Snapshot af a restructured financial sector

The transformation and restructuring of the Icelandic financial sector after the crisis of 2008 has been mostly completed.   The banking sector is now dominated by four universal banks. Three of them are continuations of the three large banks that failed during the crisis of 2008. The fourth survived the crisis but has been restructured and recapitalized after a change of ownership.

Höfundur: 
Guðjón Rúnarsson
Managing director of the Icelandic Financial Services

The transformation and restructuring of the Icelandic financial sector after the crisis of 2008 has been mostly completed.   The banking sector is now dominated by four universal banks. Three of them are continuations of the three large banks that failed during the crisis of 2008. The fourth survived the crisis but has been restructured and recapitalized after a change of ownership.

Along with those four major banks the banking sector is made of one investment bank, based on the estate of one of the failed banks, and ten small saving banks that operate in the rural areas.

The restructuring of the banking system implies a huge balance sheet adjustment. Total assets have shrunk from 14.900 billion ISK in Sept. 2008 to 2.876 billion ISK at end of Oct. 2011 or what amounts to ten times GDP to two times GDP.  The banks are predominantly funded with domestic deposits which are around 1.519 billion ISK or around 100% of GDP. Total loans in the banking sector amount to 1.700 billion

All of the major banks have been profitable since start of operation four years ago but with irregular factors, such as sale of assets and revaluation of loan books contributing to the return on equity.  Average interest rate margin has risen, reflecting partly the increased share of retail deposits in bank funding. Capital adequacy ratios (CAR) have risen well above the required minimum.  All the large banks have now CAR above 20%, well above the 16% requirement by the regulator.

Since the Icelandic economy was highly leveraged when the financial crisis broke out in 2008 debt restructuring has been a key issue in the banking sector over the last four years. Some 200 billion ISK of household debt has been written off in the last four years through various forms of payment  and debt restructuring. This amounts to little less than 13% of GDP. The write downs of corporate debt amount to 1000 billion ISK. The banking sector has been able to go to those extreme measures without out challenging the capital adequacy ratios required of the new banks is 16%.

Although the stock market has not been very active since the financial crisis broke out turnover has been increasing gradually. This trend is expected to continue when some of the larger companies will be floated. On the other hand the bond market has been robust and several new startups are operating with licenses as securities brokers along with established securities firms.

The insurance sector was not as severely affected by the financial crisis as they banking sector. Still one major insurance firm was taken over by the government, restructured and sold off and the sector as a whole took a hit on the asset side. Yet the sector is thriving well and total assets have been gaining value again over the last couple of years.

In general the Icelandic economic prospects are positive. State finances have been consolidated and the government budget is expected to be balanced in 2013, a turnaround from a 8% deficit in 2009. Unemployment is around 5% and has been decreasing from a peak in 2009 of 9% . Although inflation has been stubborn it has moderated and is now around 4%. The economy started to grow again in the latter half of year 2010 registering a overall growth in 2011 of 3%. Economic forecasts expect a moderate GDP growth at 2-3% for the next three years. Investment in the economy has been lagging but signs show that it can be expected to pick up pace in the coming years.