Landsbankinn hf. - Financial Statement Release

Landsbankinn: Financial results for Q1 2014

Landsbankinn reports an ISK 4.3bn profit in the first three months of 2014

In the first three months of 2014, Landsbankinn's net after-tax profit was ISK
4.3bn. Landsbankinn's after-tax profit for the same period in 2013 was just
under ISK 8bn. Landsbankinn paid just under ISK 20bn in dividends to its owners
in the first quarter; despite that payment, the Bank's equity and capital
adequacy ratio remain far above regulatory requirements. 

The YoY lower net profits are due for the most part to a decreasing interest
spread and decreasing market value of financial assets and higher taxes.
However, the increase in net commission income offsets these lower profits. The
main reason for the decreasing interest spread is the YoY drop in inflation. 

Falling income leads to a higher cost-income ratio between these periods.
General operating expenses increase slightly on the back of collective
bargaining agreements concluded in the first quarter. Disregarding fluctuations
in income from marketable bonds, operating expenses are on track and a
decrease, in real terms, is expected during the course of the year. 

Steinthór Pálsson, CEO of Landsbankinn: "Landsbankinn's performance in the
first quarter of the year is acceptable in light of a considerable fall in the
interest spread and unfavourable price developments in the market. The Bank
paid a high dividend to its shareholders in March while maintaining its strong
equity and liquidity positions. Defaults continue to decrease parallel to
recovery in the local economy. The Bank's market share among individuals has
never been as high and, as evidenced by the opening of a new Corporate Service
Centre in April, we continuously seek new ways to provide better services to
our customers in the most efficient manner. We remain optimistic about the
outlook for the Bank's performance for the remainder of the year and will
continue to streamline our operations.” 

In May Landsbankinn and the Winding up Board of LBI reached an agreement on
amendments to the bonds of December 2009. Initially, the bonds were issued on
the basis of decisions of the Icelandic Financial Supervisory Authority in
accordance with provisions of the Emergency Act from 2008. The Principal amount
of the bonds was compensation for the net assets and liabilities transferred to
Landsbankinn. The final maturity of the bonds is to be extended from October
2018 to October 2026. 

Steinthor Palsson says that this is an important step for Landsbankinn: “This
agreement strengthens the bank's present position and its future opportunities
and puts the bank in a good position and facilitates access to international
debt capital markets. Specific restrictions on dividend payments have also been
removed, enhancing shareholder value. The agreement is conditional upon the
Winding up Board of LBI obtaining certain exemptions from the capital
controls."





Key figures from the profit and loss account and balance sheet for Q1 2014

  -- In the first three months of 2014, Landsbankinn's net after-tax profit was
     ISK 4.3bn as compared to just under ISK 8bn for the same period in 2013.
  -- Return on equity (ROE) after taxes for the period was 7.3% as compared to a
     ROE of 14% for the same period in 2013.
  -- Net interest revenue during the first three months of the year was ISK
     7.9bn as compared with ISK 9.9bn in the same period in 2013.
  -- The interest spread as the annualised ratio of net interest income to the
     average carrying amount of total assets is falling, was 2.7% in the first
     three months of the year as compared to 3.6% for the same period in 2013.
  -- Net commission income amounted to ISK 1.5bn, increasing by 11% from the
     same period the previous year.
  -- General operating costs remain virtually unchanged. 
  -- Taxes have increased by 22% YoY.
  -- Allowing for inflation, the real decrease of operating expenses amounts to
     3.3% YoY.
  -- The cost-income ratio for the first three months of the year was 72.0% as
     compared with 42.9% at the beginning of the year. Operating expenses have
     changed very little whereas revenues have fallen since the beginning of the
     year, accounting for the higher cost-income ratio. The Bank aims to further
     decrease operating costs in real terms.
  -- Full-time equivalent positions as at 31 March were 1,178.
  -- The Bank's equity amounted to ISK 225.4bn at the end of March 2014 and has
     decreased by 7% since the beginning of the year. Landsbankinn paid just
     under ISK 20bn in dividends in Q1 which leads to a decrease in equity and
     the capital adequacy ratio.
  -- The Bank's capital adequacy ratio (CAR) is nonetheless high, well above the
     minimum requirement of the Financial Supervisory Authority (FME). It is
     currently 24.8%, down from 26.6% at the end of March 2013.
  -- The Bank's total assets amounted to ISK 1,154bn at the end of March 2014,
     remaining virtually unchanged from the beginning of the year.
  -- Customer deposits have increased by 3% since the beginning of the year, or
     by ISK 12bn.
  -- Total lending amounts to ISK 33bn yet, due to instalments and other
     factors, total lending has only increased by ISK 1.4bn during the period.
  -- The Bank's liquidity position is strong, both in foreign currency and
     Icelandic króna. The liquidity ratio was 49% at the end of March 2014 as
     compared to 42% at the same time last year.
  -- The Bank has a favourable foreign currency position whereby assets in
     foreign currencies are around ISK 18.9bn in excess of foreign currency
     liabilities.
  -- Total defaults by companies and households were 5% at the end of March 2014
     and have decreased during the year.



Key aspects of operations in the first three months of 2014

  -- In January, the international rating agency Standard & Poor's (S&P)
     assigned Landsbankinn a BB+ long-term counterparty credit rating with a
     stable outlook.
  -- Landsbankinn paid dividends to its shareholders in March. The dividend
     payment was in accordance with a motion approved by the Annual General
     Meeting of Landsbankinn hf. on 19 April and amounted to 70% of last year's
     profit, or just under ISK 20bn. The dividend payment led to a decrease in
     equity in Q1.
  -- The Bank added ISK 1.5bn to its issue of covered bonds during the period.
  -- Landsbankinn was one of four companies nominated for the Icelandic
     Employers' Education Award in 2014.
  -- Landsbankinn received two nominations for the Icelandic Ad Awards, hosted
     by ÍMARK, the Icelandic Marketing Association.
  -- Global Finance magazine named Landsbankinn the best bank in Iceland.
  -- International Finance magazine selected Landsbankinn as the best Icelandic
     bank and Landsbankinn's online banking as the best Internet banking option.
  -- A new organisational structure of Landsbankinn's branches in the capital
     region became effective in March. As a result, all branches in the region
     are now devoted to personal banking. All corporate services for small and
     medium-sized enterprises will be provided out of a new Corporate Service
     Centre.
  -- Landsbankinn's share in the retail market has, according to surveys,
     increased recently and is now 35.4%. This is the highest it has measured.



New agreement with LBI hf.

A new agreement between Landsbankinn hf. and LBI hf. was signed on March 8,
2014 amending the 2009 bond agreement. The final maturity of the bonds will be
extended from October 2018 to October 2026. According to the agreement
Landsbankinn has an option to make aluable and flexible prepayments of the
bonds without any additional costs which is highly important for the bank. 

Interest rate terms will remain unchanged until October 2018, i.e. LIBOR +
2.90% but in October 2018 the margin will be stepped up and will be 3.50-4.05%
for individual instalments due in 2020 - 2026. Each of the maturities between
2020 and 2026 will be equivalent to approximately 30 billion ISK. 

This change will see considerable lowering of the debt burden of Landsbankinn
and it strengthens the banks overall financial position. Furthermore, this
change will lower the minimum coverage ratio reduced from 124.8% to 115% which
in itself will help facilitate financing on international markets. Also it will
be possible to pay dividend to owners without paying an equal amount to LBI hf. 

The agreement is conditional upon LBI receiving certain exemptions, in
accordance with the Foreign Exchange Act. 



Outlook and principal tasks ahead

  -- Performance in the first quarter is strongly influenced by unfavourable
     market developments. But prospects for the remainder of the year remain
     good.  Work on refinancing and paperwork on LBI hf. bondagreement
     continues.
  -- Efforts to increase cost-efficiency are on-going. A part of that plan is
     the construction of new headquarters - now being considered - with the aim
     to reduce significantly the square meters occupied by head office
     operations.
  -- Landsbankinn has reduced square meters used by branch operations by just
     under 30%
  -- Emphasis on increasing loan quality and reducing equity holdings
  -- Emphasis on responsible market expansion, for example, in housing loans and
     asset management
  -- Finalise the correction of illegal exchange rate indexed loans
  -- Work on debt adjustment in accordance with the government's actions and new
     laws passed by parliament



For further information:

Kristjan Kristjansson,  Public Relations, pr@landsbankinn.is, tel: +354 410 4011

Kolbrun Gudlaugsdottir, Investor Relations, ir@landsbankinn.is , tel:  +354 
410 4014

Attachments:

Landsbankinn Consolidated Interim Financial Statement 31.03.2014.pdf

Landsbankinn Q1 2014 Results Presentation.pdf

Landsbankinn Q1 2014 Results Press Release.pdf