Bank results dispel fears over Icelandic economy

Concerns over the Icelandic economy have receded following the publication of financial results of the three main banks in Iceland, reports the Financial Times.

Icelandic banks Glitnir, Kaupthing and Landsbanki released their second quarter results on Friday which showed better results than many analysts had forecast. Capital strength, core lending and fee and commission income remained strong for all three banks during the quarter, despite credit losses and weaknesses in global markets.

There were concerns that the rapid international expansion of Icelandic banks, financed principally by overseas borrowing, could prove detrimental in light of the increased cost of borrowing during the credit crisis.

These fears helped create a surge in CDS (credit default swap) spreads to around 1,000 basis points, indicating that the market considered a banking collapse in Iceland to be likely.

However, the second quarter results show that a collapse is increasingly unlikely. Instead, they demonstrate that Icelandic banks have responded by deleveraging, diversifying their operations geographically, reducing their reliance on wholesale funding in favour of deposits, and expanding fee and commission based income.

Glitnir’s net profit was up 29.3% from the first quarter to ISK 7.6 bn whilst its net interest income rose 84 per cent to ISK17.8bn compared with the same period last year.

Landsbanki’s net interest income rose 37 per cent. “There is nothing in our results to justify CDS spreads of 1,000 basis points,” said Sigurjon Arnason, joint chief executive.

Even though loan losses are increasing, Icelandic banks’ capital adequacy ratios remain solid by international regulatory standards. The banks have met funding requirements for next year and reduced their wholesale borrowing, and are also increasingly relying on deposits as a source of funding.