Iceland troubles overblown

Kaupthing has taken the initiative recently to reassure the market
about the strength of the Icelandic bank. Do you think the recent speculation
about the systemic failure of the Icelandic economy is overblown?

Yes, I believe so. This has definitely been overblown recently. The Icelandic
economy is fairly sound. The debt of the government is almost non-existent;
there is no unemployment.

What people have been focusing on primarily is the debt as a percentage of
the GDP. But this is not the right thing to look at. You have to have the other
parts of the equation ­ the assets. Iceland is a fairly small economy, but has a
big asset base outside Iceland. So, if you take the net foreign debt as a
percentage of GDP, you would have a totally different picture.

Kaupthing’s share price has fallen significantly and bond spreads
have widened considerably. Do you think the market has just got it

Yes, I believe partly the market has got this wrong. You’re absolutely right
that our share price has dropped significantly from its peak in the beginning of
February. But, to put it into context, the share price is still up around 8% or
9% from the
beginning of this year. So there is no collapse of the share price.

On the bond issue, on the widening of the spreads, you’re right there. That
surprised us somewhat. We obviously have not got our message through to the
fixed income market. We are doing a lot of roadshows to the equity investors to
broaden our shareholder base and, frankly, we’ve been quite successful there.

Looking at the scale and the size of the loans made by Iceland’s
biggest banks, they’re three times the size of deposits. Are there any concerns
over this over-leveraging of the banks?

Well, I can only speak for Kaupthing, and then I would like to emphasise that
we don’t view ourselves as an Icelandic bank. We view ourselves as a northern
European bank since the bulk of our income is outside Iceland. And, as I said
before, the UK is our biggest market. And the bulk of our balance sheet is
outside Iceland as well.

But you’re absolutely right. We are not a savings bank. We are not
predominantly a retail bank. We are a wholesale investment bank. And, for a bank
of our type, it is quite natural to have a limited deposit base. Our deposits,
as a percentage of our total lending, are 31% today and we have a goal of
getting that above 40% before the end of this year. And we are, I must say, well
on our way. The deposit base has grown significantly since the beginning of this

How do you justify the size of Kaupthing’s trading gains, which
surely must be unstable profits?

Over the past 12 years we had trading gains, or net financial income,
accounting for 20% to 25% of our total revenues. Even if you take all these
revenues out of the revenue base for last year, you would still have a return on
equity above 15%, which is quite interesting. And another way of answering it is
that our net interest income covers all the costs of the bank. So we are not
dependent on the net financial income.

Having said that, we definitely have a track record of 12 years of net
financial income. And the net financial income comes from the currency trading,
the fixed income trading, the equity trading and the kind of private equity type
of investments that the bank does.

Related reading