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Hitt og þetta 24. apríl 2006

DJ FOCUS: Iceland Banks Equity Holdings Draw Scrutiny

Iceland's biggest banks, deemed risky and secretive by ratings agencies and foreign observers, are defending their transparency record, but haven't thus far disclosed full details of their equity holdings, the point that most concerns analysts.

After watching their share prices plunge since February, the banks' executives pledged to be more open about their businesses. They will have an opportunity with earnings reports starting this week.

Kaupthing Bank Hf. (KAUP.IC), the biggest Icelandic bank by assets, begins, with its earnings report on Thursday. Glitnir Banki Hf.(GLB.IC), the second biggest bank, and Landsbanki Islands Hf. (LAIS.IC), a close third, are both scheduled to release results May 2.

Investors will be looking to see whether the reports clear up concerns about earnings and the assets that are generating them. Without that information, analysts have found it hard to judge investment risks.

What bothers some critics is the quality of the banks' assets, particularly their equities holdings.

"They show the figures and may explain where it comes from in general terms, but we'd like to know where these gains come from," said Glitnir analyst Jonas Fridthofsson, who thinks the banks could disclose more about their equity holdings and their trading gains.

"Here we usually have a pretty good idea of what they are," he said. "For outsiders, the full picture might be a bit harder to grasp. But I expect them to have improved that now."

Kaupthing reported about EUR1.2 billion in equity exposure at the end of 2005. Landsbanki had EUR700 million while Glitnir had around EUR40 million. None of the three provide the full details of their holdings, including the names and nationality of some of the companies they own.

To date, Kaupthing has gone the furthest, disclosing the regions in which its equity holdings are listed - mostly in Iceland or Nordic countries - and that the companies are in food production, financial services, fashion, fisheries and telecoms.

The bank's holdings in companies listed on the Iceland stock exchange total EUR640 million at current market rates. Of that, EUR300 million is in bonds convertible into stock. But Kaupthing said only a quarter of the companies in which it has invested have operations based in Iceland, limiting its exposure to domestic financial markets.

Glitnir, which attributes around 9% of its 2005 income to equity holdings divided between Norway and Iceland, said it doesn't need to disclose full details because the equities make up such a small part of its business.

Landsbanki said it notified the Iceland stock exchange of equity stakes exceeding 5% of a company, and has also provided a list of its largest listed holdings. Even though it isn't obliged by law to disclose unlisted holdings, it said it has unofficially provided information on some of them.

Sigurdur Erlingsson, deputy managing director of international banking, said Landsbanki will "gather and produce lists of everything that has been published in the public domain" on a more systematic basis.

The banks' holdings attracted attention after Fitch Ratings Agency gave a negative outlook on the country's sovereign debt on Feb. 21. Merrill Lynch and Danske Bank followed with reports raising additional concerns about massive current account deficits, the stability of the banks' balance sheets and rising refinancing costs on maturing debt.

Iceland's high-flying bank stocks plummeted in the wake of those reports. Kaupthing, whose price had shot up to ISK1,003 in February, has since dropped 26%. Glitnir is down 29% from its February peak and Landsbanki fell 32%.

The problem of equity holdings is twofold.

First, the Icelandic stock market soared over the past two years, the result of an economic boom that many economists say needs cooling. The central bank has more than doubled interest rates since May 2004, to the present 11.5%. Any slowdown that dampens the share market could reduce the value of the banks' equity portfolio.

Second, the banks' loan books soared in 2005, raising questions about who the borrowers are.

"The focus when the reports come out now will of course be the bottom-line numbers to see if they're actually making money," said Peter Bruhn at HSH Nordbank in Copenhagen.

By capital adequacy measures, Iceland's banks pass muster. Kaupthing put its capital ratio at 12.2% at the end of 2005; Landsbanki was at 13.1% and Glitnir was at 12.6%. The Financial Supervisory Authority of Iceland requires a rate of at least 8%.

The banks met previous transparency requirements, said Asgeir Fridgeirsson, an independent consultant for Icelandic banks and financial institutions. "But the greater attention of media, analysts and investors has created a new level of transparency and, to my understanding, it is the banks' full commitment to reach that level."

Nordbank's Bruhn says the lack of visibility on ownership structures of banks and companies makes risk assessment hard.

"The Icelanders themselves know much more about it because a lot of it gets disclosed, but only in the Icelandic language," said Bruhn. "Also they have the network, so the question is: how much is done through informal information?"

The three banks have grown explosively in recent years.

Kaupthing, for example, lifted its assets more than fivefold to EUR34 billion, from 2003 to 2005. Loans and receivables climbed to EUR23.3 billion in 2005 from EUR15.3 billion in 2004.

Landsbanki and Glitnir doubled their assets in a year. Landsbanki's climbed to EUR18.7 billion in 2005 from EUR9.83 billion the year before. Glitnir rose to EUR19.6 billion in 2005 from EUR9.03 billion in 2004.

Most of the recent asset growth resulted from purchases outside Iceland.

Kaupthing recently bought FIH in Denmark, Singer & Friedlander in the U.K. and JP Nordiska in Sweden. Landsbanki bought the U.K.'s Teather & Greenwood, Kepler Equities and Ireland's Merrion Capital, and Glitnir bought BN Bank and Kredittbank in Norway.

Such purchases make it harder to do year-on-year comparisons of the banks' performance, said Glitnir's Fridthofsson.

The confusion about equity holdings also results partly from forward agreements, in which the bank buys shares for a customer and immediately hedges the purchase, removing any risk about the shares' performance. Analysts are sometimes unsure who owns such shares. Only Kaupthing discloses the ownership by distinguishing the transactions through a custody company.

"Registered ownership isn't always the same as true ownership," Merrill Lynch analysts observed in a February report.

Glitnir itself acknowledges the need for more transparency on forward agreements.

The bank needs "to find a good solution on how to disclose forward agreements," said Vala Palsdottir, spokeswoman for Glitnir. "We're discussing how to approach it, and it's in all the banks' interest that it is on the table. It's not as if it has been something that has been hidden."

Company Web site: http://www.glitnir.is

Company Web site: http://www.kaupthing.net

Company Web site: http://www.landsbanki.is

-By Louise Nordstrom, Dow Jones Newswires; +46 8 545 130 97; louise.nordstrom@dowjones.com

(END) Dow Jones Newswires