Iceland review - 2006, Side 96

94 BUSINESS SUPPLEMENT
Disregarding all trading gains and adding back
the positions cost of carry, Landsbanki’s 2005
core return-on-equity was 30 percent before
tax and its cost-income ratio 48 percent.
In addition to the strong performance in
Landsbanki’s fundamentals, the official stress
test by the Icelandic Financial Supervisory
Authority (FME), demonstrates that the
Icelandic banks, including Landsbanki, can
easily withstand severe adverse developments
in the economy. On 17 March 2006,
Landsbanki’s capital adequacy ratio (CAD) was
15.7 percent, its Tier 1 capital ratio 14.5 percent
and equity ratio 10.1 percent, the strongest it
has ever been. Applying the FME stress test
brings Landsbanki’s CAD ratio down from
15.7 percent to 13.6 percent, which is still well
above the 8 percent regulatory requirement.
In comparison, the average Tier 1 capital ratio
of the Icelandic banks at year-end 2005 (10.5
percent) is considerably higher than ratios of
banks in the Nordic countries (7.7 percent), the
UK (8.1 percent) and the US (8.3 percent).
Furthermore, it is of paramount importance to
note the international character of the Icelandic
banks and corporations. The Icelandic banks’
lending to foreign entities compromises a
weighted average of 57 percent of their total
lending. According to a recent survey published
by the Icelandic Bankers Association actual
foreign credit risk for the banking system as a
whole is 73 percent of their total lending, while
domestic credit risk is only 27 percent. These
figures include lending to foreign entities and
SIGURJÓN Þ. ÁRNASON