Islandsbanki hf

The stable outlook reflects our expectation that the RAC ratio will remain very strong, notwithstanding the bank's ongoing privatization and the potential for distribution of excess capital as the economy emerges from the pandemic. In our base case, we anticipate that profitability will remain high in the coming two years, as margins rebound from pandemic-induced lows and credit losses revert to about 30 bps of gross loans. In addition, we expect costs to remain contained amid high inflation as the bank continues to scale its digital presence. The stable outlook also reflects our view that Islandsbanki should be able to absorb the effects of a moderate correction in the housing market, should it materialize. The most likely downside scenario in

...Our ratings on Islandsbanki balance the bank's established franchise, high capitalization, and robust profitability against its concentration in Iceland's small economy alongside an elevated risk of a housing correction. Islandsbanki's capital and earnings strength provides a buffer to absorb higher-than-anticipated credit losses. These losses could materialize in the event of a housing correction, which we see as a prominent risk given lofty valuations, rising interest rates, and the recent build-up in household debt. Capitalization is set to fall but remain very strong. We project the risk-adjusted capital (RAC) ratio to be stable at close to 16.0% over our two-year forecast horizon. This is a decline from 19.5% as of Dec. 31, 2021, resulting from two factors: first, distribution of excess capital built up during the pandemic; and second, the higher risk weights we now apply to the bank's household and corporate credit exposures. This reflects the higher risk we see from the sharp...

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