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Hitt og þetta 12. september 2006

(IFN) Press release: Moodys Cuts Kaupthing Bank BFSR To C

Reykjavik (IFN) London, 12 September 2006 -- Moody's Investors Service downgraded the Bank Financial Strength Rating ("BFSR") of Kaupthing Bank hf ("Kaupthing" or "the bank") to C from C+, concluding the review for possible downgrade initiated in April. The agency affirmed the long-term debt and deposit rating of A1 and the short-term rating of P-1, reflecting Moody's belief that government support remains likely in the event of difficulties. The outlook on all ratings is stable.

The bank financial strength rating was put on review following the deterioration of its domestic operating environment when the Icelandic economy showed signs of imbalances, which caused rapidly rising interest rates and a falling currency, and the three Icelandic commercial banks experienced some disruption to what had previously been the smooth pattern to their wholesale funding operations.

The downgrade of Kaupthing's BFSR reflects (i) the increased challenges the bank faces due to its high dependence on wholesale funding combined with a volatile, contracting domestic economy; (ii) the potential volatility to which the bank's earnings are exposed due to the relatively large contribution to income that is derived from proprietary trading and investing activities; and (iii) the heightened risk profile of the bank's assets, due to the proportion of equities held relative to its Tier 1 capital. Moody's believes that this adverse combination of factors will continue to pose threats to the predictability of the bank's refinancing of its market-based funding, which is sensitive to investor confidence, and hence its liquidity. Nonetheless, Moody's acknowledges that the bank has made great strides in improving its liquidity profile and lengthening the average maturity of its funding; furthermore, in the rating agency's view, the bank would able to withstand the absence of wholesale funding for at least a year without having to cut back its lending activities. Were the bank to face a more extended period of market disruption, such challenges could also be addressed through potential asset securitisations or sales. However, the loss of credit-sensitive investor confidence could lead to protracted challenges to its funding operations.

Moody's further noted that, while the bank's level of profitability is very high, it remains underpinned by substantial amounts of proprietary trading. Due to the recent changes in the operating environment in the form of the devaluation of the Icelandic krona, an increase in interest rates and volatility in the international funding markets for Icelandic risk, the mainly wholesale-funded bank has experienced increased funding costs. However, despite the economic downturn in Iceland, the bank has continued to produce good core profits and maintain the quality of its loan portfolios.

Moody's noted that Kaupthing's BFSR could improve over time depending upon the positive effects of the bank's stated objective to further limit its proprietary trading and investing activities, grow its deposit base and maintain its diversification by geography and line of business.

The bank's deposit and debt ratings have been affirmed at their present levels due to Moody's belief that the importance of the major banks to the Icelandic markets makes government support likely in the event of difficulties or a systemic shock. The rating of the government of Iceland is Aaa, reflecting the country's high income level and advanced economic structure along with the government's low and rapidly declining debt levels.

The following rating was downgraded:

- Kaupthing Bank hf financial strength rating to C from C+ with stable outlook

The following ratings were affirmed with stable outlook:

- Kaupthing Bank long-term debt and deposit rating at A1

- Kaupthing Bank short-term rating at Prime-1

Kaupthing Bank hf is headquartered in Reykjavik, Iceland and had total assets of ISK3.55 billion (EUR38.9 million) at the end of the first half of 2006.
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