Landsbankinn hf. - Financial Statement Release

Lansbankinn’s 3Q 2013 financial results

In the first nine months of 2013, Landsbankinn's net after-tax profit was ISK
22.3bn. Landsbankinn's net after-tax profit for the same period in 2012 was ISK
13.5bn. The difference is due mainly to growth of other operating income,
reduced operating cost, increase in value of equities and bonds, valuation
changes of loans and higher commission income. 

Steinthór Pálsson, CEO of Landsbankinn: “The bank's operations and
profitability are very satisfactory, showing positive developments in income
and expenses and its financial position is sound. The capital adequacy ratio is
well in excess of regulatory requirements, as is the bank's liquidity position,
both in foreign currency and Icelandic króna. Our efforts to reduce operating
expenses have been very successful, with the real decrease of operating
expenses in the first 9M of 2013 amounting to 9.4%, having regard for
inflation. These results far exceed our expectations.” 

Commenting on the challenges ahead, Steinthór says: “We will continue
emphasising on reducing risk and operat­ing costs while simultaneously working
to improve customer services. The Winding-up Board of LBI hf. has agreed to
enter into discussions to amend the terms and conditions of the bonds issued to
LBI hf. by Landsbankinn. The results of such discussions can materially affect
the lifting of capital controls and are one of the most important challenges
currently facing the bank. We will continue our efforts to correct recalculated
illegal exchange rate indexed loans and the end of that undertaking is clearly
in sight.” 



Key figures from the profit and loss account and balance sheet

» In the first nine months of 2013, Landsbankinn's after-tax profit was ISK
22.3bn compared to ISK 13.5bn for the same period in 2012. The bank's
year-over-year profit has increased by 65%. 

» Profit in Q3 amounted to ISK 6.8bn. This result is just below the outcome in
earlier quarters of the year. 

» Net interest income during the first nine months of the year was ISK 24.3bn
as compared with ISK 26.4bn in the same period in 2012. 

» The ratio of interest spread to average of total assets is falling, was 2.9%
in the first nine months of 2013 as compared to 3.2% for the same period in
2012. 

» Net commission income amounted to ISK 4.1bn, a year-over-year increase of
just under ISK 1bn, or 32%. 

» Successful measures have been taken to lower operating expenses. General
operating costs decreased by 10% and wages and wage-related expenses fell by 6%
year-over-year. This decrease does not include wage provi­sions due to own
shares received from LBI hf.; the same amount is also recognised as income in
the financial statements. 

» Having regard for inflation, the decrease of operating expenses in real terms
year-over-year has been 9.4%. 

» The cost-income ratio has also decreased, reaching 42.3% at the end of
September as compared to 48% at the same time in 2012. The bank aims to
maintain a cost-income ratio below 50% in 2013. 

» Full-time equivalent positions as at 30 September 2013 were 1179, reduced
from 54 from the beginning of the year. 

» The bank's equity was ISK 234.7bn at the end of September 2013, rising by 4%
since the beginning of the year despite an ISK 10bn cash dividend payment to
shareholders, which was declared in Q2 and paid to sharehold­ers in early
October. 

» The bank's capital adequacy ratio (CAR) is far higher than required by the
Icelandic Financial Supervisory Authority (FME). The CAR is currently at 26.2%,
rising from 24.1% at the end of September 2012. 

» After-tax ROE increased despite significantly growing equity. ROE for the
first 9 months of 2013 was 12.9%, as compared with 8.6% for the same time last
year. 

» The bank's total assets amounted to ISK 1,158bn at the end of September. The
year to date increase is about 7%, due mainly to rising deposits and liquid
assets. The bank has increased its lending by more than ISK 100bn during the
period, yet instalments and other factors contribute to a total increase of
lending in the lower amount of ISK 5.3bn. 

» Customer deposits have increased by 11% since the beginning of the year, or
ISK 44.7bn. 

» The bank's liquidity position is strong, both in foreign currency and
Icelandic króna. The liquidity ratio was 48.0% at the end of September as
compared to 45% at the same time last year. 

» The bank has a favourable foreign currency position whereby assets in foreign
currencies are around ISK 12.4bn in excess of foreign currency liabilities. 

» Assets held for sale remain unchanged since the beginning of this year,
despite the recent acquisition of the construction company Ístak. 

» Total defaults of companies and households were 6.2% at the end of September
2013 and have gone down during the year. The bank aims to reduce defaults to
less than 5% by the end of this year. 



Key aspects of operations in 2013

» Landsbankinn issued secured bonds to LBI hf. in April in the amount of ISK
92bn. At the same time, LBI surrendered all its shareholding in Landsbankinn to
the State and to Landsbankinn. These events mark the finalisation of settlement
with LBI and a milestone in the bank's development. 

» A new Board of Directors took over following the annual general meeting in
April. Tryggvi Pálsson is Chairman of the Board. 

» In June, Landsbankinn concluded its first issuance of covered bond series.
These are non-indexed with 3Y fixed rate of 6.30%. As a result, Landsbankinn
was able to lower the terms of non-indexed housing loans to customers. The
bonds were listed for trading on NASDAQ OMX Iceland in October which was the
first listing of bonds issued by the bank on an exchange. Straumur
fjárfestingarbanki hf. is market maker for the bonds. 

» Landsbankinn sold its 25% holding in the facilities management company Reginn
hf. in June for just over ISK 4bn. In 2012, the bank had already sold 75% of
shares in the company upon its listing on the stock exchange. 

» In September, Landsbankinn acquired all shares in construction company Ístak,
previously a subsidiary of Danish construction company E. Phil&Søn A/S which
entered into bankruptcy proceedings in August. The company has just been put up
for sale. 

» An agreement was reached on the allocation of the bank´s own shares to
employees in accordance with an agreement between LBI hf., the Ministry of
Finance and Landsbankinn concluded in the fall of 2009. 

» In 2013 Landsbankinn paid dividends to its owners for the first time. The
dividend payment is in accordance with the approval of the Annual General
Meeting of Landsbankinn hf. on 17 April and amounted to 39% of last year's
profit, or ISK 10bn. It was declared in Q2 and paid to shareholders in early
October. 

» Landsbankinn was awarded the transportation prize of the City of Reykjavík
this year for its outstanding efforts among large companies in implementing
eco-friendly transportation. 



Principal tasks ahead

Correction of illegal foreign exchange indexed loans

Landsbankinn continues to work on correcting the recalculation of illegal
foreign exchange indexed loans and expects to finalise correction of loans to
which current legal precedents apply around the end of this year. Court
verdicts are currently being awaited in several matters of contention. 



Agreement with LBI

At the end of Q3 2013, the outstanding liability due to LBI hf. amounts to ISK
298 billion in foreign currencies. In Q2 of 2012, Landsbankinn pre-paid the
first five instalment dates of the bonds issued by the bank to LBI hf. and the
next due date for payment is in 2014. The bonds mature in 2018, according to
current terms and conditions. The bank has accumulated considerable foreign
currency reserves and is in a position to make further pre-payments and still
comply with the stringent requirements the Central Bank of Iceland makes with
regard to FX liquidity positions. 

Despite its solid financial standing and robust liquidity position, the bank is
still faced with uncertainties con-cerning the above-mentioned foreign currency
liabilities and conditions in international credit markets. Lands­bankinn will
need to refinance its foreign debt before 2016 and therefore seeks
renegotiations with LBI hf. over the repayment terms of above-mentioned bonds
The Winding-up Board of LBI hf. agreed in October to enter into discussions on
amendments to terms of the bonds. 



Innovation in Landsbankinn branch operations

Extensive changes to Landsbankinn's branch operations are impending and in the
latter part of November, the first branch of its kind in Iceland will open at
Hagatorg Reykjavík. The changes are an important step in the bank's development
into the future. The aim of the changes is first and foremost to make the
bank's service offering more flexible and personal and banking more efficient.
The most noticeable change will be that handling of cash. Service counters and
cashiers' wickets disappear while automation increases significantly, relying
among other things on a new generation of ATMs (so-called kiosks) that partly
replace traditional cashiers. The Hagatorg branch is a developmental project.

Attachments:

Landsbankinn_3Q_2013_Results_Presentation.pdf

Landsbankinn_Condensed_Consolidated_Interim_Financial_Statements_30sept2013.pdf

Landsbankinn_3Q_2013_Results_Press_Release.pdf