both the short and long term. Great opportunities lie in current technological advances and changes to financial services; simultaneously, the Bank faces a significant challenge in meeting increased demands in this field.

We are grateful for the trust and confidence our customers show in the Bank. Landsbankinn's share in the banking market has grown surely and steadily and it is the largest of the country’s banks, for the fifth consecutive year. The Bank's market share in retail banking is 38% and 34% in the corporate sector. Customer satisfaction scores higher than before, confidence in the Bank has increased and it is especially pleasing that surveys show that Landsbankinn’s customers are more likely to recommend their bank than are the customers of other banks.

Landsbankinn had positive results in 2018 and the successful introduction of new digital solutions for customers began materialising in increased operating efficiency. The credit portfolio grew considerably, somewhat in excess of plans, yet in line with the Bank’s strategy and its lending policy. Lending now accounts for 80% of total assets and Landsbankinn is leading in housing loans to individuals among the Icelandic banks. It is enjoyable to see that the Bank is in a position to support young adults in purchasing their first home, as well as the country’s key industries.

Lilja Björk Einarsdóttir, CEO

Results from a focus on increasing operating efficiencies clearly manifested in near on unchanged total operating costs between years, despite contractual wage increases, as operating expenses other than wages decreased by 4.5%.

The Bank’s cost-income ratio fell to 45.5%. Return on equity (ROE) was 8.2% in 2018. Conditions on the domestic securities market were unfavourable for the second year running, and despite good performance in asset management and the Bank’s leading position in securities and FX trade, other operating income decreased between years. The Bank’s activities in brokerage are part of its role as market maker for numerous Icelandic companies. In that role, the Bank contributes to normal price formation and saleability on markets for Icelandic investors, regardless of economic conditions.

Steps have in recent years been taken to optimise the Bank’s capital structure. An important milestone was reached last summer with the inaugural Tier 2 issuance of EUR 100 million. Landsbankinn also issued covered bonds in Iceland and maintained its rather high level of total deposits.

At year-end, main risk indicators were in accordance with the Bank’s risk appetite and, in general, risk in the Bank’s operation has decreased. The ratio of non-performing loans is unchanged between years at 2%. The Bank’s employees are cognisant of the risks inherent in financial activities and are experienced in working with customers to prepare for important decisions, be it personal or corporate business. We will continue to develop and improve risk analysis and risk management, ensuring that the knowledge of the Bank’s employees is maintained and supports sound operation in the long term.

A new international financial reporting standard was implemented at the beginning of the year and mid-2018 saw the completion of work on implementing a new data protection policy. Coming up are more extensive projects involving the implementation of new laws and rules, most of which place increased demands on the Bank’s daily operation.

Concerted efforts have been made to ensure that social responsibility is an integral part of Landsbankinn’s core operation. Among investors and the Bank’s partners, both domestically and abroad, there is a growing interest in corporate social responsibility (CSR). Great opportunities lie in a clear policy and actions in this field. Landsbankinn has decided to endorse the UN’s new Principles for Responsible Banking, the aim of which is to further the Sustainable Development Goals (SDGs). The Principles for Responsible Banking form a shared platform for communication and action and the Bank’s membership provides us with a tool to share information on its policy and successes in CSR. The Bank’s employees have developed a great deal of knowledge in the field and the Bank is in a prime position to act as credible partner to companies interested in taking advantage of increased investor appetite for green funding.

Full-time equiv. positions at year-end

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

Banking can take place anywhere and anytime

Product development, changes and innovation are a constant and necessary aspect of the Bank’s growth and operation, and improved service to customers. The year 2018 was characterised by many exciting innovations in digital services and it can safely be said that the Bank’s services have never changed as dramatically in as short a time before. The Bank’s offering of new solutions builds on a solid foundation where robust technological capability, exceptional employees, a strong market share, varied service channels and emphasis on strengthening and maintaining personal business relationships are key.

In February 2018, Landsbankinn’s app was launched and several new digital solutions followed, including the Bank’s new card app, the first app in Iceland that allows customers to use their mobiles to pay for goods and services in contactless card readers. The card app was developed in cooperation with Visa International and Landsbankinn was one of the company’s first partners in the venture. The Bank launched 20 new solutions or vast improvements to older versions in 2018, aimed both at retail and corporate customers. Alongside an increased focus on digital service, the Bank places strong emphasis on IT security.

Customers were quick to take the new solutions into use and, as an example, only six months after international payments were made available in online banking for individuals, 86% of international payments went through that platform. While development of digital service solutions calls for considerable investment, it is more cost-efficient in the long term, both for customers and the Bank. A great deal of time and effort is saved by enabling customers to perform their own credit assessment online, sign documents electronically, and suspend payment cards and then reactivate them manually, to name a few examples. Such self-service solutions are generally cheaper for customers than traditional branch services. We will continue to simplify and optimise operations in this manner for the long term while simultaneously meeting customer needs and responding to changes in financial services.

We have found that customers are pleased to be able to get personal service and comprehensive financial advice when appropriate. At the same time, customers want to be able to use digital solutions to tend to simpler banking business.

Emphasis on cooperation, personal service and sound business relationships

The interior layout of the Bank’s branches has been changed to improve facilities for financial consultations, promote access to self-service solutions and employees have received opportunities for further education and instruction. The opening hours of several branches were changed in 2018, with shorter opening hours reflecting the increased use of digital solutions and fewer branch visits.

Numerous solutions were introduced in corporate online banking in 2018, designed to give companies a better overview of operations and proliferate self-service options. These new solutions were very positively received and the Bank will continue to boost and improve corporate services. Customer satisfaction with a comprehensive financial service called the 360° corporate consultation has been very high. The consultation provides company managers with a clear picture of their finances. In 2018, the leaders of around 400 companies availed themselves of the consultation service and were well pleased. A similar service, the 360° financial review, is available to retail customers and surveys show that customers are very satisfied with the systematic financial review the service entails.

Changes in banking services call for new work procedures. A number of important and extensive projects with the Bank have been carried out in cells whereby the members work closely together on a specific assignment in a shared space for 3-4 months. This type of collaboration and prioritisation of projects has delivered marked results and the Bank is ready to increase the use of such cells. In order for the Bank to achieve success and improve customer services, the work environment must be favourable and suited to the activities. The Bank’s current facilities in central Reykjavík are both impractical and inefficient and moving to a new building that supports its activities will be a great step forward for the Bank.

Landsbankinn has a clear policy on gender equality and re-focused its attention on these issues in 2018, among other things with participation in Capacent’s Equality Indicator. Equality within the Bank was assessed through careful analysis and with employee collaboration. The results were used to set clear goals on how to promote gender equality even further and ensure equal opportunities for both men and women. Landsbankinn has twice been awarded the golden seal of PwC's Equal Pay Audit and following legislation on equal pay certification, the Bank has undergone a final review for certification under the Equal Pay Standard ÍST 85. Formal certification will be forthcoming in the next few weeks.

Landsbankinn has strengthened its position in 2018 - increased market share, improved operating outcome and increased customer satisfaction and trust encourages us to do even better. I thank our customers and partners for very positive co-operation in 2018 and the Bank’s employees and Board of Directors for their hard work and ambition.